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dELiA*s, Inc. (NASDAQ:DLIA)

F3Q08 Earnings Call

November 25, 2008 4:30 pm ET

Executives

Marc G. Schuback – Vice President, General Counsel, and Secretary

Robert E. Bernard – Chief Executive Officer and Director

Walter Killough – Chief Operating Officer and Director

Stephen A. Feldman – Chief Financial Officer

Analysts

Jaison Blair - Rochdale Securities LLC

Dutch Fox - FBR

[Alex Furman] - Raymond James

Jim Chartier - Monness, Crespi, Hardt & Co., Inc.

Patrick Walker - Walker Smith Capital

Operator

Good afternoon, ladies and gentlemen, and welcome to the dELiA*s, Inc. third quarter 2008 earnings conference call. (Operator Instructions)

I would now like to introduce Marc Schuback, Vice President, General Counsel, and Secretary of dELiA*s, Inc. Mr. Schuback, please proceed.

Marc G. Schuback

Thank you, [Kamisha]. Good afternoon, ladies and gentlemen. If you need a copy of our third quarter press release, it is available on our website, www.deliasinc.com.

It should be noted that statements in this presentation, including but not limited to those expressing dELiA*s beliefs regarding its future results, plans, or performance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, should, estimate, plan, project, anticipate or similar expressions constitute such forward-looking statements. These statements may include but are not limited to references to sales, store growth, executing plans, increasing productivity, efficiency, or leverage.

Our goals are based upon management's current expectations and are subject to risks, assumptions, and uncertainties that could cause actual results to differ materially from those set forth and/or implied by such statements. Additional information concerning factors that could cause actual results to differ materially is available in dELiA*s filings with the SEC.

The company does not intend to update any of the forward-looking statements in this presentation to conform these statements to actual results unless required to do so by law, rule, or regulation.

As a reminder, this call is being recorded on Tuesday, November 25, 2008.

At this point, I would like to introduce our Chief Executive Officer, Rob Bernard.

Robert E. Bernard

Thank you, Marc. Good afternoon, everyone. Thank you for joining us for the dELiA*s, Inc. third quarter 2008 earnings call.

With me on the call today are Walter Killough, our Chief Operating Officer, and Steve Feldman, our Chief Financial Officer. I'll begin our discussion with an overview of recent business developments and our continuing operations performance for the third quarter of 2008. Then I'll turn the call over to Walter for a review of our plans to right size the company over the next two quarters. Steve will review our financial results, including the effects in the quarter of discontinued operations, and I will follow with concluding remarks. Then all three of us will be available to answer your questions.

Before I get started on a brief overview of our third quarter financial results, I'd like to mention a key corporate development that occurred during the third quarter - the sale of our CCS business. The sale of the business significantly changed the face of our company and provided us with added financial stability. We feel that the sale enabled us to significantly strengthen our balance sheet, which we know is particularly important in this uncertain economic environment.

As we stated when we entered into the sale agreement, we're working with our Board of Directors to determine the best use of proceeds and will defer a final determination until after the end of our fiscal year. We do not anticipate that we will discuss these decisions until the fourth quarter conference call. We remain firmly committed to prudently managing our business and carefully managing our capital, especially in these challenging times.

The sale of CCS was a key strategic initiative for our company as it allows us to focus more closely on our core dELiA*s and Alloy brands and on our key demographic target market of girl's and young women.

There's one more item related to the sale of CCS that I need to address before I talk about our quarterly results. As we mentioned in our press release, we've reflected allocated overhead expenses within our continuing operations which have previously been allocated to the CCS business. These overhead expenses aggregate approximately $6.8 million on an annual basis.

Presently, we have a transitional services agreement with the purchaser of CCS which is expected to be in place through the end of January 2009. The income from this transitional services agreement is partially offsetting these overhead expenses. We plan to undergo a right-sizing of the business in order to reduce our cost structure to levels more appropriate to support our two remaining core brands. Walter and Steve will discuss the right-sizing and the impact to our results in more detail in a few moments.

Turning now to our third quarter financial results, overall, we saw a continuation of the performance we saw in the second quarter, improved profit performance in dELiA*s brand, both Retail and Direct, continued improvements in overall full-price sell throughs, improved ability to realize higher initial markup in merchandise product margins in our Retail business, and a leveraging of our expenses.

We saw improved performance for the third quarter and during our back-to-school selling period. As we mentioned in our last conference call, we view this period as a very important inflection point for our dELiA*s brand and are quite pleased with our results for the period in comparison to those for the prior year. We were able to continue the momentum of Retail comparable store sales increases and margin growth for the third straight quarter. Despite the macro challenges, we achieved solid sales growth as a result of our improved merchandise assortment and more consistent brand edit.

We owe many of these improvements to Michele Martin, whom you may recall joined us in January as President of our dELiA*s brand and was largely responsible for much of our back-to-school merchandise. Thanks to Michele and her team, our back-to-school assortment resonated very strongly with our core customer and helped to drive additional customer interest in our newly edited brand.

As a further testament to our improved performance, we grew our Retail margin significantly over the prior year quarter, even though we adjusted our promotional activity to remain competitive. In fact, for the important three-month back-to-school period of July, August, and September, we achieved comparable store sale growth of 12%, an improvement in operating margin of over 1,000 basis points. For the quarter, we were able to cut the loss in half, excluding onetime events.

Some financial highlights for our third quarter on a consolidated continuing basis include a 9.5% increase in total revenue to $56.9 million, a 40 basis point increase in total gross margin to 37%, a 320 basis point improvement in SG&A at 41.5% of sales, an improvement in EBITDA of 350 basis points, and a reduction in EBIT loss of 250 basis points, including a one-time charge that negatively affected the EBIT by 100 basis points.

We achieved top line growth for the Retail segment of 19.4%. The sales increase reflected growth in our store base as well as a strong comparable store sales increase of 7.6% for the third quarter. As I mentioned a moment ago, we had a strong back-to-school selling period which included very solid sales trends for August and September. In the first three weeks of October we experienced a modestly negative sales trend, which we believe was largely attributable to the higher sell through of full-priced merchandise during the back-to-school period, and thus substantially lower levels of clearance merchandise available for sale during the timeframe.

We saw the biggest fall off in the final week of the month, which was felt across all our businesses and we believe was tied to the significant deterioration of the macro economy. We're pleased that our sales for the Retail segment during the third quarter included a higher proportion of full price items and less promotional sales. This helped lead to a 215 basis point improvement in product margin and an overall 280 basis point Retail margin improvement for the segment.

In addition, we're pleased we continue to see strong performance across most of our Retail categories, including all of our bottoms, dresses, sweaters, and logos. Moreover, we experienced sustained sales growth in our denim category, which included core denim and colored denim.

We'll now move to a brief review of our Direct business performance. The highlights that I will discuss will be on a continuing basis.

Sales for the Direct segment decreased approximately 1% for the quarter. We view this as a good trend because we cut 16% of catalog circulation during the period. While merchandise margins were flat year-over-year, the reported gross margin for the Direct business decreased by approximately 70 basis points, largely as a result of fuel-related costs that negatively impacted postage and handling expenses and a mix change of less full-price sales in the quarter due to the circulation cuts.

Overall, we're pleased with dELiA*s Direct and view it as a solid business with good growth potential. And, going forward, we intend to better define Alloy, much like we have done with our dELiA*s brand, so that we may begin to realize the strong potential that we see for Alloy over the long term.

Now that I've given you an overview of our third quarter's performance, I'll turn the call over to Walter. I'll be back in a few moments to discuss our outlook for the holiday selling period and the remainder of the year.

Walter?

Walter Killough

Thanks, Rob. I will now discuss the sale of CCS in more detail, as well as its impact on our overhead structure. In addition, I'll touch on our plans for right-sizing our business now that we focus solely on dELiA*s and Alloy brands.

In connection with the sale of CCS, we entered into separate agreements with Alloy, Inc. for the purchase of those CCS intellectual property assets and for specified media services to be provided to dELiA*s and our Alloy brand for an aggregate consideration of $9 million. We paid Alloy, Inc. $5.8 million at time of closing and expect to pay an additional $3.3 million over the next three years.

We also entered a transitional servicing agreement or TSA with Foot Locker, where we continue to operate the business, as we have in the past, until the end of this fiscal year. In order to continue to operate the business, Foot Locker has agreed to fund a portion of allocated overhead and all variable costs that were used to run the business.

We have worked with our teams to plan and calendar the right-sizing of the overhead and variable cost structure during the fourth quarter. Since the majority of the restructuring charge will be known and communicated in the fourth quarter, most charges will be allocated to the fourth quarter.

I'll turn now to the impact of CCS sale on our cost structure. As Rob mentioned briefly, as we disclosed in this afternoon's press release, our consolidated continuing third quarter results reflect the impact of expenses which have been previously allocated to the CCS business. On an annualized basis, these costs in aggregate are roughly $6.8 million. We also have a variable cost structure that supports the Direct business that will be approximately 40% smaller next year.

To create the appropriate operating structure for continuing business, we intend to right-size our operations to support the two core brands upon which we will focus moving forward. We believe that as a result of our intended right-sizing, we have identified a total annualized overhead cost savings of approximately $4 million, which will be comprised largely of savings in insurance, ITrelated costs, other fixed costs, and, unfortunately, a reduction in our work force.

We expect that the restructuring cost associated with our actions will occur in phases. We are currently anticipating recording approximately $1.4 million in restructuring cost to address both the overhead and the variable cost structures, most of which will fall into the fourth quarter, with the remainder to be recorded in fiscal 2009.

We are now looking at how we can reengineer all areas of our business, not just those Directly supporting CCS, so we can streamline the overhead to a more appropriate number on the ongoing business. We're in the middle of our annual operating plan process and we challenge the organization to save more than the $4 million already identified. We are in the process of reevaluating and renegotiating every contract within all businesses.

On our store front, we continue to focus on one thing in our stores - improvement in UPT, units per transaction, and we expect this to be accompanied by a higher average unit Retail. In fact, we just completed our store manager conference for holiday with a focus on a simple program to increase UPT through our BOGOs - by one, get one half off - bottoms and logos. We expect the AUR should rise due to a merchandise mix change in inventory investment in sweaters away from those knit top categories which caused us markdowns in the past.

With this update, I'll now turn over the call to Steve, who, in addition to providing you with a more detailed view of our financial results on a continuing operating basis, will provide some additional information for discontinued operations as well as an update on our outlook.

Stephen A. Feldman

Thank you, Walter. Good afternoon, everyone. I'd like to provide you with some additional details on our results. I'll focus the bulk of my discussion on our results from continuing operations. You may find additional information and a reconciliation of our revenues, gross margin, SG&A and net income to reported results from third quarter and year-to-date continuing operations in this afternoon's press release as well as in our 8-K filed with the SEC.

Total revenue from continuing operations for the third quarter of fiscal 2008 increased 9.5% to $56.9 million from $52 million in the third quarter of fiscal 2007. Revenue from the Retail segment was $32.6 million or 57.2% of total revenue, and revenue from the Direct segment, reflecting continuing operations only, was $24.4 million or 42.8% of total revenue. In the third quarter of 2007, revenue from the Retail segment comprised 52.4% of total revenue; Revenue from the Direct segment comprised 47.6% of total revenue, excluding the revenue from CCS.

Retail comparable store sales increased 7.6% for the third quarter versus a decrease of 1.5% for the quarter in 2007. Consolidated gross margin increased to 37.0% from 36.6% in the prior year period. The improvement in gross margin was driven primarily by higher merchandise margins at dELiA*s Retail, reflecting the increase in sales of full-price items and improvements in initial markups. These improvements were partially offset by higher shipping costs in the Direct segment and by the mix impact of the higher proportion of total sales which Retail represented this year.

Gross margin for the Retail segment increased 280 basis points to 30.0% from 27.2% in the prior year period. Increased IMU due to our sourcing initiatives and better sell-throughs at full and promotional prices helped to drive the increase. Retail segment gross margin also includes occupancy costs, which increased in dollars due to new store openings and lease renewals. We were, however, able to leverage these higher occupancy costs by 60 basis points due to the increased sales.

Gross margin for the Direct segment was 46.3% compared to 47% in the prior year fiscal period. This decrease was largely a result of the increase in postage and shipping cost due to fuel surcharges, while merchandise margins were flat compared to the prior fiscal year's third quarter.

Consolidated SG&A expenses were $23.6 million compared to $23.2 million for the third quarter of fiscal 2007. As a percentage of sales, SG&A improved to 41.5% of net sales for the third quarter of fiscal 2008 compared to 44.7% of sales for last year's third quarter. We achieved this 320 basis point improvement in SG&A as a percentage of net sales due largely to our ability to leverage store costs and operating expenses on increased sales in Retail and by savings in catalog costs due to circulation cuts in the Direct segment for both Alloy and dELiA*s.

Additionally, as outlined in our press release, we recorded a one-time impairment charge of $574,000 related to an underperforming store location which we had opened in 2005. As we've stated in the past, we had a few underperforming stores open during fiscal 2005, the first year for our new formats.

On a consolidated basis, the operating loss before interest and income taxes improved by 250 basis points as a percentage of sales and was $3.1 million compared with $4.2 million in the third quarter of fiscal 2007.

The Retail segment operating loss improved to $2.3 million from $3.4 million for the quarter last year, a 540 basis point reduction. As Rob stated, excluding the impairment charge, we would have reduced our loss in the Retail segment by almost 50% and shown 720 basis points of improvement.

The Direct segment operating loss was $812,000 compared to $742,000 last year.

The benefit for income taxes for continuing operations for the third quarter of fiscal 2008 was $4.3 million, which includes a year-to-date catch-up adjustment of $3.1 million. This compares with a benefit of $1.6 million for income taxes in the third quarter of fiscal 2007. Since the gain on the sale of CCS means we believe that we will have sufficient income in the fourth quarter to have a profit for the year, we expect to be able to recognize the benefit on our accumulated year-to-date loss. The incremental impact of $0.10 per share.

Now for a discussion of net income. Net income from continuing operations totaled $941,000 or $0.03 per diluted share compared with a loss of $2.7 million or $0.09 per diluted share in the prior year quarter. Income before taxes for discontinued operations was $4.1 million after reflecting a charge of $550,000 for professional fees related to the sale transaction. Net income after taxes was $2.6 million or $0.08 per diluted share compared with income before taxes of $4.45 million and $2.7 million after taxes or $0.09 per diluted share in the prior year quarter.

Were we to have treated both continuing and discontinued operations as well as income taxes as we had in prior periods, in the way, that is, that the estimates for the quarter were built, and, had we excluded the impairment charge and deal costs, consolidated earnings per share for the quarter would have been reported as $0.06.

We have opened the two remaining new 2008 stores since we spoke to you in August - one in October during the third quarter and one in the beginning of November. Both of these stores are located in California - in Brentwood, east of Walnut Creek, and in Roseville, near Sacramento. Although it is still very early, we've been pleased with the contributions of these two stores to date. This brings us to 97 stores and the fiscal 2008 total to 13 projects - 11 new stores and 2 relocations.

Turning to our balance sheet, we continue to manage our working capital very carefully and maintain adequate liquidity levels throughout the quarter. At November 1, 2008 we had total cash and equivalents of $8 million and short-term borrowings of $13.8 million versus last year's balance of $8.6 million in cash and borrowings of $12.2 million.

Total net inventories were $40.2 million at November 1 versus $33.4 million at November 3, 2007. For Retail, inventory increased by 22%, reflecting in part our higher store count. Inventory per average store was up 10%, but average units were down 4%. When you exclude the denim category, average store inventories going into the fourth quarter are up only 2.8% in dollars, but down 10% in units, with the majority of the change driven by this year's increased sweater investment versus last year's knit top investment.

On the Direct side, excluding the higher freight and overhead capitalization in inventory and the lower need this year for obsolescence reserves, inventories are up $1 million, entirely in the dELiA*s Direct division, in support of the higher November circulation.

Cash capital expenditures totaled approximately $10.8 million through the third quarter of 2008, down from $17.3 million through the third quarter of fiscal 2007. We continue to expect to have approximately $12.5 million of cash capital expenditures for the year as compared to almost $20 million last year.

I want to mention a series of items that we expect to record in the fourth quarter:

First, of course, we expect to record an estimated $48.5 million pre-tax gain as a result of the sale of CCS. This gain reflects the allocation of $28.1 million of non-deductible goodwill to the business. The resulting income taxes of approximately $31 million are expected to be reduced by utilization of the available NOL carryforwards. Thus, in addition to the approximately $0.55 per share gain from the sale we anticipate that we will recognize the release in the fourth quarter of approximately $3.2 million of the valuation reserve for that portion of the NOL which we expect to use or $0.10 per share.

We expect to incur restructuring and severance charges during the quarter which we estimate at $1.2 million.

It should also be noted that last year's fourth quarter continuing operations benefited from $580,000 for the favorable settlement of certain litigation.

Because the CCS transaction occurred in the fourth quarter, we expect our cash position, reflecting the proceeds from the sale, at the end of the fiscal year to be close to $100 million since the income taxes are not due until mid-April. We estimate that the cash income taxes payable will be in the mid to high $20 million range depending upon the results for the fourth quarter.

Our current fiscal 2009 goal is a net of 13 new stores and 2 relocations to end the year at 110 stores. We expect capital expenditures for the year will be in line with this year's levels. We are aggressively pursuing value engineering opportunities in our store construction, and we believe we can drive the cost of store build outs lower in fiscal 2009.

With that, I would like to turn the call back over to Rob.

Robert E. Bernard

Thanks, Steve. And now for a brief update on our outlook for fourth quarter and 2009.

As I mentioned a few moments ago, we're pleased that we continued to achieve improvement in our performance during the third quarter and are encouraged by our results for the very important back-to-school selling period, which I believe shows an increase in our market share.

That said, we believe that we're generally well positioned for the holiday period. We're confident in our merchandise assortment and in our ability to continue to attract new and existing customers to our stores and catalogs. As we edit our brand and focus our attention on outfitting, layering, and accessorizing, we aim to generate continued sales growth by focusing on increasing units per transaction as a means to at least partially offset the expected decline in traffic and resulting decrease in total transactions.

With the calendar shift in Thanksgiving and Black Friday, sales results for the past 10 days have been extremely hard to read. We have also seen most of our competitors have implemented an extreme promotional cadence as compared to last year. We've worked on a series of promotional strategies to implement for Black Friday and post-Black Friday that we believe will meet the anticipated competitive landscape. We will be adjusting these strategies as we read sales results.

We feel it's prudent to be looking at a flat to slightly negative comp and a flat to slightly negative merchandise margin for the fourth quarter so that we can meet the promotional cadence in the malls today. We believe it's more important to get our market share in the pre-holiday shopping period and meet our year end inventory goals.

While the environment during the holiday period will be undoubtedly difficult, we're confident in our long-term business and see this as a major opportunity to continue to differentiate our brands and increase the acceptance of what we believe is our exciting, trend-right assortment of high quality, affordable merchandise by our core consumer.

We have previously indicated that we thought continuing operations, excluding any restructuring and severance charges, can be EBITDA positive for the fourth quarter. We're still cautiously optimistic that this is achievable.

As we look ahead to 2009, we will continue to be prudent in light of the weak economic forecast. As I mentioned, we're currently in the process of finalizing our 2009 plans and determining the best use of the proceeds from our sale of the CCS business; however, we will reevaluate our 2009 and long-term growth plans based upon the economic climate.

We will continue to grow our store base and seek better locations for our new stores. We will take advantage of real estate opportunities as they materialize in this difficult economy, but at the same time we will be pragmatic and realistic in our approach. Overall, we will position ourselves for long-term growth while taking care to aggressively lower our expense structure, decrease our capital expenses, lower our store build out costs, and monitor the impact of the economy closely.

We expect to report more specifically on our 2009 operating plan, as is our custom, when we have the earnings call to report our fourth quarter results. Again, as we previously indicated, we continue to believe that continuing operations in 2009 will be EBITDA positive.

I'd like to close by saying that we remain optimistic about our long-term growth prospects. Overall, we're pleased with the Direction that our business is headed. We remain keenly focused on development of our brands and continuing our positive momentum.

As always, we'd like to thank our employees for their hard work and dedication, especially during this hard time.

I'd now like to open the call to questions. Michele Martin, President of dELiA*s brand, is visiting stores today, so I will answer any merchandise-related questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jaison Blair - Rochdale Securities LLC.

Jaison Blair - Rochdale Securities LLC

I've got an important question for Steve. I think you said that the expected cash balance will be $100 billion by the -

Stephen A. Feldman

Million. Million, Jaison, million.

Jaison Blair - Rochdale Securities LLC

Yes, yes. $100 million minus up to the high $20s for the tax burden. Does that also include the payments to Alloy or have those been made yet or will those be taken out of the $100 million balance?

Stephen A. Feldman

$5.8 was paid at the closing and, in accordance with the documents, its $3.3 - that will go $1.2 in fiscal 2009, $1.1 in fiscal 2010, and $1 in 2011.

Jaison Blair - Rochdale Securities LLC

And Rob confirmed that you guys will expect to be EBITDA positive in 2009. Is there overhead for the Direct business that you will be - and Rob may have mentioned this; my phone cut out at one point - is there overhead from the sale of the CCS business that you will be saddled with at some point in the future that we might not be expensing right now?

Robert E. Bernard

Not in the future. We'll be right-sizing the whole business in January to look at a business that's 40% smaller.

Jaison Blair - Rochdale Securities LLC

So you're EBITDA positive assumes or includes the impact of the loss of CCS and there are no  are there any agreements with Foot Locker to do things together?

Robert E. Bernard

No.

Jaison Blair - Rochdale Securities LLC

Okay, so that's a clean number?

Robert E. Bernard

Jaison, I think the best way to say it is continuing operations with a new right-sized company should make us EBITDA positive or flat.

Walter Killough

And the transitional service agreement is expiring at the end of January.

Jaison Blair - Rochdale Securities LLC

Rob, if you could just kind of give us your thoughts on the California stores and clearly Retailers tend to, you know, you want to get scale, you want to cluster stores, and it seems as though you're opening stores all along the West Coast. How do you intend to service them? Is it going to be one regional manager buying a $300 ticket every time they need to go visit a store? What's your thinking behind starting this move West and how do you justify it in terms of getting scale in that region?

Robert E. Bernard

Well, first of all, California as a state in and of itself represents some 14% of Retail sales in the country, and we see the mirror of that in our dELiA*s Direct business, so we already know we have a customer there.

Our introduction to the West Coast are two stores in Northern California and one in Seattle, and we anticipate that we're going to be able to add to that group next year and be able to create a district that would be travelable for somebody in that time zone. So we think that from Northern California to Washington, for at least starters, is a reasonable size district.

Jaison Blair - Rochdale Securities LLC

So it's still mainly Northern California?

Robert E. Bernard

Yes.

Jaison Blair - Rochdale Securities LLC

Can you talk a little bit about what you think the store economic model would be, where you perceive sales per square foot to come out and what the store economics might be based upon those types of numbers?

Robert E. Bernard

Again, we look to be updating our model with everybody with our fourth quarter call, as soon as we put together and get approval of our Board of our annual operating plan for next year. And we view it as an opportunity to get back to our investment community and our investors and shareholders and update them on our forward view.

Our original view has always been that we believe in order to produce the viable profitable specialty store chain that we aspire to attain that that chain starts producing the numbers that we'd all be very proud of and happy with at $400 per square foot.

Walter Killough

If you question was with respect to California per se, the store by store economics have to stand on their own depending on the rest structure.

Jaison Blair - Rochdale Securities LLC

And how close are you to trending towards that $400 a square foot on, let's say, the '08 class and the '07 class?

Robert E. Bernard

Well, we haven't gone class by class and talked about that. I would tell you that we finished last year at $330 per square foot as a company. That's all in, all, I believe, 87 stores - 86 at the end of last year. And a lot of that had to do with a good portion of '06 and '07 stores being under $300 a foot as they were centers that were either new centers, which we call [inaudible], or centers being remodeled.

Now, thankfully, in our '08 class that we opened, we've been able to get existing centers for the large part with a much more predictable productivity in year one. Now in our third quarter result that we just reported, we reported a 12% comp in our July, August, September period. So we're proud of that number. We think that's substantial given the current environment, and we look forward to continuing to take market share.

Jaison Blair - Rochdale Securities LLC

And was it the '06 class where you had less productivity?

Stephen A. Feldman

'07.

Jaison Blair - Rochdale Securities LLC

'07. Do you have some kind of 24-month kick out on those leases? Is there anyway to get out or renegotiate?

Walter Killough

So I just want to be clear. The productivity may be lower, but the rent deals are still profitable. It's just eating up a lot of overhead.

You know, to answer your question a little bit differently, if we take the current chain the way it is right now and say we need roughly about an 18% increase to get close to that 1400, we got 12 of the 18 during the back-to-school time period. That's what we're focusing on.

The new stores in '08 and '09 are already at a higher productivity because of the malls that we're going into.

Operator

Your next question comes from Dutch Fox - FBR.

Dutch Fox - FBR

I was hoping that you all could - your inventory position was down about what - it was about 3% in dollars ex denim on a positive 7.6 comp. I was hoping that you could give me an idea of how to think about where your inventory would be at the end of the year given that you’re guiding towards a little bit more of a slower comp given the traffic we're seeing in the malls right now.

Walter Killough

What we said was it was up 3% - 2.8% - but, with respect to where we're headed at year end, the goal, again, is to be bringing inventory down ex of denim high single digits even though total inventory may be up as much as 5%.

Dutch Fox - FBR

It seemed looking at - this is in regard to your D&A - it seemed like the trend in the first half of the year, if you carry that trend forward to 1Q and 2Q through the year you would end the year with about, call it around $9 million in D&A, and I was wondering how you could help us think about the sale of CCS would affect your D&A, both in 4Q and kind of going forward.

Stephen A. Feldman

Zip.

Dutch Fox - FBR

None whatsoever? Okay, great.

Operator

(Operator Instructions) Your next question comes from [Alex Furman] - Raymond James.

Alex Furman - Raymond James

I was wondering if you could talk about what you see as your store potential for the dELiA*s brand and how many of those stores you could support right now with your current infrastructure?

Robert E. Bernard

We said from day one that our aspiration for the brand is 400 stores. Why? Well, given the price point we sell merchandise at, which is largely where American Eagle targets their customer and Hollister - Hollister has close to 500 stores these days; American Eagle over 800 - we think that a 400store chain is reasonable as far as size of that chain.

And the second part of your question was?

Alex Furman - Raymond James

How many you could support right now given your current infrastructure.

Robert E. Bernard

Sure. Our current infrastructure in just the last 36 months, we've opened 67 new stores, additional store count, during that timeframe. We've remodeled a number of stores. In fact, in a 12month period, I believe our highest project count was about 27 stores.

So our current intention, as we've said, is we're going to grow the chain conservatively. We'll certainly look at Retail real estate opportunities, but we [expect] like a 15% growth pattern and that's way below our current capabilities.

So if we take it one other step within the DC right now, the year before we upgraded our merchandising systems and then we're in the process of just finishing an upgrade that connects to the merchandising system of our warehousing system. Without doing too much to the warehouse, that'll easily give us 150 to 160 stores in the current configuration.

After that, we can push - its smaller-type investments because of the systems already in there. It's more about getting some pick and packs based on our current configuration. With CCS leaving, it leaves us a lot of space out there, too.

Alex Furman - Raymond James

And I was wondering if you could talk a little bit about how your same-store sales progressed as the quarter went on.

Robert E. Bernard

As we mentioned, August and September were very strong, and then we further said July, August, and September was up 12 comp. So October, obviously, went slightly negative in the first three weeks and then in the fourth week of October, we saw that macroeconomic clout right before the election and Halloween that seemed to really slow things down.

Alex Furman - Raymond James

I know you said the last 10 days have been pretty hard to read, but is there any sort of a number you could put on that in terms of the same-store sales from last year quarter to date?

Robert E. Bernard

Being very honest, no.

Alex Furman - Raymond James

What's your SG&A leverage point right now in terms of same-store sales?

Walter Killough

About 6%.

Operator

Your next question comes from Jim Chartier - Monness, Crespi, Hardt & Co., Inc.

Jim Chartier - Monness, Crespi, Hardt & Co., Inc.

You talked about some catalog circulation shifting from third to fourth quarter. Can you quantify the impact on sales?

Robert E. Bernard

Sure. We cut our catalog circulation in the third quarter for two reasons - one, we're still doing our surgical cuts because, again, our business is 80% Internet and we're starting to do more with some search and affiliate-type programs.

The second thing is we saw last year in all brands - all girls' brands, I should say - the month of October was terrible for prospecting circulation. So lists that worked for us in other months, just for whatever reason, October isn't a big prospecting month. So we moved some of that circulation into the month of November, where the prospecting is much better in that month.

Jim Chartier - Monness, Crespi, Hardt & Co., Inc.

And do you have any kind of read on how that's performing for you so far in November?

Robert E. Bernard

So far, again, the big change is the November books looked good until last Thursday - Friday, when we hit the anniversary of Thanksgiving. So what happens is - what I believe is going to happen is - about 3% to 4% of the total demand for the holiday season gets moved out of last week, where we had Thanksgiving, and gets shifted into the new weeks. So before that week, everything was looking good and we were on plan.

Jim Chartier - Monness, Crespi, Hardt & Co., Inc.

And then with fuel prices now coming down, should we be expecting a year-over-year benefit from the shipping and handling costs going lower?

Robert E. Bernard

Yes, we should, but right now UPS is a little bit slower giving back the surcharges than they did when they raised them.

Jim Chartier - Monness, Crespi, Hardt & Co., Inc.

Do you expect them to come down going forward, it's just going to be a lagging?

Robert E. Bernard

It's just lagging. We're pushing them. Like we said, we're starting to renegotiate every contract for next year. We're in the process of that right now.

Operator

Your next question comes from Patrick Walker - Walker Smith Capital.

Patrick Walker - Walker Smith Capital

Did I understand what you'd said? I'd written down that you'd said the percentage of sales that were Direct excluding CCS is 47.6. Is that correct or was that gross profit margin or did you give that out?

Stephen A. Feldman

No, that was the number and let me flip back real quick as to the breakdown. It was 57.2% versus 42.8%. Last year it was 52.4% versus 47.6%.

Patrick Walker - Walker Smith Capital

But that includes CCS.

Stephen A. Feldman

Excludes CCS, that's correct.

Patrick Walker - Walker Smith Capital

That includes or excludes?

Stephen A. Feldman

Excludes, both years. The mix used to be 33/67 and this year was running 35/65 or so.

Patrick Walker - Walker Smith Capital

And how many stores - you're going to be at 110 at the end of the year, correct?

Walter Killough

Yes.

Patrick Walker - Walker Smith Capital

And how many are you at currently?

Walter Killough

Ninety-seven.

Patrick Walker - Walker Smith Capital

That was 97 as of the end of the quarter? I assume you're not going to be opening stores in the middle of the holiday season, correct, or do you have a few that are still straggling out there?

Walter Killough

We had 96 at the end of the quarter, 1 the first week of November, and no anticipated closings before year end. So we're done at 97.

Patrick Walker - Walker Smith Capital

And the TSA - transitional services agreement - with Foot Locker, does that affect cost cutting at all?

Stephen A. Feldman

It affects the timing of the cost cutting.

Patrick Walker - Walker Smith Capital

Okay, and you said that the $6.8 million annual is what you project to come out in the near term, is that correct?

Robert E. Bernard

No. No, no. There's $6.8 of overhead that was allocated to CCS. We expect to take 4 out to get started.

Patrick Walker - Walker Smith Capital

Okay, 4 out to get started?

Robert E. Bernard

Yes.

Patrick Walker - Walker Smith Capital

And how much of that or could you estimate would be in SG&A and how much of it - or would some of that be in direct costs attributed to the Direct business? Said another way, how much of that is out of SG&A? Do you have an estimate?

Stephen A. Feldman

Oh, it's coming out of SG&A. There's a very modest amount that would be in other areas.

Patrick Walker - Walker Smith Capital

Okay, so it's mostly in SG&A then? That was my question.

Operator

At this time, there are no more questions in queue. I will now turn the call back over to management.

Robert E. Bernard

Thank you, everyone, for visiting with us. Have a happy holiday season, and we look forward to speaking to you in the next 90 days. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.

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