Charming Shoppes, Inc. F3Q09 (Qtr End 11/01/08) Earnings Call Transcript

Charming Shoppes, Inc. (CHRS)

F3Q09 Earnings Call

November 25, 2008 9:15 am ET

Executives

Gayle M. Coolick – Vice President Investor Relations

Alan Rosskamm – Chairman of the Board & Interim Chief Executive Officer

Eric M. Specter – Chief Financial Officer & Executive Vice President

Brian J. Woolf – President of Lane Bryant

Analysts

Christopher Kim - J.P. Morgan

Robert Rodriguez - First Pacific Advisors

Thomas Filandro - Susquehanna Financial Group

Lizabeth Dunn - Thomas Weisel Partners

Matthew J. Teplitz - Quaker Capital Management

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Charming Shoppes third quarter sales and earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

With us today are Alan Rosskamm, Chairman of the Board of Directors and Interim CEO of Charming Shoppes, Eric Specter, CFO and Executive Vice President and Brian Woolf, President of Lane Bryant. I would now like to turn the call over to your host Ms. Gayle Coolick

Gayle M. Coolick

Today’s discussion will contain certain forward-looking statements concerning the company’s operations, performance and financial condition including sales, expenses, gross margin, capital expenditures, earnings per share, store openings and closings and other matters. Such forward-looking statements are subject to various risk and uncertainties that could cause actual results to differ materially from those indicated.

Information regarding risks and uncertainties are detailed in the company’s filings with the SEC including the company’s annual report on Form 10K for the fiscal year ended February 2, 2008, our quarterly reports on Form 10Q and other company filings with the SEC. Our complete Safe Harbor statement and today’s prepared remarks are available at www.CharmingShoppes.com.

At this time Alan Rosskamm our Chairman of the Board and Interim CEO would like to share his remarks about our business, our financial condition and the initiatives we have announced today.

Alan Rosskamm

Given our disappointing stock price and the many questions we’ve been getting about our liquidity and financial strength we will attempt to address those concerns directly this morning. I will briefly review our quarterly results and then comment on our liquidity and cash position and then discuss a number of the initiatives underway at Charming that we feel will not only enhance our cash flows but will also provide the focus to build an exciting and successful future based on our unique position as the nation’s largest specialty retailer serving the plus size women’s apparel market.

Then, Eric Specter our CEO will follow with a sensitivity analysis on our liquidity under various assumptions for next year and will address questions that have been raised regarding our various debt instruments. Finally, Brian Woolfe, the President of our flagship Lane Bryant division will provide a glimpse of our exciting forward focused work actually underway at our brands. Although we will do our best to anticipate some of your concerns in our prepared remarks, we will then open the call for your questions.

Our third quarter results were better than our early October guidance helped by improved sales and margins during October. October sales trends improved significantly with a -4% comp following the very difficult September comp of -15%. The stronger October sales helped to get us to a -9% comp for the quarter as opposed to the double digit decline we had projected.

Driven by our commitment to achieve clean inventories by the end of the year, we accelerated aggressive markdowns early in the fall season particularly at our Fashion Bug brand. These prices reductions helped drive sales but negatively impacted our gross margin for the quarter. As a result of the actions taken during the quarter, we are now in a much cleaner inventory position.

There’s been a lot of press lately about consumer credit. We are pleased to report that the performance of our credit operations was favorable to plan and contributed more than $11 million towards results for the quarter and $32 million year to date. Although charge offs have shown some deterioration, they are performing within plan. In fact, increases in interest and fee revenue more than offset the increase in charge offs so that income from this business is above plan.

Unlike general purpose credit cards with balances of several thousand dollars, our credit cards are only usable at our brands with average balances of approximately $300. I am keenly aware that liquidity is an important subject in this environment. Our strong liquidity position at the end of the third quarter includes $74 million in cash, cash equivalents and available for sale securities, an increase compared to $63 million a year ago.

Our ability to generate cash in this very difficult climate comes from our aggressive steps to liquidate inventory, reduce capital spending, realize cost savings from previously announced initiatives as well as the sale of our non-core misses apparel catalogs. As a result, we ended the quarter with no borrowings under our revolving credit facility despite the fact that we are in our typical period of peak seasonal borrowing.

Looking ahead, we expect to generate positive free cash flow during our fourth quarter, ending the year with cash and cash equivalents and available for sales securities of approximately $90 million to $100 million, a solid increase of last year’s yearend balance of $75 million. This projection assumes comparable store sales declines in the low double digits in the fourth quarter as well as continued strict management of capital spending, expenses and inventory.

We expect to end the fiscal year with decreases in inventories on a same store basis of approximately 13%. Today we announced a restructuring plan which when combined with cost reductions and store closings already initiated is expected to generate at least $75 million in cost savings for next fiscal year. We are working with a leading management consulting firm A. T. Kearney, to assist us in our restructuring and cost reduction efforts.

Reinforcing steps taken to simplify our business, we are reviewing all major cost areas of our company including corporate and brand overhead, non-merchandise expense, supply chain and store operations. Our goals are to optimize our cash flow and operational efficiency with a targeted total expense savings goal over the next two years of $100 million to $125 million. As part of our commitment to eliminate distraction and divest non-core assets, we have decided to discontinue the operation of the Lane Bryant Woman catalog.

Given the very weak economic climate and escalating catalog operating costs, the Lane Bryant Woman catalog is projected to lose approximately $10 million in this fiscal year. By exiting this business we will not only avoid additional losses next year but we expect to generate cash as we liquidate the inventory. We have booked an expense of $5.4 million in the fourth quarter for the write down of inventory and severance costs.

The Lane Bryant Woman catalog and the Lane Bryant retail stores target very different customers and offer very different merchandise assortments both in terms of fashion and price points. As we focus increasingly on our core brands, it is crucial that the Lane Bryant customer be engaged with only one Lane Bryant brand. As a result, we have chosen not to relicense the catalog renaming rights as this would perpetuate the confusion in brand identity and we intend to remain in full control of the Lane Bryant brand.

Today’s announced closing of the Lane Bryant Woman catalog follows our successful sale of the Crosstown Traders Misses Catalogs and our announcement that we are also exploring the sale of our Figis food and gift catalog. These steps will enable us to focus all of our direct-to-consumer efforts on our brand and particularly on their ecommerce businesses which have great potential to generate profitable incremental sales in the near term.

This morning we announced that we would be closing approximately 100 additional stores during fiscal year 2010. During the current fiscal year we have been successful in achieving significant occupancy cost reductions through renegotiations of leases with our landlords. Our continuing review of our retail store portfolio is expected to include opportunities for further occupancy cost reductions.

Today’s announcement is in addition to the 150 locations which we announced earlier last February for closing in this fiscal year. At this time approximately 100 of those 150 closings have been completed with the remainder to be closed by January 31, 2009. Beyond the actions we are taking to simplify our business and manage for cash in this difficult economy, we believe we have additional business improvement opportunities that are unique to Charming Shoppes.

In general we have lacked clear, consistent brand positioning at our core three brands. We have relied too heavily on the market to dictate our fashion image rather than creating our own specific fashion point of view and our assortments have been too broad. It is well within our control to improve our merchandising strategy.

We have brought in three highly qualified and seasoned executives to lead our core retail brands: Brian Woolfe at Lane Bryant; Jay Levitt at Fashion Bug; and Carol Williams at Catherines. I am delighted how they have all taken hold of their businesses. All have created a new sense of urgency at their brands, they have fully engaged their teams and all of them have put together turnaround plans for their businesses.

Together we have agreed that the company must refine its merchandise procurement process by creating a vertical specialty store model. This is the model that most successful specialty retailers employ and although we have had a direct sourcing organization at Charming for over 20 years, we have limited our direct imports to basics not fashion. As a result we current direct source only 40% of our store’s assortments.

[Kirk Sam & Associates] is helping us with this transformation. We possess a unique women’s plus size apparel platform and as specialists and experts at plus apparel we want to design and develop compelling fashion assortments specifically for our core customers. Through our new vertical merchandising model and an increase in directly sourced merchandise, we expect to significantly reduce lead times, offer better value for our customers and improve gross margins.

We expect to achieve initial benefits in next year’s fall season and major improvements by spring 2010. To summarize, we feel we are playing strong defense in this brutal retail environment and managing for cash by divesting non-core assets, controlling inventories, reducing capital spending, closing non-productive stores and aggressively cutting costs. At the same time, I believe we have upsides that others may not by playing offense through our intense focus on our three core brands.

Through the leadership of our seasoned and empowered brand presidents augmented by newly hired product design executives we feel we will be able to serve the needs of the plus size women’s apparel customers better than the general merchants who currently occupy the largest share of this market.

I would now like to pass the call over to our Chief Financial Officer, Eric Specter to lead a discussion on liquidity and our various credit facilities.

Eric M. Specter

I want to take a few minutes here this morning and then certainly we’re going to open it up for a Q&A but to go through our cash position at the end of the third quarter. I will then discuss our liquidity and revolving facilities and get specific about the terms to get everyone comfortable with those terms and covenants. Then, I’ll talk a little bit about an illustrative example sensitivity that we did put in the press release and I will give a little more color to it.

First, our liquidity position at the third quarter remained strong and included $74 million of cash and available securities on the balance sheet. Now through nine months our cash and available securities position is about where it was beginning of the fiscal year. So, in a period where we are now funding our peak inventories for the holiday season we were able to maintain our cash levels through various mechanisms of controlling inventories, reducing expense, slashing capital expenditures.

Our revolver of $375 million I’m pleased to say that despite we’re in a typical period of peak seasonal borrowing, we have no outstanding borrowings at the end of the third quarter and furthermore, if I bring it current through last week, we do not have borrowings. We do not anticipate borrowing on the line in the fourth quarter and we expect the line to be fully available to us as we move through the fourth quarter.

The facility is fully committed, it runs through the end of July 2010 and our borrowing capacity at the end of the third quarter on the line was $255 million so the borrowing capacity on our committed credit line in conjunction with the cash on our balance sheet gave us an excess of $325 million of liquidity as we moved in to the fourth quarter.

I will mention just in terms of covenants on that facility, there are no financial covenants on the revolver until we have less than 10% of availability on the line. As I mentioned, since we are not borrowing, we have 100% available on that line. An example in terms of using the availability I mentioned of $255 million, just so that it’s clear on how this covenant would trigger, if we currently borrowed $229 million of the $255 million the covenant would not trigger until we exceeded borrowings of $229 million. Translating in to a percentage, that would be in excess of 90% of the availability.

So, we can borrow with no financial covenants up to $229 million at the end of the third quarter against the total availability on the line of $255 million. Now, in the event we exceed 90% of the use of the line which our models and as I’ll speak in a minute on sensitivity, nowhere do we get even close to using that kind of availability. A covenant does become applicable only in that case which is a fixed charge cover ratio but we have no obligation to report against that covenant until such time that we have used up 90% of the availability on the revolving credit line.

Let me just switch and talk a little bit about our securitization funding against our credit card. Alan commented on our continued strong performance of our credit card portfolio. Our operating results are at plan, slightly actually above plan, they’re actually higher than a year ago in terms of its operating income. But, let me talk a little bit about the liquidity available under that line.

As a result of the sale of the Crosstown receivables which we announced a week ago Monday, we have expanded our available securitization funding through our Charming Shoppes master trust by $55 million. So, we have freed up $55 million of availability through the sale of the Crosstown receivables. This now gives us total conduit or financing facilities of $155 million in the trust and as of November 14^th we had available $117 million in that trust.

What I will say in terms of a forward look in to 2009 and that is due to our store closing programs and the fact that we are running comp store sales decreases, we do not anticipate growth in the credit file, nor do we see the need to expand any of our facilities and therefore we only need to maintain our current conduit financing in order to fund our receivables through 2009.

At the end of the third quarter, we had in our master trust under managed receivables approximately $588 million. We see that number moving down closer to $510 million, $520 million throughout 2009 so we will have less to finance as we move in to the fiscal year ending July 2010. What I want to do now is just comment on the disclosure we made this morning relative to an illustrative example and a sensitivity analysis.

First, what I want to talk about is the fourth quarter’s liquidity. We expect to generate positive cash flow here in the fourth quarter under the projections we laid out in the release this morning. Cash to grow from the third quarter of $74 million to a projected $90 million to $100 million at the end of the fiscal year. We’re getting some of the components to generate positive free cash flow, is continued well managed inventories.

We see inventories continuing to stay down on a double digit rate across the core brands throughout the fourth quarter and actually ending very clean particularly on our seasonal inventories as the brands have been taking timely and deeper markdowns on the fall holiday products throughout this second half of the year.

We’re seeing the benefits of our capital expenditure reduction program that is now saving us considerable cash flow and we’re starting to see the benefits here in the third quarter for a number of the previously announced cost reduction initiatives as well as the new initiative Alan commented on that we are working with the consulting firm of A. T. Kearney with. We expect our inventories as I mentioned, on a comp store basis to be down approximately 13% at the end of the fiscal year.

As we turn the fiscal year relative to the sensitivity analysis on 2009 or the fiscal year ending January, 2010, we are limiting our capital budget primarily to maintenance cap ex and are planning net capital expenditures down over 50% to approximately $22 million. This is another significant reduction against the projection this year of net capital expenditures of approximately $51 million.

In the event that our comparable store sales trends continue throughout all next fiscal year to perform at a double digit comp store sales decline, our models indicate we would still continue to generate positive cash flow and the components that will drive this positive cash flow on an assumption that the run rate continues at a low double digit rate are the slashing of our capital expenditures by almost $30 million next year, the continued well managed inventories.

We anticipate that we will continue to see double digit drops in inventory on a comparable store basis or on a square footage basis throughout next year so we will be squeezing cash out of our working capital. In fact, our working capital will be a source of cash. We also will generate based on our losses of this fiscal year, we will file our January 2009 tax return during the fiscal year ending January 2010 and we will be able to carry back that loss to the two proceeding years and generate approximately $27 million of cash flow out of a federal income tax refund.

Then, we of course will get the benefit, and this is a significant contributor to being able to offset these continuing declines in sales, we will see a significant benefit across our entire expense structure, SG&A, occupancy as well as buying expenses and we expect to realize over $75 million of savings in the fiscal year ending January 2010.

One other comment, we have further sensitized the model that if things become a little more difficult and our comps would deteriorate from the low double digit in to the mid teens, we’ve run those models based on many of the assumptions I just mentioned and that would at minimum leave us in a cash neutral position for the year. Now, I say that in that we’re opening the fiscal year with $90 million to $100 million of cash on the balance sheet.

This implies that we would not have drawings on our fully committed revolving credit facility which again, based on the fact that the availability is based on an inventory borrowing base the availability will fluctuate through the year but it will average across the year in terms of at any point in time, any month the availability would be in excess of $200 million.

Though we feel that we have taken the steps to protect the balance sheet, to protect the liquidity of the company and furthermore have considerable liquidity through our revolving credit facility through the entire fiscal year ending January 2010.

I do want to make a comment regarding our fourth quarter outlook that we put in our release this morning and I want to just review that with you because again, because of the current income tax accounting rules, the earnings per share estimate of a loss of $0.32 to $0.38 on a sales assumption of $650 million to $660 million assuming a continued trend out of this nine month period of low double digit negative comps I do want to mention the fact and this has been noted, that there was no income tax benefit against our pre-tax operating losses provided due to the current income tax accounting rules.

If you for illustrative purposes would model an effective income tax benefit rate of just for illustrative purposes of 37% the corresponding earnings per share numbers would be at $0.20 to $0.24 which would be slightly higher of a loss rate than we occurred in the last year of the fourth quarter. Certainly in the Q&A I will elaborate if there are any questions on how we have projected our earnings per share here in the fourth quarter of the year.

Alan Rosskamm

It is now my pleasure to introduce Brian Woolfe who joined our Lane Bryant brand in July of this year.

Brian J. Woolf

I’m very pleased to join the call today and provide our shareholders with my thoughts and forward plans for our Lane Bryant retail brand. First and foremost, I view Lane Bryant as a leading brand with a high degree of brand equity and customer loyalty and with all the ingredients for growth in the long term.

However, changes in the business over the last few years have resulted in a product assortment that is far too basic with a marketing strategy that is too promotional and lacks a fashion focus. Our target customer are 35 to 55 years old is right but we’ve been serving her from the wrong vantage point. We have a core customer that is interested in fashion, wants to look great and is willing to spend provided we give her the right value proposition.

I believe we have both short term and long term opportunities to favorably impact our results. At this moment we have made a number of changes in our processes with more to come and are on a clear path to reinvent the brand. Our plans are to focus on more compelling fashion while improving product execution and communicating our fashion leadership to our customer through marketing that provides a higher level of creative aesthetic and more focus on fashion.

While we pursue our reinvention, we are taking rapid steps to manage through a very difficult retail and economic climate. In many cases the tactics for both a good defense and a good offense are the same including an aggressive approach to inventory and expense management. We experienced improved gross margins for our Lane Bryant business during the third quarter. We were able to achieve this by reducing seasonal inventories by more than 30% compared to last year which resulted in faster turns and a much cleaner store.

At any point in time a very high percentage of goods in the store are new deliveries. Our lower inventory density also improves our store presentation by allowing our fashion point of view and our key outfits to stand out. Over the next several months our assortments will be transitioning from the key item model to an outfit driven model both in the way we buy product and in the way we present it in the store.

We have the opportunity to provide a much better balance of product categories and have planned a greater focus on wear to work, accessories and dresses all with improved fashion messages. A the same we are planning tighter inventories to include minimal back stock so we have the ability to chase the right trends and improve turns, average dollar sales and gross margins.

We hold a huge competitive advantage in our Cacique intimate apparel business but we are lacking in consumer awareness of our superior offerings in all the important areas: fashion; comfort; and size availability. Our marketing team is hard at work and we have already made important changes in how we communicate our fashion and price value equation to our customer base.

Our October and November magalogs have been a big success with increased pages and product stories but more importantly highlighting a classier fashion image. We have in the past operated with an excessive amount of in store POS promotions as a price reduction strategy. Moving forward timely hard marks will replace the need for the majority of POS promotions and will ensure that we keep the store fresh with current fashions.

Our offers to the customer will continue to include our gift check mailings which provide a discount only on larger spends and encourage a higher average dollar sale. Along with our loyalty program, these offers make it mean something to register with us and to be a best customer at Lane Bryant.

In closing, I want to share my vision for the Lane Bryant brand. We are positively on a path to reinvent the brand and regain a stand on market share. We can do this by focusing on our elevated fashion position particularly through outfit driven assortments and by emphasizing our assortments in wear to work, dresses, accessories and intimate apparel. Finally, it is critical for us to communicate our superior offerings and value messages to our customer and highlight our fashion offerings through an improved store presentation and marketing strategy.

I have inherited a smart, passionate and committed organization with capable leadership abilities and a strong culture of expense management. We have inherent brand equity and a loyal customer base that has a deep desire for us to succeed.

Alan Rosskamm

Obviously to all of our listeners, we’ve had an awful lot of news to cover this morning and we now look forward to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Christopher Kim - J.P. Morgan.

Christopher Kim - J.P. Morgan

Could you walk us through some of the expenses and costs, whether it’s cash or noncash, related to this expense savings initiative?

Alan Rosskamm

In terms of the planned $120 million to $125 million initiatives we are looking at a number of areas. As I mentioned in my comments it is across our entire expense structure so it goes well beyond SG&A. So let me just try to give a little more color on this, although I will say that we are in the midst of developing the full detail plan in conjunction with A.T. Kearney. But let me give a little color.

First we have a very significant initiative on the occupancy line. Of course our occupancy expense is net in our gross margin relative to a fairly extensive program to reduce rents in our store portfolio. Obviously we’re getting the benefit of our store closing program but we also have a significant imitative going on which of course would all be cash.

Let me comment to your opening remark. The majority of these expenses are targeted on cash expenses as opposed to other noncash expenses in terms of these initiatives.

We are taking a look at the entire corporate overhead as well as brand overhead and across all of the offices of the retail business. We are taking a look at all of our indirect expenses, looking at our current contracts for not-for-resale kinds of products that we purchase, contracts in the IT area, contracts that support our credit program, along with hundreds of millions of dollars of expenses that support our 2,300 stores across our three core brands.

We also are taking a hard look at supply chain related expenses. Some of those expenses roll up into our buying expense to the extent that they are costs associated with running our distribution network, both for our retail businesses as well as for our e-commerce business. Some of those will be in essence tracked in our cost of sales and margin due to they’re related to the transportation logistics and would show up in freight.

We’re taking a very hard look and see extensive cash savings in our marketing area. We talked in the past about our database of over 75 million names. That database is managed centrally, although by brand, and we are constantly mining that database to determine the optimum number of pieces of mail that should be part of each brand’s marketing programs. We have put in new software; we’ve upgraded some of the CRM, customer relation management, systems that have cleansed that file; and as a result of that we’re going to realize single millions of dollars of savings related to cleansing it and optimizing our direct mail campaign.

And we are looking at again all of our controllable type expenses in terms of seeing reductions. So we’re very comfortable at this point with what we’ve said today relative to framing the cost reduction initiative at $120 million to $125 million.

I want to also clarify this is an additional reduction initiative. This is not combining with what we talked about earlier in the fiscal year. This covers what we commenced here in the third quarter and what we’ll continue working on in order to achieve the additional $75 million that we outlined, Alan and I here, this morning for next fiscal year.

Christopher Kim - J.P. Morgan

So the $120 million to $125 million is net of whatever costs to implement the program?

Alan Rosskamm

That is correct. Again as we finalize the detail of this program during the fourth quarter, we’ll have a little more to talk about relative to some of the implementation costs. But the majority of what we’re looking to get next year, the $75 million, there is not a significant cost to take to implement that initiative as we’ve outlined.

Christopher Kim - J.P. Morgan

The incremental store closures that you talked about today, am I correct in assuming that those would be mostly Fashion Bug stores?

Alan Rosskamm

The majority will be Fashion Bug. That is a correct assumption. But it will also include Lane Bryant, Catherines as well as our Petite Sophisticate outlet stores.

Christopher Kim - J.P. Morgan

Could you give us some framework in terms of the Figi’s business; I know you guys are contemplating a sale right now; whether it’s in terms of revenues and the segment operating margin structure just for everyone’s models?

Alan Rosskamm

Again to remind everyone on the call, we do have a small Figi’s gift and catalog business. In fact with our announcement today of discontinuing our Lane Bryant catalog business, that will be our only stand-alone business that we’re in both catalog and e-commerce once we liquidate through the inventories for Lane Bryant.

To your comment Chris, the fourth quarter is the all-important quarter for Figi’s. It generates over 90% of its revenues in the fourth quarter. All of its profits over these next four or five weeks are the critical weeks. Over 75% of its revenues in the fourth quarter are derived between this week of Thanksgiving through Christmas. The business as we’ve talked in the past has been very profitable for us, has been achieving its plans.

For what it’s worth, up through the first nine months of the year where it does the balance of its business it has been achieving its sales plans and operating plans. They feel and we feel very well positioned to achieve the fourth quarter plans. We will do in the fourth quarter in terms of sales approximately $55 million to $60 million of its net sales. I’m giving you a net sales number, not giving the shipping and handling.

Overall its revenues for the year are roughly $85 million to $90 million; very high initial and gross margins. These margins don’t look anything like the apparel margins. As we said it’s extremely profitable and contributes a significant amount of cash flows here in the fourth quarter.

Just an update on the process, again we have announced and Alan commented we are continuing the exploration of a sale of that business. It does not fit in the core strategy of the company. We are exploring that. We have had interest from several companies over the last several weeks. But since we’re in the all-important season, the focus of this management team for Figi’s is to deliver our fourth quarter results. We will continue the process that we began after the first of the year and we’ll have more to say about this at our year-end conference call.

Christopher Kim - J.P. Morgan

A final question for Brian. How are you approaching this holiday season in terms of your promotional strategy and the value proposition which the customer base seems to be focused on and responding to?

Brian P. Woolf

With our inventories 30% below a year ago and the fact that we’re on a very clean glide path to the end of the season, we don’t have to go into a liquidation mode just to force goods out the door. We unlike most other retailers are more conservative in terms of our POS approach since we don’t have these inventory issues and we will want to build for the future and transition away from POS activity to more hard markets to run a cleaner business.

We’re going to be very conservative in terms of the promotional approach that we will take. We will attempt to build the margins and profitability. It’s very difficult these days to get both margin and volume at the same time. So we are taking a pathway of higher margins even if it would be at the expense of the top line because we just don’t have the huge amounts of inventory to promote to get that volume and to liquidate. So we will be conservative.

Operator

Our next question comes from Robert Rodriguez - First Pacific Advisors.

Robert Rodriguez - First Pacific Advisors

Good focus on cash conservation and stabilization of the company in that area. So survival is more assured.

A question on the new strategy of vertical. I just would like to have you take me through that. I know the focus today is going to be more on the immediate concerns about sales, etc. but from a strategic focus I’d like to better understand where you see this vertical strategy and how it’s going to be implemented and what’s different from where you’ve been presently?

Eric M. Specter

All three of our new brand presidents have experience and come from organizations that did more direct sourcing of fashion merchandising than Charming has. Although we’ve had our Hong Kong office for 23 years and have a capability, we have limited our imports historically to basics; denim, bottoms, T shirts; and have gone to the market for fashion. I guess that our feeling is that as the leading specialty store in the plus apparel category, we need to be a leader. We need to have the point of view and we need to begin developing our own fashion approach.

So with the experience of our three new brand presidents, with the experience of career design professionals that we’ve just hired at Lane Bryant and at Fashion Bug, and with some substantial process improvement which will take a little bit of time working with our Hong Kong office to get lead times out, to build more important relationships with our key factories, we believe that we can increase the percentage of direct import merchandise substantially from the 40% we’re at now.

Robert Rodriguez - First Pacific Advisors

From what to what?

Eric M. Specter

I think it’s reasonable within a couple years to get to 70% or higher. A lot of vertical, especially retailers, are in the 90% range. There are certain categories like intimates that would be harder to do but certainly from our fashion merchandise and our apparel merchandise, we believe that there’s an opportunity to dramatically increase our direct source penetration.

And obviously with that, beyond getting a unique point of view that differentiates our three individual brands, there’s also a wonderful gross margin opportunity.

Robert Rodriguez - First Pacific Advisors

Are there a couple of stores or concepts, etc. out there that would be an example or emulation of what you’re thinking about that you would want to say?

Alan Rosskamm

You’d have companies like Chico’s, American Eagle, and Abercrombie, but let me also comment that this is not to be taken as if 100% of our product will be direct sourced. There will be a number of strategic vendors that each of the brands are working with. Brian has brought in probably about a dozen, many of which we have been working with.

So what we’re talking about through this vertical strategy is it’s not about going back to where we were in the early 90s where we were doing 70% to 75% through our office. It will build from 30% to 40% and over the next several years that will build proportionately maybe up to between 40% and 50%.

But really what this whole strategy is really from a merchandising and vendor structure to have each of the brands, they’ve identified strategic vendors that they’ll be working with so that we can ensure a single point of view to service our target customer when they walk through any one of our three brands going forward.

Robert Rodriguez - First Pacific Advisors

You confused me there a little bit from what Alan said.

Eric M. Specter

Let me clarify. What this implies is as Eric said a more consistent fashion point of view driven by internal design capability which we have lacked in the past. What it also implies is an editing of our vendor base so that we will do more directly with our own Hong Kong office and we will do more with key strategic vendor partners, particularly those that have a combination of design capability and direct sourcing capability.

Operator

Our next question comes from Thomas Filandro - Susquehanna Financial Group.

Thomas Filandro - Susquehanna Financial Group

Just to expand on this vertical strategy, can someone help me understand how the Gitano relationship will play out with Fashion Bug given this change?

And then I have a direct question for Brian. The one thing that really stood out to me was your comment that the target customer was 35 to 55 which just looking at the marketing, the Right Fit campaign, to seek sub-brand. The store’s always felt much broader and younger to me. I’ve been covering it for many years. So I’m curious to know, is that a change in what you view as the target audience and do you know specifically what percentage of your business you currently derive from a 35 to 55 year old?

Brian P. Woolf

Certainly 35 to 55 years old is a true Missy customer that we choose to service. I would say that the target customer has always been the same but over the years the execution of trying to service her has obviously varied greatly and from time to time we did get too young and too junior. That won’t be the case going forward.

We feel that she is more of an upscale customer certainly aspirationally. That’s where we would like to position her. She’s better off in terms of her economic sense and she understands what the value of fashion and trend and excitement is in the business. We will cater to that Missy segment of the customer. We do think too that when it comes to fashion and trends and excitement, it’s all a mindset, not necessarily specifically an age. But 35 to 55 we feel is the sweet spot.

Thomas Filandro - Susquehanna Financial Group

Does the current Right Fit campaign fit into that sweet spot as well as the Cacique brand, the way it’s structured today?

Brian P. Woolf

Yes. If you take a look just from an aesthetic point of view, I think you’ll see that the Cacique piece of the business as it stands right now; it will change in February, March and April; to be more fashion forward, more trend driven and probably more exciting to the customer where you will get more impulse selling. Aspirationally we want more excitement, we want more impulse buying and we think that the opportunity to position Lane Bryant along those lines is certainly a huge opportunity for us going forward.

Thomas Filandro - Susquehanna Financial Group

Do we know specifically what percentage of your business is derived from that customer?

Eric M. Specter

I don’t know the answer to that specifically.

Brian J. Woolf

Let me just add a data point on that topic and we can get that answer for you. But just in terms of looking at the proprietary credit buyer which contributes almost a third of Lane Bryant’s sales, the average age of the core credit card customer is 43 years old. That customer this fall has been responding very well in terms of looking at higher average dollar sales coming out of that customer, typically anywhere from 40% to 50% greater than what we’ll call the Visa, MasterCard or cash customer, and we’re seeing much greater response rates to the direct mail.

So that gives you some sense in terms of the core customer to Bryant’s going after. It’s clearly supported by the data that we have and what we’re seeing in terms of the activity in our proprietary card file.

Eric M. Specter

Tom, I didn’t answer the Right Fit question. The Right Fit question is a huge piece of our business. It is definitely geared to that 35 to 55 year old. What we’re looking to do is keep the Right Fit business going but also get more novelty in trends in fashion to surround it.

Thomas Filandro - Susquehanna Financial Group

And just a Gitano follow up?

Alan Rosskamm

Gitano is a Fashion Bug brand. We have a license there with VF. I’d say it’s probably too early. Jay Levitt is reviewing everything in that business so I don’t have any news or update with respect to Gitano at all.

Operator

Our next question comes from Lizabeth Dunn - Thomas Weisel Partners.

Lizabeth Dunn - Thomas Weisel Partners

The actual results versus your expectations, was some of that just the fact that you’ve gone forward with discontinuing Lane Bryant and so it’s a better result from continuing operations or would you really characterize the $0.21 loss as better than your expectations, your original guidance?

Alan Rosskamm

Let me just clarify that. Again although we announced this morning the discontinuance of our Lane Bryant catalog, it has not been reclassed into the discontinued ops section of the P&L. We are closing down on that business so all of its operating results, sales, and expenses all are continuing to run through the body of the P&L.

In the release this morning we did put in a GAAP to non-GAAP table to address what you have called out and that was done in order to try to compare as best we can, and we feel it’s a more representative comparison, the $0.21 loss against what we had modeled in the end of September which is the $0.35 to $0.37.

I’ll just very briefly cover the three or four areas of unusual one-time items. The most significant was we took a noncash impairment charge of $20.2 million. That’s not tax affected due to our tax accounting that we described in the release. That accounted for $0.18 a share.

We did record one-time charges in relation to closing our Lane Bryant catalog. $4.2 million of those charges were for inventory write-down which are showing up in our cost of goods sold section of the income statement and the other $1.2 million for estimated severance costs as we will eliminate approximately 100 associates both directly running the Lane Bryant catalog as well as support services and shared services supporting that business.

We took other restructuring charges of $2.9 million. The most significant are severance charges related to corporate positions we eliminated here during the third quarter of the fiscal year. That accounted to $0.02 a share.

And then we showed the impact of our valuation allowance since we are not providing a full income tax benefit at the federal or state effective income tax rate. That’s how we get to the $0.21.

Lizabeth Dunn - Thomas Weisel Partners

I’m sorry. Maybe I wasn’t clear. The $0.21 loss versus your $0.35 to $0.37 loss, was that better and if so why?

Alan Rosskamm

Real simple. We had a -4% comp in October when we had been running double-digit negative comps in august and September. So we were pleasantly surprised that our business strengthened during October and that’s why we had the improvement we did.

Lizabeth Dunn - Thomas Weisel Partners

In terms of Figi’s is there any help you can provide on what it might be worth?

Alan Rosskamm

The market I guess will determine that. It’s not useful to speculate.

Lizabeth Dunn - Thomas Weisel Partners

As you look at the remaining parts of your business, are there any that are losing a significant amount of money that’s different than just the environment or anything else you might look to sell or divest?

Alan Rosskamm

There are no other parts of our business that are losing money. Obviously Figi’s is not losing money. It’s making money. But it strategically doesn’t fit with what we’re doing.

By the way, just one other comment. Our sensitivity analysis that Eric shared does not assume any asset sales. It’s strictly operating cash flow.

Lizabeth Dunn - Thomas Weisel Partners

I’d just like to add my comment that that was very helpful, the sensitivity analysis.

Alan Rosskamm

While we have just a moment here, to respond to Tom’s question the 35 to 55 year old customer segment is roughly 50% of our Lane Bryant business, about 20% is older and about 30% is younger. So it is our current sweet spot.

Operator

Our next question comes from Matthew J. Teplitz - Quaker Capital Management.

Matthew J. Teplitz - Quaker Capital Management

Can you give us any insight as to how same-store sales have trended in November particularly given that October was certainly obviously better than you had anticipated?

Alan Rosskamm

What I can say is we have put a forward projection in our fourth quarter outlook that we would model continued low double-digit drops in sales. I certainly don’t want to lead anyone to believe that because the October trends improved significantly to down 4% that that is a trend that we are currently on.

The other comment I would make is that we are in as we sit today a mismatch in the retail calendar from a year ago meaning that the business to date does not include the all-important Thanksgiving week and Black Friday which occurred last year last week and this year of course it’s in front of us in terms of commenting on specifics relative to the early part of the week. But I think our forward outlook of modeling low double-digit sales comps hopefully will give some guidance relative to where we see trends as we move through this holiday season.

Alan Rosskamm

And to be a little bit blunt, the environment is still very tough out there as you know.

Matthew J. Teplitz - Quaker Capital Management

Any sense as to why, not that -4% is wonderful, but why October was as good as it was?

Alan Rosskamm

Among other things, again to be candid, we made some hard decisions and put some real value particularly into the Fashion Bug merchandise which we were concerned with. We felt we were over bought, our sell-through percentages weekly were unacceptable, and as soon as we took the hard markdowns the customer responded. That’s not the entire story but certainly that was a big part of it.

Matthew J. Teplitz - Quaker Capital Management

It is comforting I guess that at least there is some sensitivity although obviously you’d like to get there without having to use price to drive sales.

Did you guys disclose what the P&L was of the finance business in the quarter?

Alan Rosskamm

I can. Again we talked about it being within plan.

The operating income results that contributed to our profit and income statement was $11 million for the quarter. Alan commented that we’re clearly seeing and we had planned for increased charge-offs. The increase of charge-offs was more than offset by improvements in interest and other fee revenue as well as very good cost control and reductions in operating expenses. We were pleased with the performance of the credit business in the third quarter.

Year-to-date the operating income contribution from credit is greater than a year ago and we feel we have it well managed.

I should comment though as credit is on again everyone’s mind as we’re seeing through the media, we are being very proactive in managing risk. We are taking steps as appropriate in terms of managing our credit lines in some cases where we’re going out more often to the scoring bureaus and we are taking more aggressive action relative to managing credit lines in terms of the credit line that a new customer would be offered as well as managing the lines of existing customers.

So we are limiting the amount of credit line increases we’re giving unless they are absolutely meeting our risk management standards, and in many cases where a customer’s balance sheet or scoring has deteriorated we have been proactive and aggressive in reducing lines where appropriate.

Matthew J. Teplitz - Quaker Capital Management

Two last somewhat related questions. Obviously it’s significant with year-over-year inventories down roughly 30%. Is there any concern that you’re under-inventoried or maybe it’s just the choice you have to make here?

Alan Rosskamm

Let me just clarify that. That is a comment Brian Woolf made relative to his seasonal component of his total inventory, meaning the fall holiday inventory assortment being down 30%. Overall as we reported this morning we’re down double digit, around 13% on a comp store basis. What we’ve really done has been very aggressive in managing the seasonal inventories. That’s where the markdown risk is but there is clearly sufficient inventory in the chain at all the brands to meet their plans here as we move through this fourth quarter.

Matthew J. Teplitz - Quaker Capital Management

I don’t know that you give specific numbers but it sounds like an awful lot of the store closings have been and will be in the Fashion Bug brand. I think you’ve got issues there as to what is the mission of Fashion Bug, but is there a risk that we’re approaching a loss of critical mass for the chain itself?

Alan Rosskamm

No. We’re still well over 800 stores and I hope at a future call to be able to report to our investor community on the free positioning of Fashion Bug. Jay’s got a lot of good energy happening there and it’s premature to say a lot but we’re excited about where we can go there. The idea of brand positioning and customer definition is high on Jay’s list of priorities.

Matthew J. Teplitz - Quaker Capital Management

Can you give us any update on the CEO search?

Alan Rosskamm

The CEO search is progressing. As you know this is a tough time of year to be talking to retailers but I was involved in a few interviews within the past week. There continue to be strong candidates in the pool. These things have a life of their own and I guess we’ll report news when we have it.

Operator

Our next question comes from Robert Rodriguez - First Pacific Advisors.

Robert Rodriguez - First Pacific Advisors

I just wanted to clarify after the credit questions. How much is in the trust and where that is moving presently?

Alan Rosskamm

The receivables that are being managed under the master trust I had mentioned that in total now, of course we’re in a peak period in the holiday season, we right now have $588 million of receivables being managed through the trust. They’re supported of course by a fixed five-year term. The most significant piece of that trust in terms of the financing is a $320 million financing five-year term that we did last October. So that’s the biggest piece of it.

I mentioned at the top of the call we have freed up $55 million of liquidity under our conduit facilities with our banking institutions. So there’s a $155 million of conduit facilities in addition to the $320 million. And right now we still have in place the 2004 facility that is $180 million that will start amortizing in the April time period next year.

My comment was though that although today the markets are obviously extremely difficult, our strategy would be if we could not do a term facility, and we’re assuming right now that we cannot do another term facility to replace the facility that will start amortizing, we can get through next year with maintaining our current conduit facilities in addition to the $320 million fixed five-year term facility that’s out there in order to support what will clearly be declining receivables under management next year due to many factors including store closures as well as obviously reduced sales that we’re modeling.

We are not in need of additional financing. We need to maintain the status quo.

Robert Rodriguez - First Pacific Advisors

Just remind me, what is the residual in here for Charming Shoppes?

Alan Rosskamm

If you look at the balance sheet that we have in the release today, under the caption investment and asset backed securities, we carry a balance of $112 million. That balance incidentally with the sale of Crosstown’s credit card file will drop to roughly $100 million and within that $100 million we’re supporting the facilities to the tune of between $60 million and $70 million. In a sense that’s supporting the financings that sit in the master trust.

Robert Rodriguez - First Pacific Advisors

$60 million to $70 million is the residual risk to Charming Shoppes?

Alan Rosskamm

That’s correct.

Robert Rodriguez - First Pacific Advisors

You guys have done a great job here explaining things and sensitizing and focusing on cash flow to survive this terrible environment. You’re all to be congratulated on that.

Operator

There are no further questions in the queue at this time. I’d like to hand it back over to management for closing comments.

Gayle M. Coolick

Thanks so much everyone for joining us today. We know you’ll have some follow up questions. Eric Specter, [Steve Wishner], or myself are all available as well as Alan Rosskamm to talk through any outside questions you might have. So please do be in touch. Aside from that have a wonderful, wonderful holiday this week.

Operator

Ladies and Gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect.

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