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Executives

Thomas A. Andruskevich - President, Chief Executive Officer, Director

Michael Rabinovitch - Chief Financial Officer, Senior Vice President

Martha [Rodriguez]

Analysts

Barbara Wyckoff - Buckingham Research

Bob Gibson – Octagon Capital

Janet Kloppenburg – JJK Research

David Mann – Johnson Rice

Andrew Shapiro – Lawndale Capital

Birks & Mayors, Inc. (BMJ) F2Q09 Earnings Call November 17, 2008 4:45 PM ET

Operator

Welcome to the Birks & Mayors second quarter fiscal 2009 earnings conference call. At this time all participants are in a listen only mode. (Operator Instructions) It is now my pleasure to introduce Ms. Martha [Rodriguez]. Ms. [Rodriguez] you may begin.

Martha [Rodriguez]

Thank you. I hope each of you has received a copy of our earnings release. If for any reason you did not, you may download it from our web site at www.BirksandMayors.com by clicking on Investor Relations on the home page index and then on financial news releases.

Before we get started I'd like to remind you of the company's Safe Harbor language. The statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the company's annual report filed on Form 20F and other SEC filings.

Now I'd like to turn the call over to Birks & Mayors President and CEO, Tom Andruskevich.

Thomas Andruskevich

Thank you. Good afternoon everyone. Thank you for joining us to discuss our company’s second fiscal quarter 2009 results. On the call with me today is Mike Rabinovitch, our Chief Financial Officer.

For today’s call I will begin with a brief summary of our second quarter performance and highlight our progress toward achieving the key strategies we identified as we began the year. Then Mike will provide you a more detailed review of our second quarter performance followed by our business outlook. Finally, I will make some closing remarks and then turn the call over to the operator to begin the question-and-answer portion of the call.

As we anticipated, the economic environment during the second quarter proved extremely challenging for our company. While our key strategies of maximizing the sale of items over $20,000, reducing costs and controlling inventory gained momentum as the quarter began, the continued weakness of the United States’ and global economy, the volatility in stock markets around the world and news of the worsening financial crisis led to a sharp decline in store traffic, in consumer confidence and spending in the latter part of the period which negatively affected sales in both Canada and the U.S.

In the United States we experienced strength in sales of items over $20,000 and as a result increased our average sale, partially mitigating the impact of the declining store traffic during the quarter. In Canada where the economy continued to be less volatile consumer spending was nonetheless affected by the financial crisis and weakening in the United States and global economies and led to declines in store traffic and disappointing sales performance in the region.

We also successfully reduced expenses during the period despite the incremental costs associated with our Brinkhaus acquisition and one new Mayor store while carefully controlling the level of our inventory which decreased over 5% on a comparable store basis. In total, for the second quarter net sales grew 2.2% to $61.2 million from $59.8 million in the second quarter last year. Sales for the quarter benefited from the Brinkhaus acquisition and the opening of one new Mayors store in Jacksonville.

On a quarter consolidated basis comparable store sales declined 6% which included a 5% decline in Canada and a 6% decline in the United States. Net loss per share was $0.18 as compared to a loss per share of $0.31 last year. Net loss for the second quarter this year included a tax benefit of $0.18 per share versus a tax benefit of $0.05 per share in last year’s second quarter.

While the results were disappointing we continued to make progress on our key initiatives that position us for improved profitability in the long-term. To this end we grew sales to our best clients which led to an increase in sales of items over $20,000 in our U.S. region, partially mitigating the decline in customer traffic to our overall sales. We executed to our expense reduction goals as evidenced by the 310 basis point decline in SG&A as a percentage of sales compared to the prior period.

This was achieved even as we incurred incremental costs related to the Brinkhaus acquisition and the opening of a new Mayors store. At the same time we also maintained our unending commitment to providing a superior level of personalized client service which resulted in strengthened client relations. We prudently managed our inventory levels, refining the product assortments that are less productive while investing in the categories that are performing well.

As we enter the holiday season we expect consumer confidence and spending to be quite weak, negatively impacting our upcoming third quarter performance as evidenced by a very difficult month of October realized by many retailers including Birks & Mayors. As a result, we will continue our strategies with an even greater focus on executing those initiatives that are proving successful.

To this end we expect to further strengthen our relationships with our loyal customers to ensure our Birks & Mayors stores continue to be their destination of choice this holiday season. We have targeted in-store events where we will showcase the strength of our brands and product offerings to further utilize an increase in average sales and to offset store traffic declines. We will also continue to exercise fiscal discipline through expense reduction and effectively and prudently managing inventory levels below that of prior year.

We will also limit capital expenditures to only those projects which are considered necessary. These strategies combined with the advantages of our business model should hopefully provide us with an opportunity for market share gain when North American economies improve and consumer confidence strengthens.

Additionally, we are in the process of negotiating additional sources of financing and an extension of our secured line of credit which we believe will provide us with the adequate liquidity to fund our business over the near-term.

Finally, we have begun a strategic review of our store base and upon completion plan to selectively close or not renew at expiration a small number of under performing locations that do not meet our stringent productivity targets.

Now I’d like to turn the call over to Mike to review our financials and outlook in more detail.

Michael Rabinovitch

Thank you. Good afternoon everyone. Before I begin my financial review I first want to remind listeners that our results are reported in U.S. dollars and are prepared in accordance with U.S. GAAP. Although the impact of foreign exchange translation may be significant on certain line items the impact of the net results on the company is insignificant year-to-date.

Beginning with the review of the income statement for the second quarter fiscal 2009, net sales increased 2.25% or $1.4 million to $61.2 million during the second quarter. This increase was primarily driven by $3.8 million in sales generated by new store additions including two acquired Brinkhaus stores and one new Mayors store, $300,000 of international sales of Birks products to third party retailers as well as $150,000 benefit from foreign currency translation which offsets the sales loss from our comparable store sales declines during the quarter.

Total comparable store sales decreased 6% following a 5% gain during the prior year’s second quarter. Regionally, comparable store sales in Canada and the U.S. decreased 5% and 6% respectively primarily due to decreased consumer confidence and spending in a continued weak and challenging economic environment which resulted in a decrease in customer traffic in both Canada and the U.S. which were partially offset by an increase in our average sales.

Gross profit declined $1.5 million to $27.4 million or 44.8% of net sales as compared to $28.9 million or 48.3% of net sales in the prior year period. The 350 basis point decline in gross profit margin was driven by the lowering of retail prices in certain products sold in Canada in November 2007 to reduce price disparity with the U.S. market and certain sales initiatives in the U.S. which resulted in lower margins on the sale of selected products.

SG&A expense in the second quarter of fiscal 2009 decreased $1.3 million to $27.3 million of 44.6% of sales from $28.5 million or 47.7% of net sales in the second quarter last year. The decline in SG&A was primarily driven by a $700,000 decline in marketing costs, $1 million decrease in compensation costs and $700,000 decrease in general operating expenses resulting from our continued effort to reduce general corporate overhead costs. Offset by $1.1 million increase in operating costs related to the opening of a new Mayors location and the acquisition of the two Brinkhaus locations.

Our second quarter net loss improved to $2.1 million or $0.18 per share from a net loss of $3.5 million or $0.31 per share in the second quarter of last year. The results for the second quarter of fiscal 2009 include tax benefits of $2 million or $0.18 per share as compared to a tax benefit of $500,000 or $0.05 per share during the same period last year related to the recognition of income tax recovery for losses generated in both our Canadian and U.S. operations during the period and the resolution of matters pertaining to prior year’s income taxes.

For the first six months of fiscal 2009 net sales grew $5.7 million or 4.4% to $133.6 million. Comparable store sales for the first half of fiscal 2009 decreased 5% which follows a 4% gain in the prior year period. Comparable store sales in Canada decreased 1% while comparable store sales in the U.S. declined 9%. Despite the decrease in comparable store sales net sales compared to the same period last year increased by $5.7 million primarily due to $8.9 million of additional sales generated from the opening of two new Mayors stores and two acquired Brinkhaus stores and $3.1 million in foreign currency translation.

Gross margin for the first six months of fiscal 2009 declined 220 basis points to 45.1% of net sales as the result of lowering retail prices in Canada in 2007 and certain sales initiatives in the U.S. which resulted in lower margins on the sale of selected products. SG&A expense decreased $149,000 in the first half of fiscal 2009 to $58.5 million or 43.8% of net sales from $58.6 million or 45.8% of net sales in the prior year period. The improvement in our SG&A resulted from $1.3 million of lower marketing expenses, $1.6 million decrease in compensation expenses and $800,000 reduction in general operating expenses resulting from our continued efforts to reduce general corporate overhead costs.

These cost savings were partially offset by $2.3 million in expenses associated with the November 2007 acquisition of the Brinkhaus stores and the opening of two new Mayors stores and $1.3 million of higher expenses due to the impact of foreign currency translation.

Our loss before income taxes during the six-month period ended September 27 increased to $6.8 million from $6.5 million during the comparable period last year. This $300,000 increase was primarily driven by decreased net sales and gross margin rates partially offset by $8.9 million of additional sales resulting from the acquisition of Brinkhaus and the opening of two new Mayors locations. $3.1 million of additional sales resulting from the translation of Canadian sales in U.S. dollars at a higher foreign currency exchange rate and the exercise of fiscal discipline which resulted in a reduction in general operating expenses.

Net loss for the first six months of fiscal 2009 improved to $4 million or $0.35 loss per share from a net loss of $5.5 million or $0.49 per share in the prior year period. Results for the first six months of fiscal 2009 include a tax benefit of $2.8 million or $0.25 per share as compared to $1 million or $0.08 per share during the same period last year related to the recognition of income tax recovery for year-to-date losses generated in both our U.S. and Canadian operations and the resolution of matters pertaining to prior year’s income taxes.

Turning to the balance sheet, inventory at September 27 was $187.9 million as compared to $191 million at September 29, 2007. The $3.1 million decline in inventory primarily reflects the impact of $3.2 million of lower inventory related to foreign currency translation. Excluding foreign currency translation and the inventory related to the Brinkhaus acquisition and one new Mayors store, inventory increased 5.6% on a comparable store basis.

Bank debt at September 27, 2008 decreased $7.2 million to $127 million from $134.1 million on September 29, 2007. Of this decrease $3.8 million was due to the impact of foreign currency translation. On a comparable basis with the end of September 2007 which excludes the additional bank debt associated with the opening of one new store, the Brinkhaus acquisition and the impact of foreign currency translation, bank debt was approximately $10.5 million lower than at the end of the comparable period last year.

Now for an update on our revolving credit facility. We are currently in negotiations to extend our secured line of credit which expires on January 19, 2009 for a period of three years. Additionally, we are concurrently negotiating additional sources of financing. These borrowing facilities, if executed, will be at a higher cost and will be more restrictive than our current credit facility. We seek to close these facilities during the third fiscal quarter ending December 27, 2008.

Capital expenditures year-to-date totaled $3.2 million and for the full fiscal 2009 year we currently project capital expenditures to be approximately $4 million. Now I’d like to make some comments in regard to our business outlook for the year.

Due to the potential impact on our business of the volatility in the financial markets, equity markets and the related effects on consumer confidence and consumer spending, we have less visibility heading into this holiday season than in years past. As a result of these events and an all-time low in consumer confidence and spending we expect our net sales and gross margin rates to decrease for the remainder of this fiscal year and for the year as a whole.

As you know, our third quarter performance and full-year results are driven in large part by the holiday selling period of November and December. Comparable store sales during the month of October decreased 15%, demonstrating the worsening of consumer confidence and its impact on consumer spending. While we feel confident about our strategies in merchandising and marketing, we are expecting an extremely difficult holiday selling period. We will maintain our fiscal disciplines of expense control and inventory management and are hopeful our efforts will enable us to grow market share when the economy improves.

Now I’d like to turn the call back over to Tom for closing remarks.

Thomas Andruskevich

In summary, we are operating in unprecedented times as we experience challenging and weakening U.S. and global economic environment. We are fortunate to possess two strong brands with heritage and reputation for the highest quality jewelry and timepieces and superior client service as well as a strong base of loyal clients and a talented management team. We will continue to manage expenses and assets efficiently in order to minimize the financial impact this economic cycle could have on our company.

We are also very focused on our ability to maintain sources of borrowings to finance our operations and strategies.

With that I would now like to turn the call over to the operator to conduct the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Barbara Wyckoff - Buckingham Research.

Barbara Wyckoff - Buckingham Research

Can you talk about trends in diamonds, statement jewelry and bridal categories and then I have a couple of other questions.

Thomas Andruskevich

In terms of overall trends in the business, as I think is true pretty much across the industry from what I have read, bridal of all categories continues to hold up pretty well. In terms of statement jewelry are you talking about solitaires specifically?

Barbara Wyckoff - Buckingham Research

Statement jewelry in terms of necklaces, earrings and things like that which are diamond related and then I guess separate bridal being a separate conversation.

Thomas Andruskevich

Bridal, as I said before, is holding up better than other categories. Let me put it this way. Statement jewelry at the high end of our business through September held up pretty well in both Canada and in our U.S. markets on a year-to-date basis with some weakening as we moved beyond September. Fine jewelry as a category is a challenging category right now.

Barbara Wyckoff - Buckingham Research

With the sales trends pretty consistent in the U.S. and Canada as the quarter progressed or did it deteriorate a little as the quarter went along?

Thomas Andruskevich

As the quarter went along it deteriorated particularly as we moved into the middle and latter part of September and that deterioration as you probably heard continued into October.

Operator

The next question comes from Bob Gibson – Octagon Capital.

Bob Gibson – Octagon Capital

Could you just give us some flavor as to how you did versus your competition?

Thomas Andruskevich

I think there are some hard numbers we can offer. I think I’ll let Mike address the numbers that are out there and I can give some anecdotal references.

Michael Rabinovitch

There are several retailers who announced their quarter end but our fiscal quarter doesn’t directly correlate with theirs where other retailers have an October quarter end and we have a September. But what I can gather is that some of the larger chains, high-end retailers, big box such as Nordstrom, Sachs and Neiman fared worse than we did on a comparable store basis. Even if I include our month of October into making our quarter comparable I believe that on Blue Nile’s conference call they announced their October was minus 20. We announced just a few moments ago our October comparable store sales were minus 15. So, whether it is the ones that are publicly released or the anecdotal information we receive from the industry, we think we are faring better than some and there are some that are doing not as poorly but for the most part it is a very difficult trend right now.

Thomas Andruskevich

I think to add to that, and all this is public information, but my recollection tells me I believe Neiman’s comp store sales in October were down 26.8%. Sachs was down 17%. I think Nordstrom was down 26% and beyond that anecdotally from speaking with some of our suppliers and to people who do business in our market, I think with one particular watch brand which I will not, cannot disclose, I think we are probably doing better than just about most of their retailers from what we have been told. I think within Florida, compared to a couple of the other retailers we compete against within Florida we seem to be doing better than they are.

It is all anecdotal information and information that is hard to verify.

Bob Gibson – Octagon Capital

Can you just educate me a little bit into diamond pricing? With the strength of the U.S. buck are you able to source your product cheaper in U.S. currency and therefore could pass that along? How does that work?

Thomas Andruskevich

Diamonds are priced in U.S. dollars and the strengthening of the U.S. dollar really doesn’t affect our cost of diamonds in the U.S. The weakening of the Canadian dollar against the U.S. actually hurts us when we source diamonds in Canada and buy them in Canadian dollars. So if anything, higher diamond price will hurt us in Canada if the Canadian dollar is weakening. Over the last several years, high quality, high carat weight goods have increased quite substantially but it has been reported in the last several weeks that diamond prices on the high end, high quality goods, have actually weakened for the first or second time in quite a while.

Bob Gibson – Octagon Capital

Lastly, on your line of credit, when you said there might be some restrictions can you give us any color as to what that might be or is it strictly a rate issue?

Michael Rabinovitch

It is going to be a rate issue and it is going to be a borrowing structure issue. We are an asset-backed; it is an asset-backed loan. We are a secured borrower and the amount of borrowings we are able to borrow on our inventory is going to be restricted by a block on the amount of borrowings on our inventory. So in year’s past we had an availability on our borrowing base that would allow us to borrow up to our borrowing base and then if we went below certain excess availability thresholds we would have to tap some financial covenants. Instead, the banks are more focused on the availability so they instituted a block which is an amount we won’t be able to borrow on to keep them secured. However, they have relaxed the financial test within the agreement.

Now given the agreement is not finalized or executed, my comments are cautioned by the fact that the final documents when finalized will be publicly filed and things could change between now and then.

Operator

The next question comes from Janet Kloppenburg – JJK Research.

Janet Kloppenburg – JJK Research

Did you provide guidance for your fiscal third quarter?

Michael Rabinovitch

We didn’t provide a quarter guidance. We did say, however, that the third quarter we were expecting sales and margin rate to be lower than the prior year. As a result, we expected a net sale and gross margin decrease for the full year as compared to last year.

Janet Kloppenburg – JJK Research

But you didn’t give out dollar values?

Michael Rabinovitch

No.

Janet Kloppenburg – JJK Research

I also wanted to ask if the sales in October worsened as the month progressed or was it pretty stable.

Michael Rabinovitch

October is a five-week fiscal month for us and two of the three were worse than the other three but they were not consecutive weeks.

Thomas Andruskevich

I think the answer to your question, it didn’t start at one point and it didn’t worsen week by week. I think the middle of the month, particularly in Canada, there were two particular weeks that were quite challenging but that coincided with when the Canadian stock market took a huge hit and when there was a lot of press in Canada about growth in Canada slowing.

Janet Kloppenburg – JJK Research

As far as gross margin goes, did you get any sort of price promoting or anything this year? I know you talked about price declines last year but what happened this year to make gross margin decline to the extent it did?

Thomas Andruskevich

In our Canadian business when we decreased our prices in Canada last year that price decrease has eroded our margins throughout the entire fiscal year in our Canadian business. That should anniversary in about a week or two. That impact year-over-year should be changing in the month of November in the latter part of this November.

In our U.S. business due to market conditions and due to competitive conditions we decided to become a little more strategically aggressive on certain products in certain points in time. That in turn has actually worked quite well for us.

Janet Kloppenburg – JJK Research

So we can anticipate that some preferred customers and that may continue through this quarter?

Thomas Andruskevich

Yes. As a matter of practice, we have had what we call client appreciation night which we are in the middle of right now, actually just the beginning of it, which we had planned to anniversary from year’s past. However, we have discussed once again strategic matters and tactical matters of trying to reach our most loyal clients and make sure they feel appreciated in this competitive environment.

Janet Kloppenburg – JJK Research

Do you think you can continue to bring your cost structure down? You did a nice job in the September quarter.

Thomas Andruskevich

I think we have been from the beginning of this fiscal year as a matter of strategy and business planning we felt we had to manage the business conservatively and we have done that both with our expenses and with inventory. We have had more meetings last week and again today and we will continue to do that as the year goes on. So yes we believe there is more opportunity there.

Janet Kloppenburg – JJK Research

On the line of credit, when do you expect to finalize the new line and do you think that the covenants put in place put some strain on your inventory planning and limit the level of inventory you will be able to offer to the public?

Thomas Andruskevich

On the contrary, the new loan facility really does not limit inventory. It is an asset-based loan and we actually borrow against inventory. So it doesn’t limit inventory at all. When it comes to covenants, as Mike pointed out earlier, there are really no covenants in the new loan if the new loan stays as it is structured right now which we believe it will. But there is this block which basically reduces our overall borrowing availability compared to the old loan. Did that answer your question?

Janet Kloppenburg – JJK Research

When do you expect to finalize the borrowing?

Thomas Andruskevich

We expect to finalize it in this fiscal quarter which ends in December and the banks really are moving this quite along as we are. We would be hopeful it would not be too far from the beginning of December.

Operator

The next question comes from David Mann – Johnson Rice.

David Mann – Johnson Rice

Just to clarify on the October trend, it sounds like that did not vary too much between Canada and the U.S.?

Michael Rabinovitch

To be specific, the U.S. was worse than Canada but on a combined basis they were 15 and both of the chains were worse than their September trend.

David Mann – Johnson Rice

In terms of some of the performance of initial or lower price points, I understand your higher price points may be doing better. How are the lower price points or initial price points doing?

Thomas Andruskevich

The lower price points have been challenging actually since the beginning of this fiscal year and actually as far back as the fourth quarter of the previous fiscal year. I think that is consistent with what one would expect given some of the economic challenges that upper-middle income or middle-income or lower middle-income clients would be facing in this kind of economy. Initially with higher gas prices and in Florida real estate taxes and home insurance increases, and as time went on I think it just became an overall difficult economic situation. That continues to be the most challenging segment of our business.

David Mann – Johnson Rice

Can you talk about your latest read on industry consolidation or rationalization?

Thomas Andruskevich

I think when it comes to industry consolidation and rationalization I think we have been seeing it happen over the course of the year. We have seen several major jewelers and smaller jewelers either file for bankruptcy protection or go into liquidation. I think if the mode and severity of the consumer confidence and consumer spending decrease we see continues and if it continues for a prolonged period I think there will be substantial consolidation over the next 12-18 months.

Operator

The next question comes from Andrew Shapiro – Lawndale Capital.

Andrew Shapiro – Lawndale Capital

You talked about the trend in October. That is generally when the fear gauge and credit threat blew way open. There has been substantial governmental intervention, national elections, etc. and the fear gauges are still higher than normal but they have come down. Do you have any early indications from the first few weeks of November on whether or not the sales results have equaled the declines of October or improved or gotten worse?

Thomas Andruskevich

November has continued to be difficult. Without getting into a week-by-week scenario here, our November year-to-date sales at this point in time as we speak are tracking worse than the October comp store sales did. However, we have two important weeks of November ahead of us. Thanksgiving falls later this year than it did last year in the holiday shopping cycle. I think it is very difficult to predict how November is going to turn out.

Andrew Shapiro – Lawndale Capital

The Canadian currency strength was the prime motivator for you to drop Canadian prices last year. The currency has massively depreciated to 3-4 year level lows or even lower than that versus the U.S. dollar. Do you have any thoughts on the impact of the reversal of this currency move and the impact on the pricing moves you might make either in the near term or as the business environment stabilizes?

Thomas Andruskevich

Our merchants are analyzing our marketplace in Canada on a regular basis. As a result of the change in exchange rates and also how our goods are priced in the Canadian market versus the U.S. market we have already made certain price adjustments to normalize our pricing where we believe the market can handle it. I will say, however, compared to where we were a year ago we lowered prices on a greater group of product offerings last year than we felt it prudent to do this year. So inasmuch as we have been following the market and the cross currency exchange rates and impact on our pricing, we were not able to prudently go as far as we did last year when it came to perhaps rolling back some of those reductions.

Andrew Shapiro – Lawndale Capital

There was mention in the press release and in your script that you are concurrently negotiating alternative financing sources rather than, let’s say, waiting until it happens to the bank line. Is it correct to assume that any alternative financing would not be entered into or pursued further until the bank line is locked down and settled in or is it part of possibly a package deal?

Michael Rabinovitch

It is much more a part of a package deal. I spoke a little earlier about the main restriction in our new credit facility we are in the process of negotiating, it is an availability block. That liquidity needs to come from somewhere. So we have identified an additional source of financing outside of the ABL facility that will take a secondary but yet secured position at a different level of pricing and terms to replace the liquidity that has been absorbed by the current ABL availability block. In addition to that we continue to look for alternative sources of financing whether it be for operational initiatives or capital expenditure initiatives and we will seek to concurrently execute these transactions.

Andrew Shapiro – Lawndale Capital

Hoping the debt piece might be completed by the beginning of December, does that mean these other pieces would also be announceable and likely completed around that time as well?

Michael Rabinovitch

It is our hope we can complete these various facilities as quickly as possible but it is anticipated they would likely be at the same time. If there were something that fell out of the timeline cycle we would have a separate release on that.

Andrew Shapiro – Lawndale Capital

So assuming they were around the same time and in the not too distant future, the tangible book value of this company is 672 and the book value is in the 7’s. Any equity investment in this company at these levels with the stock at $0.55 per share, is extraordinarily and highly dilutive. Do you anticipate there is an equity component to warrant kicker that have to be included in any of these alternative financing arrangements or that there will just be a larger interest rate spread to reflect the higher risk of subordinated type of debt?

Michael Rabinovitch

I don’t anticipate any equity dilutive component to any of our financings we are currently negotiating. I do expect the costs to be coming from a higher spread and higher costs.

Andrew Shapiro – Lawndale Capital

What further cost reduction programs do you feel you could implement? Are we down to the bone or is there still some in light of lower sales levels there is still some fixed costs that can be extracted out of the business and what are the triggers for you to implement these additional cuts? It is holiday season, do you do it before the holidays, your biggest quarter? Or would these be things you’d implement after the holidays?

Thomas Andruskevich

I think we have been cutting what we believe are expenses that would not jeopardize our sales or service levels throughout the year. We have tried to prudently reduce our inventory levels in a manner that would not negatively impact sales opportunities. I would say we are now at the point where we will begin cutting some of not just the things that are good to do but we may have to start cutting some of the things that are necessary to do. We will obviously go to every length to cut all of the unnecessary things and all the nice things and we have been doing that all along. Given our results in October and the first part of November we have decided to make additional cuts, non-staffing cuts, before the holidays and we will evaluate where those bring us after the holidays and where our sales, margins and profits lay after the holidays and then evaluate what additional actions we need to take at that point in time.

Andrew Shapiro – Lawndale Capital

Your capEx, what is it planned to be going into? Are these remodels? What other type of maintenance items is this for?

Michael Rabinovitch

The remaining capEx is really only in the range of several hundred thousand dollars for the back six months. So, we have some projects that are currently underway that will be finished very shortly, post-quarter end. No major remodels included in the back six months. No major projects included in the back six months. It is just some minor items here and there.

Andrew Shapiro – Lawndale Capital

Your inventories were flat sequentially when you usually look to increase going into the holiday season. Did you have room to reduce inventory? Are we going into the season with some SKU’s you would have liked to have had?

Thomas Andruskevich

I have recently visited a very large number of all of our stores both in Canada and in the United States. Not in one store has anyone told me they felt our inventory levels are not adequate for the holidays. I believe that our merchants have managed well. I believe we are adequately prepared for the holidays. One of the things we have to be careful of now is being prepared for after the holidays in the event that some of our sales goals are not met. So it is more of a focus, I think, of not having enough now but making sure we do not have too much after the holidays.

Andrew Shapiro – Lawndale Capital

Are you staying focused on the $20,000 plus market? Or is there a migration or move down scale as you approach the season? What are your thoughts?

Thomas Andruskevich

I still believe that the more affluent consumer who obviously could afford items over $20,000 will be the consumer that is most active as we approach the holidays. We are certainly not ignoring the consumer who may spend under $10,000 but it is just we are not seeing as many of them out there. I will say we are trying a variety of both marketing and merchandising initiatives in a very targeted way. We are not looking at broad ad campaigns or broad sale campaigns. We are looking at very, very targeted initiatives that we believe will work for all of our target clients, both our existing loyal clients as well as potential clients.

Andrew Shapiro – Lawndale Capital

Hypothetically, worst-case scenario, with a high-end jeweler that you are what is the process of harvesting cash from inventory if hypothetically matters deteriorated further? Is it better for you to melt down the jewelry versus selling at distressed values and harming the clients and the brand?

Thomas Andruskevich

We have actually been on an ongoing basis with metal prices being what they have been, not so much now but when platinum was up to over $2,000 and gold was over $900 an ounce, and silver got up pretty high as well, we have actually melted down some of our older goods over the course of the last 12-18 months. We have been doing it on an ongoing basis. That is certainly one avenue we use to do that. Recently we looked at some of our loose diamonds that were bought at very, very good prices and decided to sell some of those loose diamonds in the trade at a very good price. We obviously have our ability to generate inventory reduction and cash through our sales at different points in the year which I don’t want to talk too much about because we don’t like to train consumers to wait for a particular period of time.

During this holiday period we are actually approaching the same issue in a slightly different way during the holiday period in a way that may slightly harm margin but I think it will take advantage of the rather high traffic period during the year. Offer some of our clients some exceptional values and at the same time help us perhaps sell some inventory we’d prefer not to have.

I would say on average on an ongoing basis we do pretty well with all these different types of initiatives. We have had good success in measuring our slow moving goods and aged goods and increasing the quality of our inventory on an ongoing basis. It continues to work well for us this year. If we obviously have to take drastic action after the holidays, we can have a very aggressive sale if we need to and have it for a very long period of time but you hit the nail on the head. That begins to threaten client franchise loyalty and it also begins to hurt the brand as well. So to us that would be really a last resort.

Andrew Shapiro – Lawndale Capital

Following up on that, if you melt down from a financial accounting perspective, how does that work? Do you write down the production component of making the jewelry with some gain on the gold?

Thomas Andruskevich

Actually what we have done so far over the last 12-18 months has not really hurt us that much because a lot of the goods were bought in some cases a number of years ago when metal prices were much lower and the metal price appreciated so much that they more than offset the cost of production and labor.

Andrew Shapiro – Lawndale Capital

So does it go through the revenue sales at all or just a conversion of inventory? How do you do that?

Michael Rabinovitch

It is a cost recovery. What I can do is answer your question very concisely in that although the amount of inventory we have worked through on this program is of a good-sized number the result to our margin is relatively insignificant.

Andrew Shapiro – Lawndale Capital

You talked a little bit about closing some stores. What type of benefit do you see cost and balance sheet wise and the timing of some of the shuttering?

Michael Rabinovitch

We have a few stores we are looking at. What we are currently anticipating doing is looking at them at renewal. We have one or two that are this year and we have a couple that are the following year. I would say these stores are not losing a great deal of money. It is a matter of how productive…

Andrew Shapiro – Lawndale Capital

Return on inventory assets?

Michael Rabinovitch

Exactly. The business in this cycle will be better served by re-deploying those assets into our most productive stores.

Andrew Shapiro – Lawndale Capital

So what would you generally do? The inventory would just get shipped to the other stores? You would be out of your lease expense and move on?

Michael Rabinovitch

That is generally it.

Andrew Shapiro – Lawndale Capital

When you say this year you are referring to this fiscal year ending in March?

Michael Rabinovitch

This fiscal year ending March I think there is one we are looking at. No decisions have been made just to be very clear. We are looking at possibly one this year and one or two in the next fiscal year. We have a lot of lease expirations between January and March in terms of that is when they generally expire. It is at the end of each year.

Thomas Andruskevich

The other alternative is of course which we are doing is the one store that comes due rather quickly that Mike referred to is also a store that perhaps could make money if the landlord significantly reduced our rent. That course of action is also actively being pursued.

Andrew Shapiro – Lawndale Capital

On those instances, these leases that are coming up are these generally leases whose lease rates are above market now?

Thomas Andruskevich

It is sort of hard to tell what market is right now. I would say it is not so much they are above market. I would say that in certain malls where traffic is depressed and where we believe that over the course of the next 2-5 years it is going to be very hard for us to make a contribution that makes sense for us we are going back to the landlord and being honest with them and saying listen either we are going to walk away or if you want to keep us here this is what you need to do. We are in one of those discussions right now. Some of them may be rent reductions. Some of them may be downsizing of sort so the size of the store and economics make more sense. But Mike made a good point earlier. None of our stores lose a tremendous amount of money. There are only four stores that we are actually really evaluating very carefully because they either lose a little money or are around a break-even point at their current level of sales. However, if sale trends were to worsen and if their levels of sales were not as great we may choose to rather not have those stores. So that is basically the way we are looking at it.

Operator

There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thomas Andruskevich

Thank you for joining us today. We look forward to speaking with you when we report third quarter results in February.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Birks & Mayors, Inc. F2Q09 (Qtr End 09/27/08) Earnings Call Transcript
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