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Executives

Stacie Shirley - Vice President Finance

Burton M. Tansky - President and Chief Executive Officer

James E. Skinner - Chief Financial Officer

Analysts

Carew Martinson - Deutsch Bank Securities

Bill Broder - Banc of America Securities

Grant Jordan – Wachovia Securities

Carla Casella – J. P. Morgan

Ann [Weirheim] – Van Kampen

Mary Gilbert - Imperial Capital

John Dionne – Blackport

Lance Vitanza – Knighthead Capital

Emily Shanks – Barclays Capital

Andrea Cullen - Ares Management

Neiman Marcus, Inc. (NMG) F1Q09 Earnings Call December 10, 2008 4:00 PM ET

Operator

Good day, everyone, and welcome to the first quarter fiscal 2009 Neiman Marcus Inc. earnings conference call. My name is Candice and I will be your coordinator for today. (Operator Instruction) I would now like to turn the presentation over to your host for today’s conference, Vice President of Finance, Ms. Stacie Shirley.

Stacie Shirley

Good afternoon and thank you for joining us. Joining me on the call today is Jim Skinner, Executive Vice President and CFO, and Burt Tansky, President and CEO of Neiman Marcus. Burt will provide some highlights for the quarter as well as an update on business. Then Jim and I will discuss some of the details of our financial results.

The call today involves our view of the future for the businesses that make up Neiman Marcus. Any statements referring to the expected future plans and performance of Neiman Marcus are forward-looking statements and actual future results may differ materially from such statements. Please refer to our SEC filings where we include a description of the factors and risks that might cause our future results to differ from what we will be discussing today. For more details please refer to our 10-Q which we filed this morning.

And with that, I will turn the call over to Burt.

Burton M. Tansky

Good afternoon and thank you for joining us today to review our first quarter results. Since our last earnings call in September the economic environment has further deteriorated. It was a challenging quarter as we responded aggressively to slowing consumer demand which was intensified by the increasingly turbulent financial markets.

As you would expect, our high-end customers have reacted negatively to this time of unstable environment. As the quarter progressed, the sales trends worsened, along with the sharp decline in the stock market. Throughout the quarter we remained focus on stimulating sales through promotional events, reducing inventory levels, and implementing expense reductions, and although our results declined on a year-over-year basis, we believe the actions we took have mitigated the overall impact.

Now let me take a few minutes to review some of our first quarter financial results. Sales for the quarter were $986.0 million, which is a comparable revenue decrease of 14.5%. The weakness we experienced was in both our specialty retail division and our direct consumer division, across all geographic areas and all merchandise categories.

Sales per square foot for the trailing 12 months declined to $605.00. These results reflect a weakness in both our aspirational shopper and our most loyal customer. Whereas the aspirational shopper’s financial condition has been more directly impacted by the financial crisis, the affluent customer is affected differently.

We believe our most loyal customer still has the financial ability to shop with us, however, the uncertainty that is prevalent in the economic landscape has caused her to pull back on the quantity of her purchases. This customer has become much more focused on what she is buying. Although she might have temporarily reduced her total spend, she still has a very strong desire for the quality of merchandise and the level of customer service that we offer. We believe this customer will return to a more normal pattern of shopping as the economy improves.

Throughout the quarter we added to our promotional calendar and increased the value of the events already in our plans in order to stimulate sales and thereby reducing inventories. The impact of these actions was higher mark downs, which reduced our gross margin, but at the same time helped us to further liquidate our inventory.

SG&A expenses on a dollar basis decreased approximately 11% as a result of flexing our variable expenses and from cost-containment strategies, but on a rate basis SG&A increased approximately 60 basis points due to the decline in revenue for the quarter. Jim will address our expenses further in just a few moments. The combination of these factors resulted in our adjusted operating margins declining to 8.3% for the quarter.

Before I turn the call over to Jim and Stacie to take you through the remaining details of the financials, I will provide a brief update of our real estate activities. A significant amount of our annual capital expenditure plan is committed to new stores and remodels. We, like our developer partners, are evaluating our current schedule of planned stores. With the opening of our newest store in Topanga, which is in California, that occurred in September, we have six remaining full-line new stores on our schedule.

Our list of planned new stores has not changed, however, in some cases the opening date has shifted slightly, which provides us with more flexibility in the near term. Our opening schedule is as follows: 120,000 s.f. store in Bellevue, Washington, a suburb of Seattle, in the fall of 2009; Walnut Creek, 110,000 s.f. store, which is in Northern California’s East Bay, in the fall of 2011; and in the fall of 2011 an 80,000 s.f. store in Sarasota, Florida. This store was originally planned for the fall of 2010; in the fall of 2012, San Jose, California, the location is planned at 120,000 s.f.; a 90,000 s.f. store in Princeton, New Jersey, has shifted to the fall of 2013; and lastly, we are still planning a 150,000 s.f. in Oyster Bay, New York, which is on the North Shore of Long Island.

One quick note about our new store in Topanga. Despite current conditions we are very encouraged by the initial results of this store. The customer response, relative to the environment, has been very good.

As to major and minor remodels, our plans are temporarily on hold. We will continue to develop design and construction plans so that when we are more comfortable with the outlook we will be able to proceed efficiently and effectively with these projects.

It is important to note that we have allocated adequate capital in our plans for maintenance, selling, and other store-related projects to ensure we continue to meet our customers’ expectations.

In addition to full-line stores, we recently opened a new Last Call clearance center in October in Deer Park, New York, which is located on Long Island. We plan to open three more Last Call stores over the course of this fiscal year, which will bring the total to 28.

The last update on real estate relates to our Cusp stores. A few weeks ago we opened our sixth Cusp store in Water Tower in Chicago. The store is approximately 6,000 s.f. and we remain very optimistic about the prospects of this concept, as we believe we are broadening our market share in reaching a new, younger customer.

That being said, we are adjusting our store opening plan for Cusp for the year in the light of the overall deteriorating retail trends. We had previously stated we planned to open four to six Cusp stores in fiscal 2009 and early fiscal 2010. We have now decided to adjust our plans and will not open any additional Cusp stores this year, other than the two we have already opened, Chestnut Hill, which is a suburb of Boston, and Water Tower in Chicago. We will be evaluating our plans for fiscal 2010 over the next three to six months.

In summary, as we navigate through these turbulent times we will continue to take the necessary steps to minimize the negative impact on our financial results. We are focusing our efforts on motivating our customers to buy with great events, special merchandise offerings, and exceptional customer service. Unfortunately, the promotional environment in our specter is more aggressive than we have seen in many, many years. We anticipate that the level of promotions will continue and as a result our margins will be under pressure.

However, with each new season comes the opportunity to start fresh. As you know, we purchase our merchandise six to nine months ahead of the season and although we were more conservative with our spring 2009 buying plan than the fall 2008 plan, no one could have projected the current turmoil of the financial markets and the ensuing instability. We are, and have been, working with our vendor partners to adjust our inventories to the current expected level of demand.

In addition to our efforts to control inventory levels, we are taking actions to reduce expenses. From a short-term perspective we are reducing our expenses and are intensely reviewing every cost, no matter how large or how small. From a longer-term standpoint we began a strategic project approximately twelve months ago to review every area of the company with the goal to determine how we want to manage our business for the next five to ten years. We have implemented some of our findings and we expect to implement additional changes over the next six to twelve months.

As we move forward, we are planning conservatively, reducing our expenses, controlling our inventories, and maintaining strong relationships with our customers and vendors. We are identifying any and all opportunities to improve our financial results while at the same time investing in our future.

Our customer base is more resilient than most. It has been our experience that during challenging economic cycles our customer is the last to be impacted and the first to return to a more normal level of spending.

We believe that once the environment begins to stabilize, we will start to experience an improvement in our sales trend. With that, our full-price selling, and therefore our margins, should and will improve.

I am extremely confident in our management team and our underlying, unyielding focus on what Neiman Marcus represents. Paramount to our strategy is that every action we take ensures we are supporting the quality of our brand and maintaining our reputation.

Our merchants have been challenged to make certain that our assortments are highly focused, and are meeting the demands of our customers, as our stores’ primary goal is to provide the most luxurious shopping environment and the highest level of service possible.

We have a strong foundation that will support us during this difficult time and I firmly believe that we will emerge as a much stronger company.

And now Jim Skinner will review our financial results.

James E. Skinner

First I will begin with our consolidated results. As Burt mentioned, Q1 was a very challenging quarter and our total revenues fell almost 13% and on a comping basis revenues declined 14.5%.

For the quarter, gross margins decreased approximately 380 basis points compared to last year. This decrease was primarily due to higher mark-downs and a decrease in full-price selling in both of our divisions due to lower level customer demands we experienced.

We incurred higher mark-downs and sales promotion costs during the quarter to liquidate on-hand inventories and excess of sales trends.

Also contributing to the 380 basis point decline was an increase in buying occupancy cost of approximately 100 basis points due to the de-leveraging of payroll and rent expenses on the lower level of revenues.

As Burt said, our total SG&A expense declined in absolute dollars about $29.0 million, or 11%. Much of this is due to the variable expense structure of our model. Also, we had implemented short-term expense control initiatives, including holding open vacant positions, and reducing discretionary expenses such as travel, supplies, training, etc.

As Burt noted, we are continuing our strategic review of our business processes and organization. Despite these efforts, we did experience an increase in our expense rate, which de-leverages approximately 16 basis points for the quarter. This was primarily due to higher payroll and related benefit costs as percentage of sales and in increase in advertising costs as a percentage of revenue for our direct marketing operations, primarily related to the de-leveraging of catalogue production costs and lower catalogue revenues.

Partially offsetting these increases were lower annual incentive compensation costs for the quarter and a decrease in marketing and advertising costs at our specialty retail stores as a percentage of sales.

During the first quarter of the prior year we incurred incremental advertising and promotion costs in connection with the celebration of the 100th Anniversary of Neiman Marcus in October 2007.

Income from our credit card program declined 20 basis points as a percentage of sales. The decline was due to a charge we took for our portion of the estimated credit card losses that we share with HSBC as a result of higher delinquencies.

Depreciation increased in total dollars primarily due to a higher level of capital expenditures in the past few years. On a rate basis, depreciation increased approximately 80 basis points for the quarter as these expenses de-leveraged on the lower level of sales.

In total, our first quarter adjusted operating results, which excluded certain items from fiscal 2008, as detailed in the earnings release, were $82.0 million, a decrease of approximately 48% from last year. On a rate basis, our adjusted operating margin was 8.3% and our adjusted EBITDA rate was 14% compared to 18.6% last year.

Now a brief review of our segments. Specialty retail sales decreased 14% for the quarter and on a comparable basis sales decreased 15.8%. This decrease was comprised of a comp decrease of 16.8% at Neiman Marcus stores and a decrease of 10.8% at Bergdorf Goodman.

For the quarter we experienced a weakness in sales trends in stores across all geographies. Whereas we had been experiencing strong trends in New York City at Bergdorf Goodman, sales for the first quarter dropped off significantly with the many Wall Street lay-offs and market instability.

Adjusted operating earnings at the Specialty Retail division were $94.0 million this quarter compared to about $166.0 million in the prior year, a 43% decrease. This decrease is primarily a result of the factors that I mentioned earlier, including a lower level of full-price sales and higher mark-downs and promotion costs, and the de-leveraging of a significant portion of our expenses on the lower level of sales, partially offset by a net decrease in advertising and promotional costs, and lower estimated annual inventive compensation.

At Neiman Marcus Direct, total revenues were $159.0 million, which represents a decrease of 7%. Internet sales at $121.0 million held up much better, only declining about 2.5% for the first quarter. Neiman Marcus continues to be the strongest performing brand on a relative basis of our direct consumer businesses. Our hard goods business, driven by Horchow, clearly remains the weakest area. On a positive note, our [side list] business improved on a year-over-year basis.

Quarterly operating earnings at Neiman Marcus Direct decreased 16.8% to $19.4 million, which represents an operating margin of 12.2%, a decrease of approximately 140 basis points from last year. The decrease in operating margin is primarily the result of a decrease in gross margin, primarily due to higher mark-downs, and the de-leveraging of a significant portion of our expenses on the lower level of sales, including higher catalogue production costs, that did not result in higher catalogue revenues.

Our consolidated inventory for the quarter was relatively flat at about $1.1 billion. If we eliminate the inventory for the new stores we have opened, inventories decreased approximately 2.5%. Although inventory is higher than we would have like, given the sales decline, the merchant organization is very committed to bringing the inventory levels down to better balanced inventory with current sales trends.

Last week we released our November sales results. Total sales declined 10.2% and on a comping basis, sales declined approximately 12%. Given our current inventory levels and the continued softness in customer demand and resulting promotional environment, we expect higher mark-downs in the second quarter compared to last year, resulting in lower gross margins for the quarter.

Also with the weaker revenue levels anticipated for fiscal 2009 we expect our SG&A rate as a percentage of sales to remain under pressure throughout the year.

And while we are still working on the current season to ensure we liquidate the fall goods, we are also very focused on the spring season. As Burt mentioned, because the lead time of purchasing inventories is so long, we committed to our spring merchandise some time ago, and importantly, well before the market declined so sharply this fall.

We had been negotiating with our vendor partners for many months in order to reduce the planned merchandise levels. At the same time, it is extremely important that we present an assortment of merchandise that is representative of our name and what our loyal customers expect.

Our strategy, and our vendor strategy, is based on full-price selling thus [inaudible] on our desire to be heavily promotional from a pricing standpoint. However, during times like these we have, and will continue to take appropriate action to adjust our inventory position.

A few years back when we were going through the acquisition process, we had many discussions around the company’s ability to withstand a downturned economy. It was critical that we build a capital structure that would support our company during challenging times.

Since the acquisition we have had very strong results and have been able to pay down a significant amount of the debt. And although we will likely see our leverage ratio increase with the pressure on EBITDA, I am confident that we will make it through this cycle without having to sacrifice who we are and what we represent to the luxury customer.

Thank you, and now Stacie Shirley will discuss a few remaining items before we take your questions.

Stacie Shirley

Let me begin with just a few other items that impacted the income statement. Net interest expense for the quarter was approximately $58.0 million compared to $61.0 million last year. The decrease is primarily due to the decrease in interest rates on our variable rate debt.

Our effective income tax rate for the quarter was 45.7%, which was higher than last year. The effective tax rate for the quarter was unfavorably impacted by a lower level of projected full-year earnings.

For comparison purposes, our Q1 fiscal year 2008 adjusted operating earnings excludes other income of $32.5 million which represents a one-time pension curtailment gain as a result of the company’s decision to freeze certain pension and retirement benefits as of December 31, 2007.

Now just a few comments on the balance sheet. We ended the quarter with cash of $115.0 million compared to $81.0 million a year ago. Our highest working capital needs fall in the October and November time frame as we build inventory for the holidays. We effectively managed our cash flow and did not have to borrow on our revolving credit facility, nor do we anticipate having to utilize the revolver during the second quarter.

Other than about $25.0 million for lines of credit that primarily support our casualty insurance program, we have full capacity of our $600.0 million ABL revolver. We did not make any payments on our term loan during the quarter. We remain very focused on liquidity and although we have adequate levels of cash flow to meet our working capital needs, we are waiting until the financial markets are more stable before we make any additional debt payments.

Capital expenditures for the quarter, on a gross basis, were $33.0 million and we received developer contributions of $4.0 million, resulting in net capex of $29.0 million. The majority of the capex this quarter was spent on two new stores, in Topanga and Bellevue, and various IT projects.

In order to build in additional flexibility we have reduced our fiscal 2009 capital plan. Our new plan, on a gross basis, is the range of $115.0 million to $125.0 million and on a net basis this represents a plan of approximately $100.0 million to $110.0 million. This is a reduction of approximately 26%.

We have now re-evaluated all the projects we had planned for the year. In some cases we deferred projects and in other cases we eliminated the project altogether. Importantly, we don’t believe the changes we made will impact our customers’ experience in any way.

The actions we took to reduce our capital plans have already impacted our first quarter investments. This quarter’s gross capex of $33.0 million compares to $46.0 million a year ago. This reduction is reflected in our total PP&E balance, which declined slightly from our July year-end balance.

One final note on the balance sheet. Our AP to inventory ratio has declined sharply from a year ago. We anticipate this ratio will be somewhat erratic this year as we continue to adjust our inventory levels.

Our adjusted EBITDA for the first quarter of 2009 was $138.0 million which represents a decline of about 34% from last year. Excluded from the Q1 2008 adjusted EBITDA results is the $32.0 million non-cash pension curtailment gain that I mentioned earlier.

Our leverage ratio was approximately 4.8 as of the end of the first quarter. If you adjust for the excess cash we have, our leverage ratio would be slight less, at approximately 4.7. This compares to a leverage ratio of approximately 4.2 as of the end of fiscal year 2008. The increase is due to our reduced EBITDA for the quarter compared to last year.

We remain very focused on liquidity. We have a strong bank group supporting the company. We have no debt maturities coming due for almost two more years and we have no covenants on our facilities.

Given these facts and the actions we are taking to manage inventory and reduce capex, coupled with ample borrowing capacity on our revolver, we are comfortable with our current liquidity position.

Now I would like to turn the call over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Carew Martinson - Deutsch Bank Securities.

Carew Martinson - Deutsch Bank Securities

What was the decline in Bergdorf’s? I missed that.

Stacie Shirley

For the quarter? The decline in sales for Bergdorf?

Carew Martinson - Deutsch Bank Securities

Correct.

Stacie Shirley

It was 10.8.

Carew Martinson - Deutsch Bank Securities

And when we look at the fiscal second quarter, you said higher mark-downs versus a year ago, is it a reasonable expectation here we will see a magnitude greater than what we saw here in the first quarter as well?

James E. Skinner

We don’t put out any forecasts for financial results, so we will have to decline answering the question. Obviously it is a challenging environment, as we have said, and as we have said, we think we will have a decline in margins, but we won’t have any other comment other than that.

Carew Martinson - Deutsch Bank Securities

In the past you have said you don’t have any intention on toggling the senior notes here. I wonder has that view evolved here as the market has tightened up?

James E. Skinner

We are looking at all the options we have. We have always said that’s one of your defenses you have to build liquidity so the question is that something you want to do or not. We know how to do it, we know what are the capabilities, we are also watching what other people are doing, and evaluating all our options. But at this point don’t have any comment on that.

Carew Martinson - Deutsch Bank Securities

In terms of your true maintenance capex spending, if liquidity, if you needed to preserve that, what could you bring capex down to?

Stacie Shirley

We could probably bring it down to somewhere in the range of $30.0 million to $40.0 million. We wouldn’t be able to do that for an extended period of time. And some of it depends on where we are with commitments of our new stores. The further out, the more flexibility you have, but those are not necessarily moveable, although we have seen shifting of the opening of some of those stores, which has kind of opened up some flexibility in the next couple of years.

Operator

Your next question comes from Bill Broder - Banc of America Securities.

Bill Broder - Banc of America Securities

I think there might have been a comment about accounts payable that I may have missed, but they are a little lower than I was expecting and I’m wondering whether this was due to timing or whether you might have some customers that are asking to be paid earlier. Is there any color you can provide there?

James E. Skinner

I think you mean vendors paying earlier versus customers. What I have seen, when you are in this kind of environment you are really adjusting purchasing. That number gets kind of erratic. It tends to be when you yank back on purchasing, that number will die down. When you think about it as you’re buying earlier, you slow down on inventory, so you’re not replacing those purchasings, then it will normalize to some level at some point.

Obviously dropping capex can also have a little impact on AP but it’s much more related to our activities on adjusting inventory levels. We haven’t seen any changes in terms or anything like that from vendors.

Bill Broder - Banc of America Securities

And do you know what percentage of your vendors utilize factoring?

James E. Skinner

I don’t. Obviously our large vendors, the world brands, don’t do that. It tends to be the small ones. I have probably talked to two in the seven years I have been here. So we don’t really hear from those.

I once asked my accounts payable person that and she was saying she hadn’t seen a big increase in it. What she was seeing was a shifting from factor A to factor B. I’m not sure how to interpret that. Maybe people trying to shop better deals, but she’s seeing some shifting occurring.

The smaller vendors tend to be more of those that are more likely to use the factors. But it’s not a huge portion of the business.

Bill Broder - Banc of America Securities

And you made some comments about trying to do greater short-term expense controls. I’m wondering what types of things you are going to be looking at to cut back expenses and any sort of qualitative comments on the magnitude of these?

James E. Skinner

I think there are two things. One is the short-term, I think both Burt and I mentioned. That’s just very classical things, I think I mentioned open positions. You are looking at every expense, travel, training, seminars, supplies. You will look at marketing and make sure you are being effective on those. Those are all the short-term things that hopefully all good management teams do. We are pretty aggressive on those. The level of scrutiny is pretty intense. That’s what we call tactical expense [inaudible].

So your expenses are going to drop because of the variable piece of the business, the variable part of our expense structure, and then those short-term.

Separate from that, which is what Burt and I both mentioned, is something we started, really not related to the timing or the level of business that’s occurring right now, it’s really a strategic review. Really saying how we do we want to organize and what are the processes if we are thinking about this for the next five to ten years. So pretty far out there. That is something we started over a year ago.

Those have resulted in various kinds of things. I will give you some examples. Like we looked at the alteration, how we did alterations, and reorganized that. What do we do in-store versus in some our more central locations, and ultimately that saved us money and actually we think improved the effectiveness of alteration department. That’s obviously win-win when you improve the efficiency and the effectiveness.

That’s an example we’re looking at. We have these little service centers around the country. We reorganized some of those, ultimately shutting one of the service centers. Look to the back of the house management, especially in some multi-store markets, kind of looked at how we managed those areas of the business.

We have a long list of things to do. That’s one we are approaching very diligently, not with a rush, because we want to make sure we are doing it right, because this is not about short term. We think there will be some good cost savings but it’s really as much about how we want to run the next five to ten years.

Bill Broder - Banc of America Securities

We have been hearing anecdotally about malls around the country that are having some challenging times in terms of their profitability. Obviously you are in A malls that are probably doing a little better, but are there any stores at all in malls that might be having significant financial difficulty? Or are you guys worried about closing over the next year or two?

Burton M. Tansky

No, we have no worries whatsoever. We are not closing any stores. We don’t know the general condition of the malls. As you said we are in, we consider them AA and AAA malls, working with only the top four or five developers. And we don’t know what the malls themselves are doing, other than what we read in the paper. You know the general growth dilemma and we have been in touch with them and we are in four or five of their centers and they have no impact on us. So there are no store closings for us.

Operator

Your next question comes from Grant Jordan – Wachovia Securities.

Grant Jordan – Wachovia Securities

Not to get you to comment on guidance or anything, but it certainly seems like the relative decline in November was better than October. Do you feel like your customer has responded to a more aggressive promotion stance? Are promotions working? Are they driving traffic to the store and the website?

Burton M. Tansky

The answer is yes. The customer seems to be motivated and has responded to the promotional activity. It is not anything we like, it is a necessity, because we have to reduce and liquidate inventories and we are caught up in a competitive environment that is, as I said in my remarks, it is the most aggressive that we have seen in many, many years. We have not gone through this before. But the customer is responding and we shall see how the rest of the year goes on.

Grant Jordan – Wachovia Securities

Obviously we don’t know what the rest of the year is going to look like, but as you kind of look out and think about when you are going to that key inventory to consumer demand ratio back in line, what is your best guess? Do you think it is middle of the year of next year, or do you think it could be later?

Burton M. Tansky

It’s going to be sooner than that and I don’t want to—it will be in this fiscal year but I don’t want to speculate in what month exactly or what quarter.

Grant Jordan – Wachovia Securities

So you think before middle of calendar next year. You think that’s a good guess.

Burton M. Tansky

It all depends on the demand. We’re working hard to bring the inventories in line with demand. If demand remains soft, on the schedule it is now, we will continue to push toward meeting that demand but it might take a little longer. We have some targeted dates that we think we can hit and we are working toward those. I don’t want to get into specifics because I don’t want to over-promise. This is one of our absolute prime motivators right now, is to get those inventories in line with demand.

Grant Jordan – Wachovia Securities

Just as you look at the online business versus the in-store business, certainly in the first quarter the online outperformed by a good bit on the sales line, but in October and November it seems like it’s come back more in line with how the overall trend of the company is. Do you think that the online business has a chance to outperform as we go forward in this environment, or just how are you thinking about that business?

Burton M. Tansky

I think it’s hard to speculate. You know, they have a much more diverse customer base than the stores do. And it’s hard to predict how that base will perform over the next period of time. I can’t speculate.

It’s a consumer out there that has the same issues as the store consumers have and they are making decisions on how they are shopping and how they buying very similar to what the store customer is. So I think it’s going to remain under pressure.

Operator

Your next question comes from Carla Casella – J. P. Morgan.

Carla Casella – J. P. Morgan

I was wondering if you could tell me how much of the SG&A for the year-over-year was, because of the [inaudible] last year?

Stacie Shirley

I can’t recall if we broke that out last year or not. If we did it would be in the Q. I will have to look, but otherwise we wouldn’t say what it is.

Carla Casella – J. P. Morgan

That would all have been in last year’s first quarter?

Stacie Shirley

I don’t know if there was any, it was primarily in the first quarter.

Operator

Your next question comes from Ann [Weirheim] – Van Kampen.

Ann [Weirheim] – Van Kampen

On your maintenance capex levels, I was wondering how long you could sustain those at the $30.0 million to $40.0 million range before you start to see noticeable deterioration? Are you talking like a year or two years before it starts to impact the stores?

James E. Skinner

There are two different levels of maintenance. Defining what maintenance means is an interesting question when you are talking about a Neiman’s level customer because their expectation of the store level, and even the freshness of it. You could probably maintain the stores as they are, make them nice, you could do that indefinitely. What you couldn’t do is change up shops. You have a new vendor that you’re trying to do and put in these new shops or say at one of our vendor sites you decide black is good instead of white, let’s go redo them.

That’s where you would start having to decide you are going to have the keep the shop the same as it was, you couldn’t go change it out. We call those selling projects. I think those would be the ones that you would have to say, at the $30.0 million to $40.0 million level you basically have no room for those. That’s what you’re missing. It’s not that you couldn’t maintain the store’s lights and the floors and those kinds of things.

Ann [Weirheim] – Van Kampen

I was wondering if you could talk about the promotional environment in your Bergdorf store versus a regular Neiman store and maybe the difference you take to approaching promotions in each of those locations.

Burton M. Tansky

They are very comparable. Each of the stores in each of the CEOs in those divisions have the ability and have the leeway to make variations but we try to keep them in sync because there is a trade off of the customers and many Neiman customers visit Bergdorf’s and vice-versa.

So the promotional activity is very similar and we use a variety of techniques, all of which you know what they are. And the price breaks are pretty similar.

Ann [Weirheim] – Van Kampen

Just kind of looking ahead, and you’re ordering for fall 2009, I was wondering if you could talk about how you view the trade-off between going into it and demand fall short even of what you are projecting now versus not having enough inventory to meet demand and how you look at that?

Burton M. Tansky

You are talking about our fall fiscal 2010, which will be calendar 2009.

Ann [Weirheim] – Van Kampen

Correct.

Burton M. Tansky

We are having to project very conservatively based on the current running rates and what our view of 2009 calendar will be. We think 2009 will continue to be a very difficult and very challenging year and so therefore we are approaching the buying for fall very conservatively.

Ann [Weirheim] – Van Kampen

So you would rather err on the side of being too conservative and not having enough inventory, if demand should for some odd reason spike?

Burton M. Tansky

We have a lot of experience in getting merchandise and if sales improve for the fall season and we find that we are in need, we will get the merchandise we need. We can chase sales. In the years we chase sales is when we perform at our very highest levels. I am not concerned about that.

And it’s not like we are going out of the stock. We are going to have plenty of inventory, we are just going to buy less, but that which we buy will be more focused and more concentrated on those vendors that we know we can get results on, we have the greatest chance of getting results. So marginal vendors, small performers, underperformers won’t be with us, but those that are terribly important, and you know who they are, we will continue to buy and we are going to buy them very focused so that we can meet the customer demands.

Operator

Your next question comes from Mary Gilbert - Imperial Capital.

Mary Gilbert - Imperial Capital

I wondered if you could talk about the liquidity flows in Q3 and Q4. You mentioned that you don’t expect to draw on the revolver in the second quarter and it was my impression that you wouldn’t really foresee or really wouldn’t need to draw on the revolver at all, but I’m wondering, given the current environment and the uncertainty and the magnitude of the decline in comps that we are experiencing, are you thinking that you might need to briefly need to dip into the revolver, potentially in Q3 or Q4?

James E. Skinner

If you can tell me what demand is going to be in the spring we can answer that question. The goods flow differently in the spring than they do in the fall and so you get a bigger spike up in the fall earlier so that’s why the cash needs are greater in the fall than the spring. So from just a steady state, it’s less likely to go into the line in the spring than the fall.

Now the question would be, if this business continues to get worse and worse, I can’t answer that question. The line is there to use if we need it. We’ll have to see. That would be the question, what is demand. If the spring demand looks like the fall demand, then I don’t know why you would need to go into the line.

Mary Gilbert - Imperial Capital

I guess the same when we look at average cash. That’s also going to have an impact on average cash, because if we look at your trailing average cash, I think it was about $229.0 million but it looks like we should probably see that average cash number come down on a go-forward basis.

Stacie Shirley

We don’t give a projection of where we’ll be, but you can factor in, obviously, the sales trends, but we don’t give a projection of where we’re going to be for the end of the year.

Mary Gilbert - Imperial Capital

When you are looking at the spring buy, you really weren’t able to make an impact there, but you were, to a certain extent, able to renegotiate or work with your vendors in some way with regard to spring commitments, is that correct? So like for example, let’s say you had x amount of spring commitments, were you able to adjust it by 10%, 15%? What’s the magnitude of adjustment you were able to make?

Burton M. Tansky

I’m not going to be specific, but I can tell you that it was a very substantial adjustment we made and we have worked with our vendor partners, who have been very sensitive to these issues and have done everything they can to satisfy our needs and our requests. It’s an ongoing issue and we will continue to work at that level as we get deeper into the spring season, but right now we have made good progress with our vendors.

Mary Gilbert - Imperial Capital

So you were able to make a good impact on the spring buy so as we get spring merchandise coming in, it should be much better than what you originally committed for? In other words, a lot less than what you originally committed for and then of course you will be even better positioned with the fall buy coming in, where if you have double-digit teen declines in comps we could see inventories down to the same magnitude, is that fair to say on a per store basis?

James E. Skinner

We don’t forecast numbers. I don’t want to get into 20 question type things. What Burt said is we are able to impact the spring more than the fall, so if demand was equal to this fall, you would have less goods to clear. If demand is less in the fall, we will have to deal with that.

What he said is we are working very hard, all of us, our goal is to get the inventory in line with demand, because ultimately we want to get back to not being promotional. That’s not what our vendors want, that’s not we want, and it’s really what our industry doesn’t want. So that’s what we are working on. The point that those will cross will be the point that you continue to be conservative about your buying and demand becomes more steady. Where that is, if you know that, give me a call.

Burton M. Tansky

It is hard to predict exactly where demand will finally land but that’s why we are being as conservative and as aggressive as we are in terms of reducing inventory, reducing on order, reducing deliveries, so that we can line up, as we perceive, demand and inventory levels. Whether we are going to be high or low is yet to be determined on whether demand is going to change. But I am not concerned about should demand improve, we will be able to get inventory in order to satisfy that change.

Mary Gilbert - Imperial Capital

What about regional differences, other than Bergdorf Goodman? In terms of sales trends.

Stacie Shirley

We didn’t really see significant differences across the country. There were pockets, a store here or there, but we didn’t really point out any across the country that were highs or lows necessarily.

Operator

Your next question comes from John Dionne – Blackport.

John Dionne – Blackport

One question that pertains to your 10-K that you filed and we haven’t had a call since. There is a line in there when you talk about your revolver that the agent bank, acting on behalf of the lenders, could impose additional availability restrictions and other reserves, which could materially impair the amount of borrowings that would otherwise be available to us. And then it goes on to say there can be no assurance that the agent bank will not impose such reserves or to do so that the resulting impact or action would not materially affect NMG’s liquidity. You said earlier in the call there are basically no covenants outside of the $60.0 million threshold. So how does that paragraph . . .?

James E. Skinner

It seems to be in the risks. Is that where you are reading?

John Dionne – Blackport

Yes.

James E. Skinner

I believe you are looking at risk factors.

John Dionne – Blackport

Yes, I am.

James E. Skinner

I believe what that refers to is that in the ABL you have auditors come in and audit your inventory. And there is obviously a judgment involved as to how you judge older inventory reserves. So that would say obviously somebody could come in here and do something in reserves, if then you took that number, after reserves, multiplied times your advance rate, did that give you full availability. That’s what that’s referring to.

Now, today our inventory has grown a lot. As you may know, we had an accordion feature in our ABL that we didn’t pull and so today there would have to be some pretty big reserves before you got to the point you didn’t have full availability.

John Dionne – Blackport

So it’s simply a reserve mechanism. Now, given the fall-off in the business and the outlook, which is very difficult, do you expect using the revolver any time this year?

James E. Skinner

The comment that we made was that we don’t expect to use it into the fall. I’m not going to go back over what we have already said, but the spring typically has the peaks and valleys that the fall does and we had more impact on the purchasing so to the extent that the demand is equal, then you would be less likely to use than in the fall anyway.

What we don’t know is what customer demand will be.

John Dionne – Blackport

The revolver matures in 2010, which given the market right now, very few people are getting their revolvers done. Are you going to try and get the revolver extended this year?

James E. Skinner

I wouldn’t see why. What you would want to do is sit there and let the banking community come to some level of normalcy. We’re about two years away from that. I would think it would be foolish to go out there right now to do that because you are in a market that is very poor. Hopefully some of the stimulus package and all the activity we have done at the federal level will have some impact on the banking. I think we will be dealing with it early but I don’t think it will be something we will be trying to do in the next six months.

Operator

Your next question comes from Lance Vitanza – Knighthead Capital.

Lance Vitanza – Knighthead Capital

I just wondered if we should expect the advertising cuts that you utilized in Q1 to continue throughout fiscal year 2009?

Burton M. Tansky

I would say this, that that is part of our review of all of our expenses and we are looking at advertising as whether how effective it is and how efficient it is and whether that is a place where we want to continue to put our emphasis. And again, we have the ability to pretty quickly shift from any kind of media advertising to direct mail and direct correspondence with our customer, which has been very effective and we do a great deal of it.

We also use the e-mails effectively to communicate with our customers.

James E. Skinner

Remember, in the first quarter the delta was really related to last year, the 100th Anniversary.

Lance Vitanza – Knighthead Capital

I thought I saw that also in the disclosure that there were some actual cuts but you’re saying it really wasn’t cuts, it was just the delta from the last year’s increased level of spending due to the anniversary?

James E. Skinner

By far the biggest impact to advertising was the not having the 100th Anniversary yet.

Burton M. Tansky

You would expect us to be reviewing the advertising on an ongoing basis and get more and more intense during this challenging period. So although the comparisons show that we are spending less this year than we did last, because last year was a very, very big lift in advertising. Even that which is targeted this year is under scrutiny right now.

Operator

Your next question comes from Emily Shanks – Barclays Capital.

Emily Shanks – Barclays Capital

Jim, you have addressed the accounts payable and I’m not quite understanding. It looks to me as though accounts payable leverage has actually declined on a sequential as well as year-over-year basis. I’m just trying to understand exactly what is driving that.

James E. Skinner

You probably need to look at it more on a year-over-year basis rather than sequential basis because the AP, you are obviously taking a snapshot at every quarter. If you think about our flow of goods, every month is not the same level of receipts. Your AP is related to what you have brought in the last 30 to 45 days. So if those are even, that ratio should be even all throughout the year. That’s not the case.

So not only receipts coming in much more volatile than just uneven, you sales are going up and down which means inventory moving. So when you look at the ratio of those two, that number can change.

Your planning cycle, your sales, your promotional events are all equal, you can kind of get some reference point on a year-over-year basis, so we track it much more on a year-over-year basis than on a sequential.

Looking year-over-year it did decline. That’s why I said when you pull back inventory, think about the receipts coming in during the fall. So we were bringing them in August and September, when did all of a sudden things start becoming more difficult? In September and October. So you’re pulling back in September. That means your receipts get impacted in the future, which drives your APs down. Your inventory is not moving down as quickly because sales aren’t what you thought. So do the math and your AP ratio will drop.

What I have seen every time you start adjusting inventory like this, you will get some pretty erratic movement in your AP ratio as you pull back, you yank on the purchasing.

If you think about those receipts as you pull it down. So you are receipting too much for the fall, you slow down, then you stop and take a snapshot, you will see that number comes down. As you start to getting to some normal level of turns, normal level of buying you will return to that AP.

Now, that other statement I made was that as you reduce capex, capex is also an AP so capex will have an impact. It’s not nearly as important as inventory, though.

Emily Shanks – Barclays Capital

As we look at some of the smaller boutique vendors that may sell into you, are you concerned about the performance of any of them and/or have you been asked to help support them on an accelerated payment basis at all?

Burton M. Tansky

We stay very close to our vendors and we try to understand what issues they are dealing with and whether it makes any sense for us to be involved. If we are requested, and after investigation and scrutiny we decide that it is appropriate, we will do something to help, yes. We don’t want any of our vendors to go out of business.

Emily Shanks – Barclays Capital

And has that occurred year-to-date?

Burton M. Tansky

Have any of them gone out of business?

Emily Shanks – Barclays Capital

No, have you accelerated payments to help them out?

James E. Skinner

Some of this is ongoing, so you’ve always got some of this. It’s whether sometimes they give you better discounts, they need money, their factors, there are lots of reasons why you do that. We will occasionally advance money, which I think you will see in the 10-K. I haven’t really seen any spike in that.

It’s probably the thing you have seen, which actually could affect AP ratio. To the extent that we have got some returns from vendors returning, you end up with a debit balance in AP which can also actually drive down your AP ratio. That’s another thing that happens to AP ratios, the RTBs will drive it down.

Operator

Your next question comes from Andrea Cullen - Ares Management.

Andrea Cullen - Ares Management

We just wanted to ask if you thought the impact of the weaker dollar, if that would have an effect over time, to the extent that potentially the full price of the items that you were selling in the store would be lower, which optically could be better. Because I think over the past couple of years, some of the shoes and hand bags that were imported from Europe had gotten to much higher prices than they had been historically. So do you see any impact if the dollar continues to strengthen against the European economy?

Burton M. Tansky

The answer is yes. We anticipate that will be the case. We will have to see how the vendors pass it along to us. Because some of them have been complaining that as it was the strong Euro, weak dollar has cost them a little bit of money. My assumption is that demand, coupled with a weakening Euro, that we will see some price easing. We anticipate that. But we’re just going to market now to work with our vendors for the fall season.

Andrea Cullen - Ares Management

But potentially that could be.

Burton M. Tansky

It has potential, yes. And we would like very much to see that happen, of course.

Andrea Cullen - Ares Management

No doubt. Because there is a big difference, just mentally for the consumer, where they are now.

Burton M. Tansky

But you still want our goods at any price, don’t you? I just want to tell you about price. Price is not an issue if somebody wants something. It’s only an issue when people don’t want something. Do you agree with that?

Andrea Cullen - Ares Management

Yes and no. Because I think the definition of want has changed.

Burton M. Tansky

We’ll see if it has changed. It is too early to determine if want and needs have changed.

Andrea Cullen - Ares Management

This is clearly an extraordinary circumstance that we have had over the last couple of months.

Burton M. Tansky

It’s much too early to determine whether customer desires will change.

Andrea Cullen - Ares Management

I do think that even people who wanted things very much, that the prices of certain things, even before the downturn happened, had gotten very, very high. So I do think optically that if prices come down permanently, from an FX perspective, that it is certainly helpful.

You know, a very expensive hand bag, as you know, used to be $1,000 or $1,100 and then all of a sudden it was $1,800.

Burton M. Tansky

Well, it was still very high quality and still in demand. You know, they actually sold very well at $1,800.

Andrea Cullen - Ares Management

I’m just saying that potentially with the strengthening of the dollar that if the prices come back to $1,100, it’s the right full-price number and then if they have to be discounted that it’s helpful from the margin perspective.

Burton M. Tansky

I don’t agree that it’s the right price, but I do agree it would be helpful if the dollar strengthened, the Euro weakened, and the prices eased.

Operator

This concludes the question and answer portion of today’s conference.

Stacie Shirley

Thank you all for participating with our call today. You may access the replay of this call at 888-286-8010 through December 31, 2008. The pass code is 34882256.

Operator

This concludes today’s conference call.

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