Welcome to the second quarter 2008 DSW Inc. earnings conference call. (Operator Instructions) I would now like to turn the call over to your host, Leslie Neville, Director of Investor Relations.

With me today in Columbus are Debbie Ferree, Vice Chairman and Chief Merchandising Office, and Doug Probst, our CFO. Earlier today we issued a press release detailing the results of operations for the quarter ended August 2, 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 and the result of various important factors, including those listed in today's press release and in our public filings with the SEC. So with that, I will turn it over to Doug.

My comments today will start with detail around the second quarter and then move into our outlook for the balance of 2008. As previously released, net sales for the second quarter increased 2.4% to $357.2 million. Same-store sales decreased 6.9%. Last year's second [break in audio] same-store sales increase of nearly 6% was driven by significant promotional activity aimed at clearing seasonal merchandise. This year, inventory levels entering the second quarter were positioned appropriately relative to anticipated comp sales declines, resulting in a 44.4% merchandise margin rate, over a 600 basis point improvement to last year. Occupancy expenses deleveraged 110 basis points to last year as a result of the negative comp in the quarter. The net result was a 500 basis point increase in the gross profit rate to 28.3%. As expected, the SG&A rate increased 250 basis points in the quarter to 23.4%, 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 250 basis point increase in the operating income rate to 4.9% of sales. Net income for the quarter was $11 million compared with net income of $6.5 million for last year and diluted earnings per share were $0.25 compared with $0.15 a year ago. We are pleased with our financial performance in the second quarter, and we are especially pleased with the DSW team's ability to execute in what continues to be a difficult economic environment. We ended the quarter with inventories down approximately 4% on a cost-per-square-foot basis, excluding the incremental inventory investment for our ecommerce channel. As a reminder, we entered the second quarter with inventory down 10% on a cost-per-square-foot basis. Our intention is to keep inventory levels consistent with anticipated comp stores sales declines. We added five…

Let me begin by saying we are pleased that strong team cooperation around inventory management produced a significant increase in merchandising margin and [break in audio] over last year. Our team intends to remain as [break in audio] managing inventory as needed to maximize margins and mitigate risk. With that said, let me provide some details on merchandising performance for you, then I will move on to other aspects of the business. We're continuing to see some trade-off from the department stores and women's better brands, resulting in strong comp increase in this category. She knows and loves these brands, the fresh fashion they represent and, of course, the value she receives [break in audio] continue to capitalize on this trend by building our presence in these brands going forward. In the women's dress department we did see double-digit comp increases in pumps and evening. We're projecting both of these areas to continue to perform well throughout the fall season. Additionally, dress trends that worked well in Q2 included platforms, [break in audio] heels. In the seasonal area, customers are buying closer to time of need. Our comp performance in casual sandals continued to improve later in the quarter as customers responded to new fashion looks like flat sandals and gladiators. This seasonal shift continues into August, as we are still producing strong regular price selling in sandals even now. We will continue to support select markets with new sandal [break in audio] into Q3 to capitalize on this trend. As customers are buying closer to time of need we have adjusted receipts in boots to support fashion trends early and flow basic items later. Early fashion boot reads are positive as new looks, such as slouch boots, Western, riding and flat boots, are checking well with the customer. We…

Okay, so now for the question-and-answer session.

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

Hey, Doug, can you talk about just the SG&A growth year-over-year that we might expect in the back half? It ticked up a little bit in 2Q, but if we're talking, you know, modest margin improvement it looks like we're anticipating, you know, 17-ish growth in the back half. Is that what you're looking for?

Yes, I think that the change in SG&A rate, Jeff, is going to be similar if not higher than the basis point deleverage that we saw in the second quarter, and a lot of that has to do with the etail investment that we've made. Also we reversed a bonus accrual last year in the third quarter and the negative comp pressure to that. So I think the basis point deleverage that you saw in the second quarter will be even higher in the third and fourth quarters.

And Doug, just to follow up quick, on the ecommerce, how do we look for that to impact the margin structure going forward? In other words, where are we going to see the impact through the balance of the year?

As far as the impact, a lot of the impact that we're talking about is going to be favorable in the 2009 year. As you know, it's very early in the game to try to determine exactly what this business is going to achieve, especially as we enter our first full season with dot com. As you remember, the dot com business opened right in the middle of the spring season so it was difficult to get a lot of read on that then, but as we move into the second quarter and our Septober time period of September and October fall selling season, that'll be a better indication of when we can kind of see that type of margin improvement. But I would expect most of the benefits to come in 2009 and beyond.

Your next question comes from Christopher Svezia - Susquehanna Financial Group.

A couple of questions. I guess first, just on the merchandise margin rate, I mean, obviously the nice improvement in Q2 and I guess, as you look to the third quarter, you're up, I think, 30 basis points on the merchandise margin rate in [Q3] last year. And I'm just trying to extrapolate between your inventory position, how you're planning the business for the back half of the year, because in Q3, obviously a little bit more challenging on the merchandise margin rate. Q4 obviously much easier. I'm just trying to weigh that against Debbie's comment earlier in relation in the pricing increases and trying to manage the merchandise margin rate as well, so I was wondering if you can add a little color around that.

Yes. Again, the back half is not too dissimilar to the first half as we look at last year. The first quarter of last year, merchandise margins were strong, the second quarter's were very weak, and the same goes true for the third quarter and fourth quarter of last year. We had pretty good merchandise margins last year in the third quarter, up 44%. To improve on that would be difficult. The merchandise margin improvement, though, that we can achieve in the fourth quarter is probably our biggest opportunity, although we have other pressures going against that. But clearly, the promotional activity that we did last year in the fourth quarter, we do not plan on doing that again given our inventories are likely going to be positioned going into the quarter. So, again, the less promotional activity will give us the opportunity to improve, but that improvements going to mostly come in the fourth quarter.

I have nothing to add to that.

I guess, so, Doug, just confirmed from that statement it seems like Q3 on the merchandise margin would be down just going up against that number; Q4 more than likely up significantly. Is that how we should infer from your statement?

I think we can maybe squeak out a little bit of improvement in the third quarter but not much, less than 100 basis points. But the biggest change will be coming in that fourth quarter, yes.

And then just on the shared services, can you maybe just quantify what that is, what the cost is?

Well, it's actually rather difficult to describe it just given the changing relationships and the period of time during the year in which the shared service agreement was in play, but we did issue an 8K this morning and some of the details are outlined there. But again, it is incorporated into our guidance and has been since the beginning of the year.

And if I can ask just one more question, just for Debbie, just on merchandising trends. You talked about boots. I know you're doing some things differently this year in terms of testing. I was just wondering maybe if you can quantify or just kind of give an explanation why you feel as strong about boots this year versus last year and kind of what you're doing differently from a testing perspective.

Yes. As far as what trends I'm the most confident around, to me I think it's going to be a very, very strong boot year. When you look at the ready to wear and the kinds of footwear that are best accessorized to go with that ready to wear, it's definitely the year of the boot. And there are certain items within boots - it could be sport boots, it could be flat suede boots - that just didn't really exist last year that will offer the customer a reason to pull money out of her wallet. So the reason why I feel strongly about it is it's typically high AUR, it's product that didn't exist in the marketplace last year, and it's trend appropriate for this year. How are we managing inventories and testing differently? I guess I would tell you that we've always had a testing mentality here at DSW. Of things that we did do differently for this year is back at the beginning of this year in January, February, we started to test a few of those items that we thought could be the big winners for this coming fall, and that will continue to be a practice in DSW, where we'll use those two months, those two or three months, to test for new trends that could be appropriate - the customer votes on those - and then it gives you a better indication on how big those items could be for the back half or third and fourth quarter. So I guess I can tell you that we've always done that but we're doing it in a much bigger and more deliberate way this year, and it is a practice here at DSW to continue to test and react our new items so that we can better understand what the customer's appetite is for those.

Your next question comes from David Mann - Johnson Rice & Company. David Mann - Johnson Rice & Company: Doug, you talked about, I guess, the strategy now for next year, about store openings, which clearly is a change from recent pronouncements. Can you just go into a little more detail about, you know, why you're slowing the store growth? Are you seeing a change in performance in these stores, and how will that affect next year's Capex?

Well, obviously fewer stores means lower Capex. But also, as we're looking into those additional remodels, the Capex may be even lower if we decide that some of the design elements aren't worth the investment. But in general on real estate, there's a lot of different variables out there and a lot of retailers are dealing with it. Some developers are opening centers later. Tenants are vacating the premium locations. In some cases, we're able to take advantage of some of those circumstances. In some cases we're able to renegotiate for improved go forward terms. Maybe a landlord being a little bit weary about leaving a particular center, maybe we'll be able to renegotiate a better term for a go forward lease or even a new lease. But we're exploring all the options. We want to obtain the best locations and our decisions will be based on the same metrics that we used before - return on cash, sales per square foot. But again, given the economic conditions, the conditions of the developers, we just don't see that the number of opportunities that meet our internal requirements are going to be out there for us. We're not going to open in locations where we're the only ones there. We're not going to open in locations where we see other tenants pulling out. So we just have to be realistic with that. We're still confident that new stores will work, but not in this particular period of time. The opportunities we just don't think will be there. David Mann - Johnson Rice & Company: How much of a reduction is reasonable for us to expect, what kind of range?

I think 15 to 20 would be likely. But again, we're updating that number almost every week as we look at some of the negotiations with developers. That's just what we see will be available. But I want to be confident in letting people know or want people to be confident that, if a good deal presents itself that meets our internal hurdle rate in the right location at the right store size, we will open that location because we're confident in the model and we certainly have the capital to do it if we need to. But we'll also see if there's capital [improvements] that can be used for remodels. As we continue to see that those programs start to work and those locations look better with those investments, we might push some of our Capex into that direction. But, as we said in the script, it's still early to tell what type of investment we'll be making in [inaudible] into 2009. David Mann - Johnson Rice & Company: And then a question on inventory. Can you say again what was your inventory per store this quarter? How did that compare to last quarter, and how much of the inventory increase, you know, can you quantify how much of that is ecommerce?

We gave you the numbers that were excluded - excluding ecommerce, so the inventory cost per square foot, including ecommerce inventory, was down 4%. And I hope you can respect the fact that there's a lot of competitors out there that would love to know some stats regarding our dot-com business so we don't necessarily want to break out exactly what our inventory investment in dot com is at this point.

Your next question comes from Jodie Young - Buckingham Research.

I just had a quick question on your G&A. Can you quantify that for the quarter?

For the year it'll be about $35 million, so I would expect about 25% of that would be what we saw in the second quarter.

Your next question comes from Jeff Mintz - Wedbush Morgan Securities Inc.

Could you comment on what you're starting to see in terms of sourcing costs for the spring of '09 now that the shows have kind of gotten going and we're hearing some things about costs going up, even above the fall '08 levels?

A lot of the costs that we're seeing are what Debbie had started to expect and she can add some more comment if she likes, but that 3% to 7% increase cost from China for a variety of reasons that have been well publicized. But we have many different ways to mitigate some of that impact, so the cost truly is going up but there are other reasons and I'll turn it over to Debbie as to how we're going to mitigate some of that negative impact from that angle.

Yes, so what we're finding is that the average cost increases so far are right around the 3% to 7%. What we're hearing from the market is that there will be some additional cost increases. But what we're doing and how to handle that is these several initiatives that we have to try to combat that. We are increasing our opportunistic buys, which you get a higher initial markup on that, typically a higher margin and better sell through. But we also are looking at each example individually and working with our partners to better negotiate those prices to make sure that we protect our core commodity big item pricing. And then take those markups, pass that cost onto the consumer through elevating [at retail] on fashion items which typically have less price sensitivity. Those fashion items are typically more emotional buys and - they're more irrational, I should say. So we're not really getting any pressure from the increase in retail on the fashion piece of our business right now. We always ground ourselves with the fact that the product has to be fresh, new, and it has to be right. We are looking at some other supply chain initiatives that are both short and longer term for the company in terms of FOB points, freight and things of that nature to look to mitigate some of these increases in the China costs and make sure that we do hit those merchandising margins that are critical to protecting the profit of the company.

A follow up, Debbie, to something you said - about how much of your business do you consider part of that fashion piece, where you're not really seeing any issues on getting the prices?

Well, I'll tell you, the way we look at our business, it's probably split about 55% fashion, true fashion, and 45% around core commodity. I would tell you that in each category you find anywhere from 15% to 25% of their business in core product, and that product, we're trying to protect the cost on.

Your next question comes from Sam Poser - Sterne, Agee & Leach. Sam Poser - Sterne, Agee & Leach: Doug, where are you on the JDA rollout now and how's that coming along?

Most of our IT investments are still into our infrastructure, so a lot of the investments that we're making in IT are just to get that infrastructure in place. But the JDA systems, we're in phase one of that transition, so it's the right packages, the right suite of packages, but it's certainly not into the levels that we want it yet. And I would say into 2009 as to when we would start to see us developing that further. Sam Poser - Sterne, Agee & Leach: Are we looking back half '09 or into the beginning do you think?

Most likely, yes, back half. Sam Poser - Sterne, Agee & Leach: And as you - I mean, maybe Debbie's better for this - Debbie, as this is rolling out and so on, what improvements are you starting to see and what do you expect to see out of it into next year as far as efficiencies and so on?

We haven't quantified it. It is [break in audio] very, very early stage. What we're basically doing is in terms of the FOB initiative, in terms of taking position of goods in China versus here, we're just starting that process right now. We've signed on a few vendors but, you know, from a financial perspective, it's very early right now for us to be able to sit down and tell you exactly what impact that's going to be. I will tell you that with - there is strategy that around all of our key vendors we will be having discussions around shipping efficiencies, freight, FOB points across the water. But we haven't quantified that yet.

Your next question comes from Susan Sansbury - Miller Tabak + Co., LLC. Susan Sansbury - Miller Tabak + Co., LLC: Deb, could you give us some sort of update on the search for your replacement for - the search for a new head guy as DSW?

Yes, the CEO search is under way. We've hired a firm; it's Berglass + Associates. And it's under way. So we expect that to take awhile. We expect to attract some good candidates. But we have a strategy to execute for the balance of this year into next so we can be patient to make sure we get the right person on board. And the search in under way. Susan Sansbury - Miller Tabak + Co., LLC: So we shouldn't anticipate any news on this front until some time next year?

The common theory is that this kind of search generally takes nine months so, yes, I would think next year would be when we would start to expect something.

Your next question comes from David Mann - Johnson Rice & Company. David Mann - Johnson Rice & Company: Doug, you were talking earlier about the remodels that you're doing. With some of the history now you have under your belt can you give us a sense on or an update on what the performance is of the remodels in terms of comp store lift and any other metrics?

Well, our metrics are really to benchmark against comparable stores. So obviously, if we just did comps, they would still likely look negative, but we do compare them to other comparable stores to get a read on that kind of lift. And their comps are slightly better in the second quarter than the rest, but with the negative 7 for the whole company, they were likely still negative. So the comparable stores, they are beating it by a variety of levels. The range is, you know, rather broad but they're all at least 3% or 5% or somewhere up double digits and beyond. So a lot has to depend. We picked this test of the first five to get a general read across the country in different demographics and that's why we're comfortable enough to expand that to another eight stores. And now we're going to adjust some of the other variables, and that relates mostly to the dollar investment that we're looking at. So we can clearly see that remodeling the store, refreshing the store gives us a sales lift. We now have to examine what's the right return on invested capital for these, and that's what the next eight stores are for. David Mann - Johnson Rice & Company: Secondly, on the shared services agreement, unfortunately I haven't had a chance to read through all of it on the 8K but in terms of, you know - first of all, congratulations on getting it done - but in terms of, you know, the costs that you’ve taken over, those functions, do you have a sense on, you know, your ability to become more efficient and what kind of savings you might have next year now that, you know, you've got it all under your belt?

Yes, the transition went smoothly and I would just say we're wrapping up the transition process. So the next phase now is to start to look at what we can do more efficiently, and we're just at the beginning stages there. But not only in the shared service organization but throughout the company, we always have to be looking at that and making sure the resources are correctly applied to the various initiatives that we have going on. So I would summarize by saying yes, we are looking at those efficiencies. We do see some on the horizon, but it's not restricted just to those areas that transferred but to the whole business in general. David Mann - Johnson Rice & Company: And, you know, the future of Value City as an ongoing operation, how important is that and what would be the cost impact in terms of, you know, what they're reimbursing you if they were no longer to be in operation? I mean, what are they giving to you this year?

Well, they've paid through the first quarter for the services that we provided them and we continue negotiations for a new shared service agreement with Value City. But to your point, we're closely monitoring their viability as an ongoing partner. So we are looking at both sides, whether they are a continued partner or if they're not a continued partner, and we have plans for both. But right now we're monitoring it closely and we're still in negotiations for how that's going to move go forward. David Mann - Johnson Rice & Company: And any timetable on what we should - should we expect another 8K in the near term relating to Value City, then?

It is our hope to have that, yes.

Ladies and gentlemen, this concludes our question-and-answer session. I will now turn the call back over to Leslie Neville for closing remarks.

Thank you very much for joining us today. As always, if you have any follow up questions, please feel free to contact us at our home office, and have a great day. Thank you.