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

F3Q08 Earnings Call

November 20, 2008 10:00 am ET

Executives

Jean Fontana - Investor Relations

Bud Bergren - President and Chief Executive Officer

Keith Plowman - Chief Financial Officer

Tony Buccina – President, Merchandising

Analysts

Grant Jordan - Wachovia

Emily Shanks - Barclays Capital

Carla [Dison] - JP Morgan

Karru Martinson - Deutsche Bank

Leah Hartman – CRT Capital

David Glick - Buckingham Research

Reade Kem - Merrill Lynch

Chris Dechiario - ISI Capital

Operator

Welcome to today’s Bon-Ton Stores Inc. third quarter 2008 earnings conference call. (Operator Instructions) And now I would like to turn the conference over to Ms. Jean Fontana of ICR.

Jean Fontana

Welcome to The Bon-Ton’s third quarter 2008 conference call. Mr. Bud Bergren, President and CEO; Mr. Tony Buccina, Vice Chairman and President, Merchandising; and Mr. Keith Plowman, Executive Vice President, Chief Financial Officer and Principal Accounting Officer will host today’s call.

You may access a copy of the earnings release on the company’s website at www.bonton.com. You may also obtain a copy of the earning’s release by calling 203-682-8200.

Before we get started, I would like to remind you of the company’s Safe Harbor language. 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, all of which are described in the company’s filings with the SEC.

I would like to turn the call over to Mr. Bud Bergren, President and CEO.

Bud Bergren

Good morning and thank you for joining us today. I will begin with my comments on the third quarter 2008 and my outlook for the remainder of the year. Keith will then provide details of the third quarter 2008 financial results and review the revised financial guidance and assumptions for 2008. Tony will outline the third quarter merchandise results and discuss the merchandising initiatives as we head into the holiday season. I will make closing remarks and then we will be available to address your questions.

I would like to begin by emphasizing a few key points I believe are important in the current environment. First, we have a strong franchise with eight regional names, a loyal customer base, almost five million private-label credit card customers, a strong merchandise mix that differentiates us from our competitors, and a strong management team with a track record of success in good and bad times and have demonstrated our experience in executing a plan.

In terms of our financial standing, I believe we are financially strong. We have an appropriate debt structure in place with one financial covenant, $75.0 million minimum availability on our revolver. We use excess cash to pay down our debt and we have strong relationships with our vendors.

I am aware there is a lot of concern about retailers and questions about their financial strength and their vendor relations but I want to emphasize we have very good relationships with our vendors and are working effectively with them to ensure our mutual success. Partnerships are important in this environment and we believe we have strong partnerships with our vendors.

Turning to our third quarter results, despite a difficult economic environment and general unrest created in the turmoil of the financial sector, we continue to work diligently to further strengthen the company. We continue to play good defense in the third quarter and focus on what is under our control.

Here are some of the highlights. By managing our inventory we reduced our comparable store inventories by approximately 9% from the prior year and we realized 80 basis points of improvement in our gross margin rate, from 34.8% to 35.6%.

Our sales of clearance merchandise are down approximately 15% compared with the prior year due to disciplined inventory management resulting in cleaner inventories today.

We realized a net reduction of $3.5 million in our SG&A expenses during the third quarter and $17.3 million less expenses year-to-date.

Our credit facility at the end of the third quarter was $214.0 million, $139.0 million above our $75.0 million credit agreement covenant. Our debt levels were $45.6 million lower than the prior-year period. We are on schedule to keep out capital expenditures, net of landlord contributions, at or below $70.0 million for 2008.

In e-commerce we tripled our offerings on line compared with the prior year. Our three strongest e-commerce categories continue to be soft home, hard home, and shoes.

We opened our 281st store in September in Blaine, Minnesota, to a rousing reception, and we had two grand re-openings of newly expanded and remodeled stores, one in Lancaster, Pennsylvania, and the other in Okemos, Michigan. Both were extremely well received by the customers in their respective markets.

Our private brand business continues to grow, as evidenced by its continued penetration to total sales. Q3 was 19.1% versus 18.7% last year. The private brand gross margin rate improved in the third quarter compared to the prior year.

Our customers have given us good feedback on our Rewards credit card loyalty program. We now have one loyalty credit card program that was rolled out in August which provides one clear and consistent message to our customers across all eight name plates. Our own credit card sales represented approximately 50% of total sales in the third quarter.

Our customer continues to respond favorably to our assortments, as confirmed by the average retail sale, up 3% to prior year, and average transaction data up slightly to prior year. However, transactions were down due to lower traffic. We are very mindful that our customer continues to be event and value driven and, therefore, we have responded with strong promotions in November and December.

Our regional results reflect Detroit, Buffalo, Minneapolis, and Omaha as our best regions. Our worst performing regions were in central Pennsylvania and our markets in Ohio, Michigan, and Indiana, which continue to impacted by the auto industry.

I believe it will be a challenging holiday season given the current environment and we are managing our expenses and inventory levels accordingly. That said, we believe we are well positioned, with our merchandise assortments and our marketing initiatives, to entice our customers during the shopping season.

Our stores are set with quality, national, and exclusive merchandise at incredible values, plus an expanded e-commerce assortment for our online shoppers, all fueled by a value-driven holiday marketing campaign that we recently presented in a press release, and our new own credit card loyalty program.

Our associates are raised to deliver the great customers to our customers they have come to expect from us. We believe the customer in our markets will recognize us as their holiday shopping destination. We believe the actions we take today will benefit both the short- and long-term success of our company.

I would now like to turn the call over to Keith for the financials.

Keith Plowman

I will review the income statement and some key balance sheet components and then update our fiscal 2008 guidance and the assumptions reflected in this guidance.

Before reviewing the financial details, I want to emphasize some key strengths of our financial position, that despite the difficult economic environment we continue to manage our business with an emphasis on maintaining cash flow and strong liquidity under our revolving credit facility.

We have a long-term debt structure in place which requires minimal principal payment in 2008, 2009, and 2010, and includes three primary committed debt facilities, as outlined today in our earnings release.

In our November 6, 2008, sales press release we noted the October excess borrowing capacity under our revolving credit facility was $214.0 million, which was below the prior-year level of $254.0 million, but well above the required minimum availability of $75.0 million, reflecting the significant available borrowing capacity under this facility.

The decrease in the excess borrowing capacity as compared with the prior year primarily reflects our ability to utilize our strong liquidity position to support the cash flow needs of certain vendors, primarily our smaller partners, and at the same time take advantage of discount terms that have been offered to benefit gross margin in the fourth quarter.

The impact of these short-term and average of about 15-day- accelerated payments is expected to continue through the buying and selling holiday season. We have strong relationships with, and continue to enjoy the support of, our vendors.

We expect our excess borrowing capacity to increase substantially in the fourth quarter, which is consistent with prior years, which will more than adequately support the working capital and operational needs of the company.

Moving to a discussion of the third quarter and year-to-date financial results of fiscal 2008, our net loss for the 13-week period ended November 1, 2008, was $14.3 million, or $0.85 per diluted share. This includes a favorable tax benefit adjustment of about $7.0 million, or $0.42 per diluted share, pursuant to the provisions of FIN interpretation 48 compared with a net loss of $19.4 million, or $1.17 per diluted share, for the 13-week period ended November 3, 2007. Thus, on a comparable basis, the third quarter loss for 2008 was $1.27 versus the prior year’s $1.17.

For the 39-week period ended November 1, 2008, the net loss was $82.2 million, or $4.90 per diluted share, including the second quarter non-cash goodwill impairment charge of $0.71 per diluted share and the favorable tax benefit adjustment of $0.42 per diluted share. This compares with a net loss of $63.6 million, or $3.86 per diluted share for the comparable period last year.

For the third quarter of fiscal 2008 comparable store sales decreased 8.3% compared with the prior-year period. Total sales for the third quarter of 2008 decreased 7.2% to $724.9 million compared with $780.8 million for the prior-year period. Year-to-date comparable store sales decreased 6.3% while year-to-date total sales decreased 5.8% to $2,098.6 billion compared with $2.227 billion for the same period last year.

Other income in the third quarter of fiscal 2008 decreased to $22.7 million compared with $24.8 million in the third quarter of fiscal 2007. And year-to-date other income decreased to $67.0 million compared with $69.9 million for the prior year. The decrease in both periods reflects reduced sales volume.

Gross margin dollars in the third quarter of fiscal 2008 decreased $13.9 million reflecting the current year decrease in sales volume compared with the third quarter of fiscal 2007. The gross margin rate for the third quarter of fiscal 2008 increased by 80 basis points to 35.6% of net sales compared with 34.8% in the prior year, primarily due to decreased mark downs on lower levels of inventory and the improved aging of that inventory and reduced distribution costs.

Year-to-date gross margin dollars decreased $51.0 million compared to the prior-year period, reflecting the current year decrease in sales volume. The year-to-date gross margin rate decreased 30 basis points to 35.1% of net sales compared with 35.4% in prior-year period.

SG&A expenses in the third quarter of 2008 decreased $3.5 million to $261.9 million compared with $265.4 million in the third quarter of fiscal 2007. The third quarter fiscal 2008 SG&A expense rate was 36.1% compared with 34% in the prior year, reflecting the reduced sales volume in the third quarter of fiscal 2008 as compared to fiscal 2007.

Year-to-date SG&A expenses decreased $17.3 million to $764.1 million compared with $781.4 million for the prior year. The SG&A expense rate was 36.4 % compared with 35.1% in the prior year, reflecting the lower sales volume in fiscal 2008.

EBITDA, defined as earnings before interest, taxes, depreciation, and amortization, including amortization of lease-related interest and the goodwill impairment charge, decreased $12.4 million in the third quarter of fiscal 2008 to $19.0 million, compared to $31.4 million in the third quarter of fiscal 2007. Year-to-date EBITDA decreased $36.6 million to $40.3 million compared with $76.9 million in the prior year.

EBITDA is a non-GAAP term, therefore, for a reconciliation of EBITDA to net loss, please refer to earnings press release.

Depreciation and amortization expense, including amortization of lease-related interest in the third quarter of 2008, decreased $400,000 to $31.0 million compared with $31.4 million in the third quarter of 2007.

Year-to-date depreciation and amortization expense, including amortization of lease-related interest, increased $1.2 million to $92.3 million compared to $91.1 million in the prior year.

Net interest expense in the third quarter of fiscal 2008 decreased $2.7 million to $24.7 million compared with the third quarter of fiscal 2007, reflecting reduced borrowings and rates.

Year-to-date net interest expense decreased $8.9 million to $73.4 million compared with $82.3 million in the prior year. This primarily reflects decreased borrowing levels, reduced interest rates, and a $1.0 million prior-year expense incurred for the extinguishment of debt.

Now turning to some key ratios and balance sheet amounts, our working capital increased to approximately $555.0 million compared with $550.1 million in the prior year. Merchandise inventories at cost decreased $58.2 million, or 5.6%, compared with the prior year, primarily reflecting inventory reductions in response to macroeconomic environment.

Retail inventory, as Bud mentioned, for comparable stores decreased approximately 9%.

Total debt to total capitalization, including capital leases, was 82.3% at November 1, 2008, compared with 82.7% in the prior-year period.

Our total debt, including capital leases, was $1,323.3 billion at November 1, 2008, compared with $1,368.6 billion at the end of the third quarter of fiscal 2007, a reduction of $45.6 million, or 3.3%.

We have $100.0 million of swaps in our fixed rate debt to funded debt was 71%.

At the end of the third quarter of fiscal 2008 there were approximately $19.4 million in letters of credit compared with the prior year’s amount of $13.0 million.

Our book value per share was $16.06 this year versus $16.59 in the prior year.

Our capital expenditures, omitting landlord contributions, were $76.6 million year-to-date, which is below the prior-year spending amount of $89.0 million. And our capital spending as compared with the prior year will remain lower throughout the fourth quarter as compared to the prior year.

Moving to our full year fiscal 2008 guidance, in light of the challenging retail climate, which shows no signs of easing for the remainder of fiscal 2008 and into 2009, inventory, capital, and expense management remain key focal points.

A revised guidance for full year fiscal 2008 is as follows: EBITDA in a range of $172.0 million to $188.0 million; and earnings per share in the range of a loss of $1.70 to a loss of $2.30 per diluted share, including the write-off of the goodwill and the favorable tax adjustment.

The underlying assumptions reflected in this revised fiscal 2008 guidance include full-year comparable store sales decrease in a range of 6.5% to 7.5%. As a side note for Q4, this calculates to a 7% to 10% decrease in our comp store sales results for that quarter.

A gross margin rate of 35.8%, SG&A expense dollars decreased from the prior year, and capital expenditures at a maximum of $70.0 million net of landlord contributions.

We recognize this is difficult retail and macroeconomic environment. We are providing our best projective view as of today with respect to the remainder of the year in sales, operations, and earnings. We continue to manage our business appropriately in this challenging environment.

We expect to generate positive cash flow in 2008 and reduce our debt levels. Based upon the guidance provided, our current estimate for cash flow, which we defined in this morning’s earnings press release, is a range of $5.0 million to $20.0 million for the year, permitting us to reduce our year-end debt levels by this amount as compared with the year end of fiscal 2007 balances. This cash flow estimate does not reflect the impact of fiscal 2008 working capital reductions.

As we move into fiscal 2009, we will continue to prudently manage our cash and liquidity in order to maintain a strong excess borrowing capacity under our credit facility. Therefore, we expect capital expenditures in fiscal 2009 to be approximately $40.0 million versus depreciation and amortization of $120.0 million, which equates to a net benefit of approximately $80.0 million.

Our Form 10-Q for the third quarter of fiscal 2008 will be available by December 11, 2008.

At this time I would like to turn the call over to Tony.

Tony Buccina

Our third quarter sales trend remained challenged as the economic environment continued to adversely impact traffic and buying patterns. We controlled what we needed to control in this environment, our largest-asset inventory. We successfully managed our receipts to sales trend for the quarter as we have demonstrated throughout the entire year, as well as diligently taking mark-downs on slow performers, which enabled to maintain lower inventory and clearance levels.

We are beginning the fourth quarter with leaner, fresher, more current inventory than prior year, packed with newness and value. Our leaner inventory levels also allowed us to have greater flexibility to respond to the strongest selling items with reorders.

We also continue to be aggressive with our promotions to capture our fair share of the consumer spend.

I would now like to highlight some of the highlights of our merchandise strategy. Our store-wide key items sales grew to 25% penetration with sales ahead of plan and produced gross margins higher than total company gross margin, and within that, our IVP, Incredible Value Program, our most profitable key item program, exceeded our plans in terms of sales and penetration. The customer really understands and gets this value initiative.

Our franchise businesses grew slightly as a percent of total sales and outperformed total company sales but did not make plan. Out of the three new focus businesses, handbags, men’s outdoor apparel, and furniture galleries, only men’s outdoor apparel made sales plan.

Differentiated product penetrated at 30% of total sales, which was down from plan in last year. Our private brand sales, now the largest portion of differentiated product, penetrated at 19.1% of total sales compared with 18.7% in the third quarter of 2007. Our private brand gross margin rate was ahead of plan and ahead of company average.

Overall, our transactions were down for the quarter but our average selling retail and average dollar transaction was slightly higher than the prior year. Our e-commerce, although a small business, is continuing to grow as we increase the assortment of offerings. Our best performing categories were hard home goods, soft home, shoes, and kids.

Our Northern Watch strategy, which affects 135 stores, with a more casual outdoor lifestyle, outperformed total company sales and had margins higher than the non-northern large stores.

Looking ahead, we will continue to focus on the quality of our inventory to ensure fresh product flow while keeping our inventory levels lean. We will continue to focus on our store-wide key item initiative with a more frequent flow of new items and we will also expand our table and tower programs.

And within our key items, we are going to expand our Incredible Value Program, which is more important than ever during this challenging time.

We will continue to grow our franchise businesses faster than total store with the addition of three new businesses to focus on, handbags, men’s outdoor apparel, and furniture galleries, and we will work diligently to increase our differentiated merchandise assortment with private brands and exclusive merchandise. We believe that this strategy is key to creating customer loyalty and protecting our market share.

We launched the Victor Alfaro line with favorable response from our customers. We continue to view this collection as having brand appeal and a great compliment to our existing portfolio of private label and national brands. We believe that the new brands in our moderate update franchise business, including Relativity Signature and Evan Picone, position us well in the affordable, fashionable, work-apparel category, that is a need in all of our markets and we will continue to focus on these important brands.

We introduced Kenneth Roberts men’s sportswear in [100 stores] and results have exceeded our expectation. This line is a great complement to our most successful brands in men’s furnishings.

We are carefully managing our assortment to ensure that we are offering our customers differentiated, fashionable product that represents real value. We are emphasizing fresh product flow, timely mark downs and promotions, and lean inventory levels.

I am proud of all of our associates in merchandise, marketing, stores visual, and human resources and the way they manage their businesses throughout this tough economic climate.

I will now turn the call back over to Bud.

Bud Bergren

In this difficult economic environment we are fortunate to have a prudent capital structure. We will continue to manage our business with an emphasis on maintaining cash flow and strong liquidity.

At this time we will open the telephones for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Grant Jordan – Wachovia.

Grant Jordan - Wachovia

On your capex, it looks like you have clearly cut it back a good bit for next year. That $40.0 million, is that kind of a maintenance capex? Or what’s incorporated in that number?

Keith Plowman

That is a maintenance capex.

Grant Jordan - Wachovia

You talked about how on your payables you increased some of those to support some of your vendors. What kind of impact was that? When I look at the payables days it’s about flat to last year, given the lower level of cost of goods sold.

Keith Plowman

As you look back to the second quarter, if you remember, we actually had better AP support because we’re turning our inventory faster and effectively have it more current. We are getting the older goods out and that gives us better AP support. That didn’t hold through to the third quarter, essentially because we are paying out a little faster. If we gave a round number we would say 50% to 75% of that decrease in the excess capacity is what we have from the standpoint of supporting vendors and taking accelerated terms. And you will see some benefit of that in our gross margin in the fourth quarter.

Grant Jordan - Wachovia

As we look at the gross margin, you guys did a great job improving the gross margin in this quarter. Is there anything in the fourth quarter we should keep in mind as we think about forecasting gross margin?

Keith Plowman

As I go through the numbers, essentially it’s a 35% to 38% that says we will continue to be about 3/10 below where we performed last year because for the full year we were at 36.1%. And that really says that we will be down slightly, maybe up to about 50 basis points compared to the prior year in our fourth quarter gross margin rate, realizing that it is a very promotional area and time and everyone is going to be out there driving to bring the consumer into their store.

But we do have some favorable items. We talked a little about the discounts that will come to benefit us as we sell through the merchandise in the fourth quarter. The levels of our inventory being down where they are, 9% on a comp basis, whereas last year we were up about 4% on a comp basis when we ended the third quarter.

And additionally, our aging. Our aging is better than it’s been. We are very fresh and the over-27-weeks goods that we have in our stores in down substantially on a year-over-year basis so we are really starting off the fourth quarter in very good shape.

Grant Jordan - Wachovia

As we move closer to the holidays and the weather has gotten cooler, have you seen any change in overall consumer behavior?

Tony Buccina

I would tell you, what we are seeing really, on the weather change, I mean, when we see the weather change, our business gets really good compared to the day-in and day-out trend. Cold weather, seasonal goods are about almost 20% of our company’s business in this fourth quarter and as the weather gets colder, we really pay a lot of attention to that merchandise and really position ourselves well there and it has been paying off for us.

Operator

Your next question comes from Emily Shanks - Barclays Capital.

Emily Shanks - Barclays Capital

Around the nice uptick in gross profit margins that you had, can you speak specifically to what you were doing to generate the distribution cost save?

Bud Bergren

Distribution costs, as you know, we report those as an expense in our gross margin. We have had really two things, first off the volume decreased, which is less of those costs up there, so just on a pure dollar basis it helped. But additionally, there has been a lot of initiative taken in the distribution center to operate more efficiently from the standpoint of the operations of the actual labor that is performed in the distribution centers, as well as addressing the surcharges that we had on fuel and such.

So the company has been very proactive, the management and the distribution centers have been very strong in bringing down their operating costs, which turns around and generates a profit and a benefit to our gross margin rate.

Emily Shanks - Barclays Capital

And in terms of the smaller vendors that you are doing the 15-day accelerated terms, what percentage of your vendor base does that represent?

Bud Bergren

It’s a very small percentage. We have about 1,000 vendors. I will tell you the large partners we have out there are not looking to do anything different in terms. We continue to ship on open account completely the same as we did before. The only thing is, everyone is looking at credit limits with where the credit environment is and everyone is trying to be very careful there, but we enjoy very good relationships.

So what you’re looking at is a very small percentage. I gave an estimate of what I thought that number was. When you run through the volume there that we would have had compared to our total year’s purchases, you’re down in a couple of percentages range.

Emily Shanks - Barclays Capital

Did you say what the actual revolver balance was at the end of the third quarter?

Keith Plowman

It was $484.0 million.

Operator

Your next question comes from Carla [Dison] - JP Morgan.

Carla [Dison] - JP Morgan

A maintenance question on the landlord allowances, you said that the net capex this should be $70.0 million. Is that $40.0 million next year net as well?

Keith Plowman

It is net. When we get down to maintenance capital, we will be doing very little expansion so there will be less landlord contributions coming in.

Carla [Dison] - JP Morgan

And when you do the landlord contributions, those actually flow through SG&A?

Keith Plowman

Yes, they do. They actually have to go in, they affect your rent as you go forward, but since we’re looking at this on a cash basis, that’s why I’m reporting it the way that I do so that you can see what the net outflow of cash will be.

Carla [Dison] - JP Morgan

You have kept your inventories quite clean and you imply in the press release that your free cash flow target is not including any benefit you might get from working capital. Do you have a sense for how much working capital could benefit the year or the quarter?

Keith Plowman

Working capital within a year will benefit us from the standpoint of bringing down our debt levels, which obviously the leveraging the company is very important as we go forward. So that is going to be a benefit from the standpoint of reducing the debt.

It doesn’t have as significant a benefit or impact on the excess borrowing availability because you have basically the coverage that you get from the vendor when you buy the merchandise and if you keep turning it you have some short term leverage that you realize there, as well as what you get on the advance rate from our facility.

So really, when we get reactionary and do a good job, as Tony has, of bringing the inventory down in the stores to match with the sales run rate, it actually puts pressure on our excess borrowing capacity as we go down and as we go up. It’s a short-term item, we will get it back and get benefit as we grow the inventory.

So I would see debt coming down but I wouldn’t necessarily see that as a benefit to our excess borrowing capacity.

Carla [Dison] - JP Morgan

In terms of the promotional environment, are you seeing any changes post-quarter in terms of a step up in promotions from your competitors across the mall?

Bud Bergren

Yes we have and as we have also taken those steps.

Carla [Dison] - JP Morgan

And would you say it is significantly more promotional than last year, across the board?

Bud Bergren

Yes.

Operator

Your next question comes from Karru Martinson - Deutsche Bank.

Karru Martinson - Deutsche Bank

In terms of the SG&A savings, I was wondering if you could provide a little more color on the sustainability of what you’re doing and how those should flow through the fourth quarter and into 2009?

Bud Bergren

From the standpoint of 2008, I would expect us to continue at the run rate we have through the first nine months. We expect that we will realize additional SG&A reductions and savings within the fourth quarter. As we go into 2009, we continue to review our expense structure, we are continuing to review the macroeconomic environment, and quite frankly, we will continue to look for opportunities and as we identify those we will attack those to try and get benefit in 2009.

So I would see us looking for additional opportunities and addressing those in 2009.

Karru Martinson - Deutsche Bank

On gift cards, what percentage of sales are those in the fourth quarter?

Keith Plowman

Gift cards are fairly small for us yet. If I had to take a rough number at it, I would say it is a couple of percentage points. It’s not a great number.

Bud Bergren

Another interesting fact is that gift card sales are actually up year-to-date.

Karru Martinson - Deutsche Bank

That’s good to hear since all the buzz is that they are going to be down this year so it is good to see that you are bucking the trend there.

In terms of the auto sales, I think you said auto-related sales were about 12% of the total?

Tony Buccina

Actually so far this year it’s running about 11%.

Operator

Your next question comes from Leah Hartman – CRT Capital.

Leah Hartman – CRT Capital

With respect to the revolver, have you passed through your peak borrowing yet?

Keith Plowman

Yes. Our peak borrowing is essentially the end of October and a little bit into November. Now we will start getting to where, as we hit the end of this month, you have the After-Thanksgiving Day sale, we will move through a significant portion of our inventory. We also had our Community Day Sale, which is a big event for us, in this month. So we will now start moving down as far as our borrowings. We have hit our peak period and we will start moving down in the levels.

Leah Hartman – CRT Capital

And I believe that as long as you maintain this excess availability beyond the $75.0 million, your bank facility permits you to repurchase that in the open market?

Keith Plowman

Well, there are a couple of requirements. We have to meet some other tests that deal with excess borrowing availability, not the $75.0 million covenant that we have, but other availability and also fixed-charge coverage ratio.

Leah Hartman – CRT Capital

And as we look at the capex, I wanted to affirm that the investment you have made in point of sale systems, that has been completed for the year?

Keith Plowman

It is completed for 2008, yes.

Bud Bergren

Actually that was completed this past summer.

Operator

Your next question comes from David Glick - Buckingham Research.

David Glick - Buckingham Research

The $40.0 million difference in excess borrowing capacity versus last year, is that entirely due to these accelerated payable terms to your smaller vendors? I’m just trying to reconcile your comments. You said that’s really only a couple of percent of your vendor base, but there is a $40.0 million difference.

Keith Plowman

The question that was asked earlier was how much was it in a month and effectively that’s where I was saying the 50% to 75% of that would deal with these vendor relationships and what we’re doing on the term. So you would say that somewhere to 50% to 75% of that $40.0 million is what we would see with the accelerated payment.

David Glick - Buckingham Research

And the balance is?

Keith Plowman

The balance really comes down to, it’s a couple of factors. First of all, the sales pressures that we’re feeling there, which are pretty much offset by the capital and expenses that we’re pulling out of the business, so those somewhat offset. There is also the inventory, as I was addressing.

As we reduce our inventory it is helping us, from a leverage standpoint, reducing our debt levels. But as we bring inventories down, we really do have what is an optimal facility here in a revolver because it is asset based. It allows as you grow for you to realize the additional capital you need to grow your business, but we are in the environment where we are today where we’re pulling out our working capital and reducing the leverage of the company, it also goes the opposite way and it pulls down your availability to borrow on the line. So we’re feeling some of those pressures there, and that would be the other piece.

Operator

Your next question comes from Reade Kem - Merrill Lynch.

Reade Kem - Merrill Lynch

I just wanted to go back to the SG&A. I was trying to back into the full year guidance and get a sense of the decline that you expect in the fourth quarter and it looks like you would expect maybe an accelerated rate of decline year-over-year, maybe as much as 4% to 5% in SG&A?

Keith Plowman

If you are doing on a pure percentage basis and you are taking that to our SG&A dollars last year, is that how you’re running it?

Reade Kem - Merrill Lynch

Right.

Keith Plowman

I think you are high there in what you are doing. If you take a look at where we are year-to-date, it seems like you would be taking higher dollar amount, and at this point, based on the guidance we have, I don’t think it would support that high. I would be a little bit lower than you.

Reade Kem - Merrill Lynch

And on the same topic, as we look at the decline you have recorded in that line item year-to-date and we start to think about distressing our models for 2009, do you have any comments, short of guidance, just in terms of how much you think you can pull a little further back? If you just look at how this year played out, what else in a direr scenario can you pull out of SG&A?

Keith Plowman

First off, we will look at what we see for sales going forward and obviously we will adjust our expense to be reflective of where the sales decrease is, the same as we did this year. So if there are continued pressures out there we would adjust.

But additionally, there are no costs out there within our SG&A structure that is not reviewable and we are going to continue to look at and we do believe there are some opportunities there that we can take advantage of in 2009. We are really not ready to talk about the specifics of those at this point.

Reade Kem - Merrill Lynch

Regarding the mortgage facility, is there any cash that is currently trapped at that entity?

Keith Plowman

No. As you know, it is the 80% EBITDA and the 60% EBITDA are two of the tests as to where we have to trap in 50% or 100% of the excess cash that runs in that facility. And the difference of the lease payments versus the debt requirements and the expenses of the facility is about $6.0 million a year. So at this point there is nothing that is trapped in there. We have not pierced that threshold at this point; we continue to monitor it and at the point it does become an issue we will certainly make sure we notice that.

Reade Kem - Merrill Lynch

It sounds like your core credit card-using customer base is doing well. I know the acceptance is down year-over-year. I was wondering if the acceptance rate and limits have come down even more, given what’s going on more broadly in the economy.

Keith Plowman

Overall we are pleased with the performance that has happened in the facility. I think HSBC would be happy with the performance that’s out there. When you look at our bad debt rate and our delinquency rates and things like that, the charge offs are actually performing much better than some of the news you hear out there from some of the other major credit card providers. So we are pleased.

We think HSBC has done some of the prudent things and taken some risk initiatives which are paying off for both the company and HSBC.

But to your point, there is no question, there is pressure there. The approval rates are lower this year than they were last year and I would expect that that is going to continue until we see some recovery.

Operator

Your next question comes from Chris Dechiario - ISI Capital.

Chris Dechiario - ISI Capital

Just in terms of those small vendors vis-à-vis payments on shorter terms, you said that was a couple of percent of the number of vendors or a couple of percent of your sales?

Bud Bergren

Of our total purchases.

Chris Dechiario - ISI Capital

And so for that to make a material impact on your gross margin percentage, just sort of like an order of magnitude range of the discounts that we could think of that you would be getting, it would have to be pretty high, sort of in the 20% or 30% range, wouldn’t it?

Keith Plowman

No, I don’t think so. You have to remember that the number I gave where I said the 50% to 75%, that is at a period end. As you’re running through this peak buying and selling season, that means that continues to turn. Remember, this is very short term, this isn’t like you do it once and it sits there for 360 days. That’s why we put in the average of 15 days. So this continues to turn constantly as you go forward.

Chris Dechiario - ISI Capital

And do you have expectations right now that you will have to do that for a larger percentage of your vendors going forward?

Keith Plowman

We don’t have that expectation but I think a lot of it is we will have to see what happens with the economy and we are all sitting here watching where the recovery is going to start.

Chris Dechiario - ISI Capital

Would you be able to tell us what the peak revolver balance today is?

Keith Plowman

The peak would have been a little over $500.0 million, that’s the best I can say to you.

Operator

That is all the time we have for questions.

Bud Bergren

Thank you for your interest in Bon-Ton. We look forward to speaking with you about the fourth quarter and full year 2008 financial results on our conference call in March. We would like to extend wishes for a happy Thanksgiving and happy holiday for everyone.

Operator

This concludes today’s conference call.

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Source: The Bon-Ton Stores, Inc. F3Q08 (Qtr End 11/01/08) Earnings Call Transcript
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