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The Bon-Ton Stores, Inc. (NASDAQ:BONT)

Q3 2012 Earnings Call

November 15, 2012, 10:00 am ET

Executives

Jean Fontana - ICR, IR

Brendan Hoffman - President & CEO

Keith Plowman - EVP, Finance, CFO & Principal Accounting Officer

Analysts

Edward Yruma - KeyBanc Capital Markets

Grant Jordan - Wells Fargo

Karru Martinson - Deutsche Bank

Mary Gilbert - Imperial Capital

Jordan Hughes - Goldman Sachs

Kristina Westura - Telsey Advisory Group

Operator

Good day and welcome to The Bon-Ton Stores, Incorporated Third Quarter Fiscal 2012 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jean Fontana. Please go ahead ma’am.

Jean Fontana

Thank you. Good morning, and welcome to The Bon-Ton’s third quarter fiscal 2012 conference call. Mr. Brendan Hoffman, President and CEO and Mr. Keith Plowman, Executive Vice President and CFO will host today’s call. You may access a copy of the earning’s release on the company’s website at www.bonton.com. You may also obtain a copy of the earnings release by calling 203-682-8200.

The statements contained in this conference call, which are not historical facts, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those projected in such statements due to a number of risks and uncertainties including those set forth in the cautionary note in the earnings release and all of which are described in the company’s filings with the SEC.

And now I would like to turn the call over to Mr. Brendan Hoffman.

Brendan Hoffman

Good morning and thank you for joining us. I will begin with some highlights from the third quarter, followed by an overview of our holiday focus areas and opportunities. We were pleased with the progress we made on several key initiatives during the third quarter resulting in improved overall performance.

We grew comparable store sales by almost 2%. We lowered our SG&A by $10 million and the rate by over 200 basis points. Adjusted EBITDA rose to $34 million, a $9 million and 36% improvement over last year; while we did show some erosion in our gross margin rate that too improved throughout the quarter.

To achieve these results, we executed on a more balanced merchandize assortment with an inventory composition that was better aligned with our loyal base customer. At the same time, we carefully picked areas and our updated offering that would allow us to cultivate the new customer overtime. This was most evident in our Ready-to-Wear categories which was one of our weakest categories throughout the spring, but became one of our stronger performers during Q3.

We actively looked to reallocate floor space with muscle moves to try and reposition the Hero categories that we believe will lead to our growth in the future; specifically, shoes picked up increased square footage in many of our stores, especially our smaller ones and was our highest growth category for the quarter. We saw positive signs in our smaller stores with sales trends that were above the overall company average. In addition to being better served by the allocation and balance of the assortments, they have also benefited from our simplified promotional offerings using our coupon to clearly frame a deal.

Our ecommerce business continues to show outsized growth. Digital marketing is rapidly growing as an important way for us to communicate to our customers and drive them to all of our different channels. We are dramatically increasing our spend in this area, as we play catch-up and recalibrate our different marketing budgets. Our in-store focus on adding emails names has proven to be very successful, and that customers recognize that this is the best way to keep current on all of our promotions.

We are also keeping focus on improving our overall efficiency both with improved expense and inventory management. We have spent a lot of time studying the balance between sales and markdowns throughout the lifecycle of merchandizing our stores. While we feel there is gross margin opportunity through our initial pricing and the impact of the coupons, there is perhaps equal or greater opportunity by improving our markdown process with price reductions more aligned with sales performance.

We launched our first clearance stores this past quarter. They are actually floors within underperforming and/or over spaced stores. We started with three in August and have expanded that to seven. While it's still too early to determine its precise impact on our overall margin, we are confident that it will provide a higher salvage value than we had previously realized and are pleased with the early results.

Likewise, we have reengineered what we call our Yellow Dot cycle which is the period before it moves to final clearance. We have given the merchants more flexibility in the pricing of these goods to allow us to better direct our markdown dollars, whereas before, everything went down the same path regardless of its rate of sale. This too is just beginning, but initial results are encouraging.

Lastly, during the third quarter, we welcomed customers through our new Herberger's store in Pocatello, Idaho, with a grand opening on October 24th. We are excited about our expansion into a new state and the customers are excited about our merchandize assortment.

Turning our thoughts to the fourth quarter, we are headed into the holiday season with a well balanced assortment of compelling merchandize and unique gifts for the entire family. Hero categories are being highlighted through expanded inventories, square footage and marketing spend. Shoes, fashion apparel, outer wear, accessories and home are expected to be key drivers of our fourth quarter business. We feel we have a strong promotional calendar that will be reinforced by a holiday marketing campaign using all the different channels with continued focus on digital and new media.

For the second year in a row, our stores will open at midnight on Black Friday for our biggest after Thanksgiving sale with over 500 door-busters being offered until 1 PM. We have also expanded our commitment to the local communities that we serve by introducing a new goodwill sale event in early December. Customer donations of toy or gently-used clothing will earn them a coupon good throughout the store.

We expect continued outsized growth from our ecommerce business. We recently added a brand index and re-launched our homepage to show multiple rotating images that better reflects the broad offering of our website. We are very pleased with the customers’ response to the changes. We know our customers will also be thrilled that we will be adding the Coach brand in classifications to our site in December. This will be filed in the spring by additional status brands that we are very excited about launching.

Our partnerships with our vendors are stronger than ever. The vendor community has been very supportive and they are working with us to drive sales to intensifying additional doors and online. We are also very excited about our exclusive partnership with Jordin Sparks; our new fragrance Ambition is being sell exclusively at Bon-Ton this holiday season.

In summary, we believe that our third quarter results reflect progress from initiatives that we have been implementing throughout the year. We are well positioned for continued momentum in the fourth quarter with strong merchandizing and marketing initiatives in place.

Before we begin with the financial review, on behalf of Bon-Ton, I want to express our sympathy for those who have been impacted by Hurricane Sandy. Our thoughts are with all of those who suffered losses during the storm as they start the process of rebuilding their homes and communities. Thanks to the quicker funds of our marketing and store divisions in reaction of the devastation led by the hurricane, we will donating over $150,000 to the Red Cross Hurricane Sandy Relief Efforts from the coupon books sold in our stores during our Community Days Event last week.

As far as the effect that Hurricane Sandy had in our business, although 37 stores, plus a distribution center were closed for a period of time, we did not sustained any serious damage and believe that the overall impact to our business for the fourth quarter will be minimal.

Keith will provide more detail on this review. And with that I would like to turn the call over to Keith.

Keith Plowman

Thank you, Brendan and good morning everyone. Some notable points for the third quarter; adjusted EBITDA defined as earnings before interest, income taxes, depreciation and amortization including amortization of lease related interest and the loss on the exchange or extinguishment of debt increased $9 million to $34.1 million as compared with $25 million in last year’s third quarter.

Please note the definition is the same for EBITDA, but we have inserted adjusted before the title because we do include impairment charges and loss on exchange or extinguishment of debt in our definition. For a reconciliation of adjusted EBITDA to net loss, please refer to our earnings press release.

As we discussed in prior conference calls, we are focused on reducing unnecessary excess costs and improving the efficiency our cost structure. In the third quarter, SG&A expense improved by $10 million compared with the prior year period, and our SG&A expense rate decreased 218 basis points to 33.6% of net sales compared with the prior year period. Our disciplined expense management and the efforts we put in the third quarter, that was on-track to achieve the $40 million annualized expense reductions with an estimated benefit to fiscal 2012 of approximately $30 million.

At the end of the quarter, our excess borrowing capacity under revolving credit facility was approximately $400 million and as noted in our Form -K filed with the SEC, the company entered into a first amendment to the second amendment and restated loan and security agreement effective October 25, 2012 which increased our excess capacity.

Our total debt levels including capital leases were $1,023,000,000 an approximate 3% reduction from the prior year period and our new proprietary credit card partnership with Alliance Data continues to perform very well. It’s delivering increased card usage, higher new account approval rates and strong customer service.

Details of our third quarter include the following, comparable store sales increased 1.9%; total sales also increased 1.9% to $668.7 million. Gross margin dollars were $244.5 million, our gross margin rate decreased to 36.6% of net sales compared with 37.4% in the prior year period. The decline in the gross margin rate is largely attributable to increased net mark downs and delivery expenses.

SG&A expense was $224.8 million compared with $234.9 million in the prior year period. The SG&A expense rate was 33.6% of net sales compared with 35.8% in the prior year period. The reduction in SG&A expenses in the third quarter of 2012 reflects a reduction in marketing expenditures as well as we transition to a more efficient and effective marketing program and store expenses which were partially offset by increased benefit and severance costs.

Interest expense was $20 million compared to $21.9 million in the prior year period. We recorded an income tax provision of approximately $349,000 in the current period compared with the provision of $640,000 in the prior year and our net loss totaled $10.1 million or $0.55 per share compared with a net loss of $22 million or $1.21 per diluted share for the third quarter of fiscal 2011.

A few notables for the year-to-date financial results, comparable store sales increased 0.3%; total sales increased 0.2% to $1,904,000,000. Gross margin dollars decreased $19.3 million to $678.2 million and our gross margin rate decreased to 35.6% of net sales compared with 36.7% in the prior year period. The decline in the gross margin rate is primarily attributable to increased net mark downs and delivery expenses.

SG&A expenses decreased $4.2 million to $672.5 million compared with $676.7 million in the prior year period. The year-to-date SG&A expense rate decreased slightly to 35.3% of net sales compared with 35.6% in the prior year period.

The year-to-date expense reduction is primarily due to decreased marketing expenditures and store expenditures partially offset by increased benefit and severance costs. And our net loss was $96 million or $5.20 per diluted shares compared with a net loss of $90.3 million or $5 per diluted shares for the prior year period.

Looking at some key ratios and balance sheet amounts, our total balance sheet inventory at the end of the third quarter increased 0.1% as compared with the prior year. Accounts payable decreased 4.8% reflecting the timing associated with payments of accounts payable and reduced in transit merchandise.

Fiscal 2012 year-to-date capital expenditures before netting third-party contributions were $57.6 million, compared with $51.1 million for the prior year period and this reflects increased expenditures for strategic initiatives, [shoe] intensification, visual support and POS equipment. Components for our debt at the end of the third quarter fiscal 2012 notes due in 2014 $134 million, notes due in 2017 $330 million, revolving credit facility $272 million, CMBS facility $227 million and capital leases and other minor mortgage notes were $60 million, bringing us to a total debt $1.23 billion.

Moving to our fiscal 2012 guidance, we're reaffirming our guidance for adjusted EBITDA in the range of $160 million to $190 million for loss or earnings per diluted share in the range of a loss of $1.35 to earnings of $0.20 per share and for cash flow in the range of $30 million to $55 million.

I would like to briefly discuss Hurricane Sandy and the impact on the company. The impact on our stores was not as great as others because of our locations. We had a total 37 stores in Pennsylvania and D.C. which closed throughout the day on Monday beginning in the morning hours. By Friday, all stores were open. There was minimal damage to a few stores. Water damage or window breakage as well as water damage to a few containers of private brand merchandise and some delay in merchandise shipments.

There remains a level of uncertainty on the final impact of this devastating storm and therefore we will continue to monitor trends in the affected areas. Our Form 10-Q for the third quarter of fiscal 2012 will be available by December 6.

At this time, I would like to turn the call back to Brendan.

Brendan Hoffman

Thank you, Keith. We now will be happy to answer any of your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question we will hear from Edward Yruma with KeyBanc Capital Markets.

Edward Yruma - KeyBanc Capital Markets

You have done a lot of early work on repositioning some of these categories within your store and I know you have identified shoes, fashion apparel, have you seen a difference in the amount of vendors you are able to track to some of these key areas and then in particular have you been able to get more national vendors to some of your lower volume stores?

Brendan Hoffman

Yeah Ed, well I think it’s a combination of things as we have so many different stores in so many different areas, on one hand we are trying to in areas that are highly competitive make sure we are competitive with the right brand. So, we are pleased with the support brands like Coach and Michael Kors and Ralph Lauren are giving us to allow us to become competitive as we continue to rollout doors with brands like that.

And then in some of our smaller doors we are working diligently with other national brands to find ways we can differentiate ourselves that the competition in those areas are enable to offer and (inaudible) I know is a great example I mentioned that we opened up our new store there a couple of weeks ago I was there for the ribbon cutting and a lady came up to me and hugged me and said thank you, I used to have to drive 60 miles to get Esteé Lauder cosmetics and now she has in her backyard.

So I think we continue to look for opportunities that we at some places where we already have the brands and are doing enough to make sure the customers aware of that in other places where we can add brands to better service the local community.

Edward Yruma - KeyBanc Capital Markets

And I know that you been more tactical in the way you brought it, you done 50 of 100 and it seems like you’ve been a little bit more aggressive on the promotional. How do we think about longer term gross margin, do you view this step up and promotion is kind of a more fundamental shift in your business strategy or is this kind of more of a new-term issue, thank you?

Brendan Hoffman

I think there is lot of ways, we ultimately get to the pricing to the end and to the pricing that the consumer realizes and for us its not just the coupons, its also the POS that's happening on the racks and on the [four] ways and so we have been playing with the different dials to ensure that we protect our gross margin but also able to better message out value to the customer.

We think that letting the coupon be the headline makes it easier for the customer understand the discount and we have changed our pricing on the actual fixtures to allow for the coupon to do the heavy lifting. So as I read them in my remarks, our gross margin erosion was due more to the at the beginning of the quarter with the carryover inventory that we had from a tough spring, and as we get into more pure form of selling even with the aggressive use of the coupons, we are seeing those rates moderate and come down and we think that bodes well for the future.

Operator

And next from the Grant Jordan with Wells Fargo.

Grant Jordan - Wells Fargo

I wanted to just understand the SG&A expenses a little bit more. How much room do you think you have to continue to bring that down and what's a good run rate to think about.

Keith Plowman

I think the run rate you want to look at Grant is, we will take out the $30 million for this year as a run rate for next year. It will be $40 million. Remember we had some one time costs in there this year, severance and such related to it. But we will continue to be diligent here. We do intend to continue to review ways to make us operate more efficient and eliminate excess costs while we are still driving the performance of the company. So I think at this point we would tell you to look at the 40 million for next year, elimination of those other costs and then as we go forward we will come up with new strategies and we will talk more about that for 2013.

Grant Jordan - Wells Fargo

And then next question is as you think about the holiday season last year was fairly promotional, given some of the warm weather early in the season, how are you thinking about this year.

Brendan Hoffman

Well, I mean we are certainly hoping that it will be colder. We think already on October when Columbus Day it was chilly and we saw it what it did to things like outerwear despite those cold weather businesses. The long range 10 day forecast for Black Friday looks cold and clear. So we are very excited about that, and combined with hopefully some favorable weather we preplanned all of our promotions.

So we know the impact they are going to have on the margin line and that was just a matter of how much they can drive top line sales. So we think by having these well thought through and preplanned and we will be able to execute both top line and bottom line, but obviously there's a long way to go. Black Friday for us is like a small month, and so we need to get through that and that will give us a real good indication of what we can expect for the holiday season.

Operator

And we will move on to William Reuter with Bank of America.

Unidentified Analyst

This is actually [Spencer] in for Bill. I appreciate you guys taking my questions. I think last call you noted that product costs were going to be down 5% to 8% in the fall. I was curious if this is still the case and kind of what you guys were thinking about for the first half of 2013.

Keith Plowman

I mean yeah, with private brand we are certainly seeing prices moderate as we had suggested last time and we think that and we know that will continue through spring and actually give us more favorability as we get into the spring with our large private brand business.

Unidentified Analyst

Just two real quick ones. I was wondering or curious what you guys were thinking about your 2014 notes and then how you are thinking about CapEx for next year.

Keith Plowman

As far as the 2014 notes, they are very much on our horizon. We are watching them. Obviously our focus has been on our performance here in the third and fourth quarter and driving additional sales and volume, and we've been looking at strengthening partnerships and relationships we have with our vendors out there, as we get into new product lines and intensify other product lines like shoes and such as we've discussed.

Right now the excess capacity is very strong. We like the position of where it sits and will continue to keep it at that level here as we go forward for the near future. But as we go forward, we will definitely be focused on and addressing those senior notes with what we've done, with the ADS agreement, with what we've done with our revolver and the amendment we put to it, we essentially had increased our capacity and availability to retire those senior notes, but we are also looking at our performance and when it is the opportune or appropriate time for us to look to do a new issue of senior notes.

So we are going to put all that together as we go forward, very focused on it and feel that in fact we can get ourselves in the right position at the right time to address them. As far as capital for next year, I don’t see a whole lot of changes. We are obviously not that focused on 2013 at this point but I would see that you know, our capital be in the same range as what we looked at this year and you know, until we drive expenditures for essentially more cash flow, we will essentially keep our capital expenditures in a somewhat fixed area.

Operator

And next we will hear from Karru Martinson with Deutsche Bank.

Karru Martinson - Deutsche Bank

Good morning. Just on those 2014 notes, are there any restrictions on using the revolver to repay those?

Keith Plowman

We have two covenants that we need to comply with. One is the fixed charge coverage ratio and the other one is an excess capacity level. We satisfy both of those very well. So we could retire at any point, we could use the revolver to retire the full proceeds if we so chose. So we have a lot of strategy if you are in different ways we can address it. But there is nothing precluding us from using the revolver.

Karru Martinson - Deutsche Bank

Just switching gears a little bit here to the outer wear. We know certainly a drag last year, and is there any way to kind of quantify how much that was off last year, just to look at the benefits that you will get this year?

Keith Plowman

Yeah, the out wear was down pretty substantially last year. There is no question if you look at on a comp basis, it could have had 3 percentage points impact in the quarter and definitely had a gross margin impact because we lost the profit on those sales, obviously being able to move them through, as well as the impact it had on the rest of our business, and we’ve estimated that before that we felt that was over a 100 basis points in the fourth quarter.

Karru Martinson - Deutsche Bank

And then when we look at Black Friday, some competitors out there, though not your two main ones have talked about opening early, 8 o’clock, 9 o’clock on Thanksgiving Day. How are you guys feeling about the midnight opening? Are you worried about losing sales or what's driving that decision?

Brendan Hoffman

Well, last year was the first year we opened up in the midnight and it worked incredibly well, and so we were very comfortable using that as kind of a starting point. We will certainly evaluate in the future, but no, really we gave no real thoughts to opening them a year earlier and feel like it’s the appropriate time for us and our customer.

Operator

And next we will move to [Paul Simonar] with JPMorgan.

Unidentified Analyst

Hi thanks (inaudible) from JPMorgan. I have some questions on inventory; can you give us a sense for how much clearance inventory you are sitting on today or at the end of third quarter versus last year’s third quarter?

Keith Plowman

From a standpoint of clearance inventory, I would really prefer at this point we let this run through its process. It’s not a material number, we have everything loaded out the stores now and we are selling through it, but we would like to get through a full cycle of clearance selling and come out in the fourth quarter and give you some results. What I can tell you is the proceeds we are realizing on that clearance inventory are already higher thus far this year, then what we realized in trying to liquidate it when we headed out in the floor in the second quarter of 2011. So we feel what we have done is prudent, but we really won’t let this run through the process before draw too much attention to it.

Unidentified Analyst

So it sounds like so you are gaining better pricing on clearance is that what you are saying?

Keith Plowman

Yes, we are getting better throughput selling on it, we are getting better pricing. Right now what we are seeing is some movement of the mark downs over the pricing which is what we want to accomplish. We believe this strategy is going to be very beneficial to us, but again we don’t have enough information. We are really only if you think about the season, we are really only about a month and a half into selling of that merchandize and it’s going to be through the fourth quarter that’s really going to drive the results.

Unidentified Analyst

Okay. And you mentioned that this quarter’s margins were slightly impacted year-over-year by increasing net mark downs. So given you are still moving through the same type of a clearance environment will we expect a similar increase in net mark downs in the fourth quarter or does it actually accelerate.

Keith Plowman

I think as you look at it and Brendan said in his comments that we saw improvement throughout the quarter. I can tell you this as we look at now all retailers use the retail stock ledgers, they run through the merchandize margins and look at the profit of selling through. As we look at August, we were below the prior year, as we look at September we got about flatness, we went to October we actually increased our gross margin rate compared to the prior year. So we like the trend we are seeing. As Brendan mentioned we’ve got more fall goods in there. We think the mark down rate and the margin rate is improving and we are excited about what we see, so we will have to prove that through the fourth quarter.

Unidentified Analyst

On the SG&A reduction, you’ve done a great job with cost saved. Can you also give us a sense for was there any of the reduced SG&A on lower employee accruals this year versus last year?

Keith Plowman

That would all be part of that. Yes, I will say when you say lower than last year, they were not a lot of those, like if you are saying bonus accruals and things like that, that was not last year, so I think probably there is somewhat comparable. I would say more the cuts that we did were across that. We felt that we are excess, we are not driving the business and really are sustainable as we go forward and will benefit us from 2013 and forward.

Unidentified Analyst

Just one last questions. Now that JCPenney is hard, there’s 11 shops and 700 or so of their stores. Are you noticing since August when they were in place any different patterns with your consumer in those categories like in Levis or I have heard some of the brands where you have crossed over with their shops?

Brendan Hoffman

I can't speak to the specific 11 occasions are the ones that I think a lot of those are down south from what I have seen. I can say that our stores that compete with JCPenney’s in the mall did outpace the balance of our stores.

Operator

And next we move to Mary Gilbert with Imperial Capital.

Mary Gilbert - Imperial Capital

I just wanted to follow-up on the gross margins. So when we look at the fourth quarter would we expect to see gross margins higher year-over-year versus it being down in the third quarter. We know that that was an improvement particularly as we got to the end of the quarter?

Brendan Hoffman

Let me back up by saying and I eluded this in my remarks, the third quarter is a combination of clearing through last season’s merchandise and starting fresh with the new season with fall. So as we know we had a very difficult spring season. Part of Q2 we try to rebalance our assortment on the fly as we had talked about previously we had gotten too updated too quickly. So we chased some traditional merchandise which I think was the right thing to do to make sure we didn't lose our customers.

But that creates along with the slow sellers we had to begin with some inventory grudge that we needed to work through in August and into September. We've seen it keep just articulated improvement each month and highlight it really in October where it was much more fall selling versus fall selling. We are hopeful that carries through along with being much more disciplined than we have been in years past about our receipt flow in inventory management.

So that we will end the quarter much cleaner than we have before. But as I said before, Black Friday next week is like a small month and then we have a huge month of December. So it’s without knowing how that's going to play out its impossible for me to say with certainty but I think we are much better positioned to allow ourselves gross margin rate improvement moving forward.

Mary Gilbert - Imperial Capital

And then also when we look at this quarter, would you say that the results were consistent with the $160 million to $190 million guidance for the year or was it ahead of plan, how should we look at that?

Keith Plowman

I think you should look at as we were pleased with the results. We expected to perform better this year than last year which we did and it kept us comfortably within our guidance range.

Mary Gilbert - Imperial Capital

And then are you experiencing any shift in spending behavior post the storm?

Keith Plowman

Not sure I'm following you.

Mary Gilbert - Imperial Capital

Well, I just wondered how the Hurricane Sandy has impacted consumer spending, particularly in the areas where it’[s nearby or you know that were hard hit?

Keith Plowman

As we noted a little bit earlier we did have some stores that were impacted really as you look at it, we have [wreck] New Jersey store, we have a store in Connecticut that were really in I will call it the more direct line but most of our stores are more inland, so we don't expect the impact to be as great on us initially from the storm but we are going to continue to monitor because there's no question we may see some changes in consumer habits and their spending. There's nothing I would say that we would draw to attention today but we will continue to monitor it as we go in here through the holiday season to see what happens.

Brendan Hoffman

We had also maneuvered our marketing calendar, promotional calendar differently in the first couple of weeks of November mostly because of the election, obviously we didn't know about Sandy but we knew that the election can cause a distraction and so I think that combined with Sandy I'm sure had an impact on the consumers’ shopping patterns but we had kind of already moved around some events to allow for that.

Mary Gilbert - Imperial Capital

And then as we look at the updated stores and their performance relative to the chain average. Can you give us an update on that on how much they outperformed the chain average and then also the JCPenney stores, direct stores that you are seeing an impact, how much more than the chain average were those performing better than the chain average?

Brendan Hoffman

Well, I think in the updated stores, I think you were referring to stores that we renovated. We continue to see good results although somewhat inconsistent, which is why we have pulled back a little bit on putting so much of our capital into so few doors and trying to spread it out over a bigger part of our store portfolio.

I mentioned some of the muscle moves we're doing in the stores which often is done with little or no capital as well as trying to go back in and see can we impact more doors through things like better lighting, new paint, just more subtle touches that can lift more stores than just a few we were able to touch in the past.

So, everything we’ve done, I think I said last time, with these stores we renovated is consistent with the direction I want to see the company move in. It's really just that it was going to take too long for us to touch enough stores to move the overall needle. So, that’s how we kind of rethought our capital spend. And with JCPenney as I mentioned, we are seeing those stores outperformed but I am not going to articulate what that percentage is.

Mary Gilbert - Imperial Capital

Okay, and then I wondered if we could just get a couple of metrics on, maybe on, this is in the release but how much was drawn on the revolver at the end of the quarter and what was borrowing base?

Keith Plowman

The revolver, again we don’t normally put that information out. We essentially give the excess capacity which was about 400 million; I don’t have that at my finger tips at this point.

Mary Gilbert - Imperial Capital

Okay. And then what was stock compensation expense in the quarter?

Keith Plowman

Stock normally runs, we’ve disclosed before that runs about $7 million a year, so it will be flat line through there.

Mary Gilbert - Imperial Capital

Finally with regard to addressing the notes, it sounds like you could consider tapping the financial markets may be in the first quarter after we get through the holiday season is that fair.

Keith Plowman

I think we have a lot of flexibility, obviously our results are going to be very important to show how we perform in the fourth quarter as Brendan mentioned, Black Friday, the holiday season itself. I think we have several opportunities where we can go out and address the markets. Right now we are still formulating our strategy watching our performance and from there I think we will come up with the right strategy.

Operator

And we do have one final question remaining, we will hear from Jordan Hughes with Goldman Sachs.

Jordan Hughes - Goldman Sachs

Just a couple of questions on your new clearance stores. To be clear these are - this is firstly an existing stores that just have been designated with clearance areas and kind of a clearance section within the store right?

Brendan Hoffman

Yeah, currently they are all within existing stores that we have partitioned off, in some cases they have their own floor so we are able to really brand it as a clearance store. We felt this was the best most efficient way to test this concept and as we move forward we will certainly look to test free standing store too.

Jordan Hughes - Goldman Sachs

And are these stores receiving merchandize from other stores in the region than being clearance at this location.

Keith Plowman

Yeah, of our 270 approximate stores we are now consolidating them down to we are starting with three, now it’s seven and we will move to 10 in the spring and spending sometime allocating it so that they can each get a balanced assortment between the categories. And again as Keith mentioned we’ll learn a lot over the next six, eight weeks and figure out, how to change the process to improve upon it.

Jordan Hughes - Goldman Sachs

Okay. I think you answered this question, but there aren’t necessarily current plans to up store that are purely discount stores but that could be an option?

Keith Plowman

Yeah, something I would expect us to test that at some point in the future, but nothing definitive at this point.

Operator

And we will take a question from Kristina Westura with Telsey Advisory Group.

Kristina Westura - Telsey Advisory Group

I have two questions. Assuming that your annual comp items at zero to 1.25% previously stays impacted and that the EBITDA and EPS is unchanged to clarify that. and then second on can you shed some positive commentary around the proprietary credit card and increase usage, just wondering if there is any color there, can you mind as up the penetration rate and then is there is anything that you are doing to drive that, thanks?

Keith Plowman

From the standpoint of the underlying assumptions, you are correct in what you are assuming at all. Could we achieve a little bit above that, could that impact as we do the mix between gross margin and between sales, right now I am looking at those somewhat combined and I think that's why we are comfortable in saying with the underlying assumptions and really not getting in any more detail at this point. We feel that we can achieve within that range and essentially will drive that 160 to 190 EBITDA.

From the standpoint of the credit card, yeah, what I can share with you is, we are running in round terms anywhere from, I will say almost 2 percentage point to 3 percentage point better in our credit penetration throughout the quarter, it actually has gone up and down within the periods. But as we entered into October again that was our strongest month.

All the new cards are reissued and out there and we are definitely seeing response, we are tracking the coupons with the credit performance to see how that's doing for the company and everything we are seeing is very positive. [ADS] has been absolutely excellent partner and we are excited about the direction we see going forward with them.

Operator

That will conclude today's question-and-answer session. I would like to turn the call back over to Mr. Brendan Hoffman for any additional or closing remarks.

Brendan Hoffman

Okay, well thank you for your questions and your interest in Bon-Ton and we look forward to updating you at the end of the fourth quarter. Thank you.

Operator

And that will conclude today's call. We thank you for your participation.

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