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Christopher & Banks Corp. (NYSE:CBK)

F3Q09 Earnings Call

January 7, 2009 5:00 pm ET

Executives

Jean Fontana - Investor Relations, ICR

Lorna E. Nagler - President and Chief Executive Officer

Michael Lyftogt - Interim Chief Financial Officer and VP of Fin.

Monica L. Dahl - Senior Vice President, Planning & Allocation and e-Commerce

Analysts

Robin Murchison - Suntrust Robinson Humphrey

Roxanne Meyer - UBS

Barbara Wyckoff - Buckingham Research Group

Howard Tubin - RBC Capital Markets

Margaret Whitfield - Sterne, Agee & Leach

Crystal Kallik - D. A. Davidson & Co.

Operator

Welcome to today’s Christopher & Banks Corporation third quarter fiscal 2009 earnings conference call. (Operator Instructions). Now I would like to turn the conference over to Ms. Jean Fontana of ICR.

Jean Fontana

Thank you for joining us to discuss Christopher & Banks third quarter fiscal 2009 earnings results. Joining us on the call are Lorna Nagler, President and Chief Executive Officer; Michael Lyftogt, Interim Chief Financial Officer; and Monica Dahl, Senior Vice President of Planning and Allocation and e-Commerce. After management has made their formal remarks, we will open up the call to questions and answers.

Before we begin, I would like to remind you that some of the comments made on the conference call during the prepared remarks or in response to your questions may constitute forward-looking statements that are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.

These forward-looking statements may address the beliefs, plans, objectives, estimates, or expectations of the company. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

Those risks and uncertainties are described in the press release and in Christopher & Banks most recent Annual Report and Form 10-K and its recent 10-Q filings and the company’s filings on Form 8-K filed with the SEC.

Investors should not assume that the statements made during the conference call will remain operative at a later time. Christopher & Banks undertakes no obligation to update any information discussed in the conference call including its forward-looking statements even if actual results, future events, or changes reflect that projected results or expectations discussed or described in such forward-looking statements will not be realized.

Now I would like to turn the call over to Lorna Nagler, President and Chief Executive Officer.

Lorna E. Nagler

Welcome to the Christopher & Banks third quarter fiscal 2009 conference call. With me today are Monica L. Dahl, Senior Vice President of Planning & Allocation and e-Commerce and Michael Lyftogt, the company’s Interim Chief Financial Officer and Vice President of Finance.

During today’s call I will be providing a brief overview of the company’s third quarter financial performance, some highlights for the business, our current view of the current retail environment, and our plans as we move through the budgeting process for fiscal 2010. Following my remarks, I will turn the call over to Mike for a more in-depth review of our third quarter fiscal 2009 financial results. I will then make a few closing comments, and Mike, Monica, and I will be available to answer your questions after our prepared remarks.

For the third quarter, we reported sales of $143 million. Earnings per share from continuing operations and excluding the charges from our previously announced closing of the Acorn division or breakeven. While we certainly were not pleased with only breaking even for the quarter, the final results were above our revised guidance for the quarter as we made a big push to drive traffic in sales in the last two weeks in November while keeping a close watch on expenses. The loss associated with the discontinuation of the Acorn division was $0.04 per share for the third quarter which was in line with our expectation.

For the quarter, comparable store sales declined 14%. Many of these sales were promotionally driven as did impact the overall gross margin. We also ended the quarter with our year-over-year in-store inventories of 8.6% on a per store basis.

Earlier this fall as marketing conditions worsened, we took steps to lower our inventory receipts. Given our product lead time, we were able to adjust merchandise receipts downwards beginning with our January assortment and continuing for fiscal 2010. Managing inventory levels in the fourth quarter and into fiscal 2010 remain a top priority of our team. We expect in-store inventory to be down low to mid single digits at the end of this quarter as compared to last year’s fourth quarter.

Excluding Acorn, during the quarter we opened 6 new stores and closed 3 stores. This brings our total store count as of November 29th to 821 stores consisting of 553 Christopher & Banks stores and 268 CJ Banks Stores. This compares to 802 stores as of the end of last year’s third quarter consisting of 546 CB stores and 256 CJ stores. To date, this fiscal year, we have opened 29 new stores and do not plan any additional store openings in the fourth quarter. Excluding Acorn for the full fiscal year, we anticipate closing approximately 12 stores for a net increase of 17 stores or 2%. As of December 31st, all of our Acorn stores have been closed.

As we and others have been expressing for some time now, traffic and overall retail trend that got materially worse beginning this fall have remained challenging right through the recent holidays. We expect the poor economic conditions and waning consumer confidence to continue through the fourth quarter and well into fiscal 2010. As a result, we anticipate the overall retail environment will remain highly promotional for some time as retailer try to entice customers and improve traffic in those stores.

In response, we will take the next third step to clear excess inventory in the fourth quarter in order to be clean as we enter spring. We will also implement even tighter expenses control and begin to implement stricter inventory disciplines for calendar 2009 as we take a very conservative approach the next year.

In view of the challenging economic conditions, we feel very fortunate to have a strong balance sheet. As of the end of the third quarter, we had no debts and our total cash and investments were approximately $90 million which includes $74.1 million in cash and cash equivalents and $15.9 million of long-term investments. As a result, we are in a very good position to weather the storm. Another top priority for fiscal 2010 will be to maintain our strong balance sheet and preserve our cash position.

Therefore, in reviewing our real estate strategy and capital expenditure plans for next year, we believe that the best course of action is to limit store openings to a few key locations and substantially reduce our CapEx spending while doing what we can to drive sales. We currently plan to open a maximum of 5 stores in fiscal 2010 and intend to cut capital expenditures to roughly $10 million next year, down considerably from $19 million this year.

With that solid foundation and our conservative strategy in place for fiscal 2010, we will continue to focus our attention on several key merchandizing and operational initiatives, many of which we have already made progress on with a goal of presenting a differentiated product and value concept to our consumers. Once the economic environment improves, these initiatives should ultimately drive meaningful productivities and operating margin improve.

In merchandizing, our next classification is our strongest performer with both signature novelties and updated selling as well as Petite item. We are also encouraged by the results of our other merchandizing initiatives, and for capital, our solution-based products, particularly the Tummy Slimmer product has been well received by our customers as has our new fit initiative and bottom. Our expanded Petite offering presently available in approximately 300 stores as well as online continues to perform well. Additionally, the introduction of Jewelry and Accessories in about 150 stores has afforded us some key learnings and we are expanding this offering in both brands to about 350 stores in total later this spring.

We are also seeing benefits from our Hot Sun initiatives which focuses on offering merchandize suitable to the local climate rather than one style for the entire country. The findings from our Hot Sun initiative are being incorporated into the direction for next year’s fall and holiday season.

Both Christopher & Banks and CJ Banks strived to offer value in the form of versatility, quality, style, and personal customer service, and we continue to fine-tune our approach to strengthen our relationship with our core customers. For example, we have seen a favorable response to our grass-root marketing efforts such as Girls’ Night Out as well as our locally focused marketing campaign.

We continue to add names to our e-mail distribution list which is an effective and economical way to communicate these events and present our product and value proposition to our customers.

During the past 6 months, our total database of names has grown 32% to just over 5.7 million names while our e-mail database has grown 74% to over 1.7 million names. Additionally, we continue to be pleased with the performance of both brands e-Commerce businesses. Having just completed our first holiday season online, we learned more about our customers’ preferences and driving a purchasing behavior including responsiveness to product categories, merchandizing placement, and call-outs along with featured promotions. We remain optimistic about this channel and the benefit it provides our customers through convenience, research, and brand awareness as well as the continuous cost of contribution it brings to our operating margin.

With respect to real estate, we continue to reevaluate our existing real estate portfolio. We are making a renewed effort to focus on the smaller market that has traditionally been the heart of our company and where we are also and the most important shopping destination for our customers. This includes communities like Buffalo, New York; Billings, Montana; Sioux Falls, South Dakota; Frankville, Missouri; and Dubuque, Iowa.

Given the lower operating costs, our existing stores in these type of markets represent a considerable opportunity for us to improve our operating margin. Once the economic environment improves through our various initiatives, we believe we are capable of returning store productivity per square foot in these type stores to a level or approaching that of 4 to 5 years ago. In addition, the proprietary real estate collection software we mentioned on our last earnings call will improve our ability to select future store sites in markets that have these same desirable characteristics.

On the operation front, we are continuing our efforts to make the company more efficient by identifying and addressing prominent cost savings opportunities. We have analyzed our supply chain and achieved considerable savings on both inbound and outbound freights. We are also making additional investments in our distribution center operation to improve its efficiency.

On the real estate front, we have over 200 leases coming out for renewal over the next 3 years, particularly in years 2 and 3. Given our strong balance sheet, we think we can negotiate more favorable terms for many of those stores, and have already begun re-negotiating leases that would have otherwise expired or will expire soon.

In store operation, we have a number of initiatives in place or under analysis to improve the way we manage our fleet of stores, and the exit from Acorn business has simplified our store operations organization and yielded other process improvements as well.

In the spring of next year, we will open our first dual store concept. We believe it offers us tremendous opportunities for the Petite, Missy, and Plus concept in one location and will allow us over time to be able to deal with even more efficiencies into our field of operation.

With the use of our e-Commerce site on the web, we can also get more efficient we can also get more efficient with our marketing dollar. We expect overall SG&A dollar in fiscal 2010 to be flat as compared to this fiscal year.

Finally, through our ongoing efforts in planning and allocation, we expect improved inventory discipline and store productivity. The planning modules we are using continue to help us better manage product wealth as can be used in store unit capacity.

While inventory per store was up approximately 9% at the end of the third quarter, we expect in-store inventory to be down low to mid single digits at the end of the fourth fiscal quarter as compared to the prior year. When market conditions worsened this fall, we responded quickly to further reduce our demand planning and future receipts.

Given our product lead times, we will start to save these reduced receipts in January with the full effect realized in fiscal 2010. As a result, inventory levels are expected to decline year-over-year by mid to high single digits through the first half of fiscal 2010, and this is on top of the declines in inventories we saw in the first half of fiscal 2009.

Overall, our top priority is to preserve our cash and maintain a strong financial position during these uncertain times. We strongly believe that our customer centered focus improving our product value proposition and making ongoing enhancements in operating efficiencies will provide us with a considerable opportunity to drive earnings when conditions improve.

With that, let me turn the call over to Mike to discuss our financials for the third quarter.

Michael Lyftogt

Before I review our quarterly results, I would like to point out that beginning in the third quarter of fiscal 2009, the results of operations for all Acorn stores have been removed from continuing operations and reflect as discontinued operations for the current and prior periods.

For the third quarter, total sales from continuing operations declined 7.9% to $143 million while comp sales declined 14%. From a geographic perspective, our comp sales performance was essentially the same across all regions of the nation. In addition, our mature store base and newer stores also reported similar comp sales performance.

Our declining comp sales for the quarter resulted from a 9% decrease in the number of transactions for average store combined with an approximate 5% decline in average transaction value due in part to the heavy promotional environment. By comparison, average units per transaction were essentially flat for the quarter.

Merchandized buying and occupancy cost were $91.9 million or 64.3% of sales this year compared to $90.5 million or 58.3% of sales in the third quarter of fiscal 2008. Our gross margin was 35.7% this year compared to 41.7% in last year’s third quarter.

Increased mark down level in the third quarter resulted in 400 basis point decline in merchandize margin. In addition, we experienced de-leveraging of occupancy costs and buying expenses associated with a 14% decline in comp sales. Selling, general, and administrative expenses were $45.2 million for the third quarter, up approximately 5% over last year.

The increase in SG&A expenses primarily resulted from a planned increase in marketing expenditures, higher self-insured medical costs, and expenses associated with the company’s two e-Commerce websites which were not operating in the third quarter of last year.

During the third quarter, we placed an even greater focus on controlling expenses across all expense categories. As a result, we achieved significant savings in store payroll, travels, and IT related costs for the quarter. Depreciation expense was $6.5 million in the third quarter compared to $5.4 million last year.

We reported an operating loss of approximately $700,000 for the third quarter compared to operating income of $16.4 million for the same period last year. Our income tax benefit was $4000 for the quarter which resulted in a 9% effective tax rate.

Earnings from continuing operations were essentially breakeven for the quarter. This is compared to $11 million of income from continuing operations in last year’s third quarter.

During the third quarter, we incurred approximately $4.7 million of pre-tax costs associated with closing the Acorn division. In total, we plan to spend approximately $6.1 million to exit the Acorn business. This compares favorably to our initial estimate of $7 million to $10 million.

We closed 29 Acorn stores in the third quarter and the 7 remaining stores were closed in December. The loss from Acorn discontinued operation net of tax was $1.3 million or $0.04 per share for the third quarter compared to a loss from Acorn discontinued operation net of tax of $800,000 or $0.02 per share in the third quarter of fiscal 2008.

Thus, for the third quarter and fiscal 2009, we were essentially breakeven from continuing operations and had a $0.04 loss from discontinued operation. Therefore, on a consolidated basis, we reported a net loss of $1.4 million or $0.04 per share compared to net income of $10.2 million or $0.29 per share for the same period last year.

With regard to our balance sheet, we ended the quarter in a strong cash position. We had $74.1 million in cash and cash equivalents. In addition, we had $15.9 million of long-term investments consisting entirely of auction rate securities. We invested in approximately $17 million of capital expenditures during the first 9 months of the year. We currently plan to expend approximately $2 million on capital expenditures in the fourth quarter and expect to end the year with approximately $95 million of cash, cash equivalents, and investment.

Total inventory was $53.2 million this year compared to $46.9 million last year. Excluding inventory at our e-Commerce division, at the end of the third quarter, inventory on a per store basis was up 8.6% over last year. The aging of our inventory was current as approximately 98% was less than 120 days old at the end of the third quarter.

We have no long-term debt and did not borrow under our credit facility during the first 9 months of fiscal 2009. In addition, we do not anticipate any borrowings during the fourth quarter.

With the current economic climate remaining soft and the overall retail environment in the fourth quarter continuing to be highly promotional, we anticipate continued pressure on our top-line. We will remain focused on targeted expense control opportunities and maintaining positive cash flow. Our goal is to end fiscal 2009 with inventories on a per store basis down low to mid single digits with fresher inventory as compared to the end of fiscal 2008. Merchandize margins are expected to be under additional pressure as we work to entice customers, drive sales, and lower inventory levels.

At this point, we anticipate our most recent comparable store sales trend will continue, and will be in the negative mid to high teens for the first quarter. We are planning our SG&A dollar expense for the fourth quarter to essentially be flat compared to the same period last year, and finally, we anticipate our effective tax rate apply to continuing operations will be in the high single digits.

Looking ahead to fiscal ’10, we expect to open a maximum of 5 stores with capital expenditures totaling approximately $10 million for the year. As Lorna mentioned earlier, this is a significant reduction over the approximate $19 million of capital expenditures expected in total for fiscal 2009.

We will continue to diligently keep our inventory fresh and clean and expect a mid single digit decline in inventory levels on a per store basis as we move through the first half of fiscal ’10. We will also continue to exert tight controls of our expenses and plan to limit SG&A dollars next year to approximately this year’s level of expenditures.

I’ll turn the call back to Lorna.

Lorna E. Nagler

Thanks Mike. For the near term, we will be focusing on maintaining our strong balance sheet and will be playing a role of defense as we manage the business through some challenging times. But for the long term, we believe we are moving forward on the initiatives necessary to improve our operations and the value proposition we offer our customers so that it will be a stronger, more profitable organization when the economy bounces back.

Mike, Monica, and I will now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will go first to Robin Murchison with Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

Congratulations, I think the press release is a little bit better than I expected frankly. Want to ask you about the last comment just on the SG&A next year, so we would be looking at about $170 million or son in SG&A?

Michael Lyftogt

That is correct.

Robin Murchison - Suntrust Robinson Humphrey

Also, in terms of your same store sales guidance for the fourth quarter, some are saying that the business got a little bit better after the Christmas holiday; wondering what kind of trend you saw in December.

Monica L. Dahl

I think we’ll just have to remind everybody that December falls into our fourth quarter and so we can comment as we usually do about the progression of trends that we saw in third quarter sales and I can tell you that as Mike spoke too, while we continue to see transaction bounce throughout the whole quarter, we did see transactions improve later in our third quarter as we got closer to holiday and we did start to simulate purchasing, the traffic was slightly better than it had been and we started to simulate the purchasing through the promotional activities that we took.

Robin Murchison - Suntrust Robinson Humphrey

And if you look at the cost landscape of various categories in the store and I heard you talk about which ones, you obviously called out some, should I assume that knit tops in solutions based dressing performed the best?

Lorna E. Nagler

I think that the overriding headline is color, pattern, texture, novelty newness worked well. Certainly, knit tops were strong classification I think. When you think of the incredible value proposition that the knit category can give our customer, I think, and the extensive amount of novelty that we’re able to offer her, she may have traded knit versus buying a sweater and being able to get novelty at a lower price. We also saw great success in vest in all classifications and all fabrications, sweaters, novelty yarns, and solid textures. You can see in the selling where she was really looking how she was going to spend her money, and she was more willing to buy something that might have had a winter motive, that had a longer life cycle than a Christmas motive which she knew was not going to be able to wear after the holidays. So, I think where she saw the value, where she saw the newness, higher-priced jackets or reversible jackets, she responds to those as well, but the top-line, other than the solution-based categories it is really about tops that drove the business and our bottoms business certainly remains challenging other than those core essentials that she really wants to pare back at this point. She doesn't really have an appetite for fashion, novelty in the bottoms. So that's kind of the headlines from a product standpoint.

Robin Murchison - Suntrust Robinson Humphrey

The markets you quoted, Buffalo, Billings, and Sioux Falls you talked about, my interpretation is you’re low to expand in smaller SMSA markets, is that correct? I know you’re only adding five stores next year, but is there sort of a renewed focus on some smaller SMSA?

Monica L. Dahl

Yes. I think, Robin, to put it in context, obviously you are right. We are not opening a lot of stores. We didn't open that many stores this year. We are not looking to open a lot of stores next year. Basically we have been afforded the opportunities during the slow growth time period is to take a look at our existing portfolio of stores and start to analyze and understand differences in markets, differences in geographic locations, differences in terms of location type whether it is off-mall or on-mall, and with that information begin to look to find the commonalities of success factors. What we have known for a while is almost 50% of our stores are in those small, whether it’s real small or mid market sizes, and many of those are older stores or have been around a while, but we've been able to look at their performance, and yes, all of the comp base has been declining over the last several years, but those smaller markets in general tend to have a higher productivity. So, when we look back to 3 and 4 years ago, we strived to get their productivity back, we like what that does to the overall portfolio. The other thing is because of the smaller markets, their occupancy stressors are generally lower. So, the operating results that we can achieve. So, you are right in both of the statements you made, it is more of a renewed focus and interest that we scrub and analyze, it's not about opening a bunch more stores in those markets in the short term, but that it is combined with using our software systems that we're getting our arms around and beginning to utilize, to understand in the future what would that market potential look like or that store base potential look like with those types of commonalities and markets.

Robin Murchison - Suntrust Robinson Humphrey

Two more questions; are you optimistic about negotiating rents, that's certainly a hot topic right now in the land of retail, negotiating rents down. And then lastly, just give another rhetoric about some of the stuff, particularly in the Detroit market, the automobile industry, industrial industries, layoffs and cutbacks; are you finding that impacts your business more or has the trend been about the same?

Monica L. Dahl

Certainly, everything I am hearing out there is true and our Vice President of Real Estate has worked diligently and aggressively throughout the year to reduce occupancy costs. During this fiscal year, to date, she has been able to impact about 16% of our store base by working to renegotiate lease terms more favorably for a couple of reasons. Obviously, there are renewals in that numbers, operating co-tenancy evaluations we have been able to aggressively keep track of and go back and look for rent reductions from the landlords, and then the sale volume thresholds that she has been able to. So, that type of disciplined approach in 13 of 16 stores will continue as we go forward and the opportunity continues to be there. In addition, as Lorna said, there are a couple hundred leases up for renewal over the next 2 and 3 years out which will afford us even greater opportunities to look for savings.

Lorna E. Nagler

The second part of your question talking about areas like Detroit, as Mike mentioned, we really didn't see a big change in the amount of where our comps were, but I think again, will continue to stick to our value proposition and we probably are more likely the place for her to shop based on how much she can get for the dollars she can spend.

Michael Lyftogt

I’d like to just add briefly, about 51% of our stores are in the rough belt or in the area that the eight states that touch the Great Lakes and Iowa, and the performance there was only slightly, only marginally better, than all of our other stores with the comp performance. So, I was just surprised that we had such strong performance out at that area.

Operator

We will take our next question from Roxanne Meyer with UBS.

Roxanne Meyer - UBS

Just to follow up on the regional store strategy, I’m just wondering how lower cost from store leases are balanced by potentially higher distribution costs in having to go farther out to replenish those stores and how you think about that?

Monica L. Dahl

That's an interesting question, Roxanne. There actually is not a significant cost addition to get to those smaller markets. The pricing is another area. Actually from a zoning standpoint where our new Vice President of Logistics has been with us since about the middle of the year, has been able to favorably renegotiate our outbound and our inbound freight, and in doing so, obviously in conjunction with our existing store bases worked very hard to ensure that the variability between those zones continued to be not a big variable, not a big significant difference. So, interesting question, but not a huge variation in bottom-line, when you take even those expenses into consideration.

Roxanne Meyer - UBS

Great. That's helpful. And then just a logistical question. You said that SG&A is expected to be flat in dollars in the fourth quarter. Can you tell us what the SG&A dollars you are basing that off of, last year's fourth quarter, I am assuming it's excluding Acorn?

Michael Lyftogt

Yes, it is.

Roxanne Meyer - UBS

Can you give us that amount?

Michael Lyftogt

I certainly can. We did not file this with the press release, but I will be filing this information tomorrow as an exhibit to our 10-Q. And if I may briefly just run down our components of the income statement last year in the fourth quarter, that would exclude Acorn operations. We had sales of approximately $122.3 million, we had merchandise buying and occupancy expenses of $79.8 million; we had selling, general, and administrative expenses of $40.9 million, and we had depreciation and amortization of approximately $6.4 million.

Roxanne Meyer - UBS

And as you think about your opportunities for SG&A savings next year, how much is coming from the continued management of IT and Payroll versus some of these other initiatives you spoke about in freight and distribution and where do you see the biggest opportunities?

Michael Lyftogt

I see the biggest opportunities in store payroll.

Lorna E. Nagler

Roxanne, I think to that point, again it’s a very good question because SG&A and the expense are opportunities for us to get that back to a rate that we're pleased with. We are just in the process of going through subtle iterations with our budget for fiscal '10 and through that even though we have seen expense savings in occupancy and we've seen expense savings in freight, we're looking at every single line item and evaluating what are those expenses that we absolutely need in order to focus and keep going on our strategic initiatives and how do we leverage and truly gain operational efficiency. So, I think it's premature to give all of the details for fiscal '10, but we certainly are going to get on the next call and we'll be sharing more about the guidance for the quarter ahead of us, fiscal '10, after we complete the entire budget review.

Roxanne Meyer - UBS

Okay. And then as you think about planning and guiding for flat SG&A dollars next year then, is that assuming that you are achieving a minimal level of savings or is that peaking in your realizing a significant portion? I am just curious how much more opportunity could there be.

Lorna E. Nagler

You are talking about the annual year to fiscal 2010?

Roxanne Meyer - UBS

Yes.

Lorna E. Nagler

Yes. And again, as we complete the budgeting process, we're not done scrubbing it, we're confident that it will be no higher, the flatter the conservative estimate at this point, but we'll share more of those components as we finish that and get to the next quarter.

Roxanne Meyer - UBS

Okay great. And then just last, are you able to break out your e-Commerce sales?

Lorna E. Nagler

Not at this point. Again, we have been very pleased since the launch of it. We have an internal stretch goal that we've been working to achieve, and now that we have completed the holiday season, we have in fact achieved that. It’s just the tip of the iceberg, and right now we're trying to put the plans and the road map together for how we maximize that in fiscal '10 and ahead.

Operator

We will take our next question from Barbara Wyckoff with Buckingham Research Group.

Barbara Wyckoff - Buckingham Research Group

What was the penetration of aged goods to total inventory last year? And did you adjust your cost bases of goods at the end of third quarter of '09, just trying to see if we’re talking apples on apples?

Lorna E. Nagler

To answer your first question, the aged inventory was relatively the same. We look at it the same way each quarter and the statistics was relatively the same.

Barbara Wyckoff - Buckingham Research Group

I heard it was third quarter; the question is, is it end of fourth quarter last year?

Lorna E. Nagler

The aged inventory has been relatively 2%, either slightly above or slightly below, but around the 2%.

Barbara Wyckoff - Buckingham Research Group

Alright. And then did you adjust your cost bases on your goods at the end of third quarter '09 or no?

Lorna E. Nagler

We take both permanent and POS markdowns as a practice in our business, and we take them on a regular basis. So, we did exercise the same practice in the third quarter that we always do.

Barbara Wyckoff - Buckingham Research Group

For you to tack the retail but not the cost. And then, are you changing your sourcing base? Are you finding that the current factory base is amenable to tighter cost and to give you a little support on the IMU?

Lorna E. Nagler

It's a good question. I think as you guys remember, about a year ago, we hired a new VP of Sourcing and we also told you that we have transitioned from our previous agent who had been the primary supplier of our goods to really focus on a diversification of our vendor base so we can align with category experts, and also looking at that time a diversification of sourcing by country, and to provide great support to the merchant team. So, I’m pleased to say we continue to make great progress on this front, and I think this new sourcing structure allows us greater capacity and flexibility while certainly maintaining our quality at this standard. So, we are feeling very good about our sourcing structure and the flexibility we're getting out of it.

Barbara Wyckoff - Buckingham Research Group

Just one last question, I know you are really not looking at or planning on giving out 2010, but could you just give us a ballpark tax rate you would just be using, historical or...?

Michael Lyftogt

At this point, I think we need to wait till we get further through the budgeting process. Right now where our earnings are trending, our tax rate is quite volatile and would fluctuate significantly. So, we just need to get further into the process to see where we're going to be ending up fiscal '10 before we can give guidance with regards to our tax rate, but will be happy to update you with that rate in the next call.

Operator

We will take our next question from Howard Tubin with RBC Capital Markets.

Howard Tubin - RBC Capital Markets

Just generally speaking, are there promotions that you use that the customer is responding more so to than others?

Lorna E. Nagler

We have talked about some of the success we continue to have with grass-roots events, like the one we had this quarter at Girls' Night Out, and it's a way for us to kind of celebrate that loyal relationship we have with our customers and allows our loyal customers spread the word about the brand experience. So, kind of building upon that heritage of our small town and connecting with customers, we have found great success with these kinds of more community, the kinds of events, and certainly, as we stated in the call, we were more promotional and we did do some things like one-day sales to create some urgency, and certainly we thought our success with that is something we had not done in the past, and those one-day sales were also ways for us to drive some business in a short period of time. I think the other thing you heard me saying on the call is we have been very pleased with the growth of our database, with e-mail names having gone up 74% in the past six months. That also has been a very effective way to communicate our value proposition and our promotions to our customers as well.

Howard Tubin - RBC Capital Markets

Just a question on the store base; is there a scenario you can envision into next year where you would actually want to start closing some stores? Do you think that's on the horizon or no?

Lorna E. Nagler

As we always do, quarterly we are evaluating stores to see how they are performing, how they are trending, how they are improving, and to that point we evaluate our longer-term horizon, what we want to do with that fleet of stores. So, when it comes time for renewal, what will be our line of action given the market condition, given the other stores we have in the market, and using all of that information. So, it’s certainly a good question and we're scrutinizing it more than ever to make sure that the portfolio of stores that we do end up with when the economy returns over the next period of time that it is the best and is the most productive stores we can have.

Operator

We will take our next question from Margaret Whitfield with Sterne, Agee & Leach.

Margaret Whitfield - Sterne, Agee & Leach

Was curious if there was any differentiation in performance in comps between CB and CJ stores during the quarter?

Lorna E. Nagler

You know we don't report different segments, but I think our two brands are really not distinct brands, they really are sister brands; similar merchandize, content, and category. So, it is safe to assume that there was consistency between both the divisions.

Margaret Whitfield - Sterne, Agee & Leach

Where will that first dual store open up and when because that sounds like a great idea.

Lorna E. Nagler

Yes. We are excited about being able to kind of have an umbrella strategy to have both Missy Plus and Petite under one roof, and certainly some of this came out of our customer research which really talked about customers saying, “I want to be able to shop with my friends, my sister, my mom, and I can't because we’re all of different sizes.” So we are excited about what this can offer us in leveraging our brands and overall provide hopefully greater efficiencies on the operating structure. Our intent is that we are going to open in late Spring and it will be on the East Coast.

Margaret Whitfield - Sterne, Agee & Leach

Can you say where at this time?

Lorna E. Nagler

It's going to be in Pennsylvania in the Scranton area.

Margaret Whitfield - Sterne, Agee & Leach

Scranton, not too far away. Alright, was interested in your comment on the smaller markets. At one point, the Sun Belt area was doing much better than the core Midwest, and now you have Hot Sun products; any further thoughts on opening more stores down south? I think you had also mentioned strip locations, are those still in the planning stages?

Lorna E. Nagler

Yes. I think if we look at that, we are pleased with what we’ve been able to accomplish in our Hot Sun initiatives and certainly we will continue to learn, but I think if you think about, in the short term, are we going to maximize the strength and the heritage and our brand awareness, it really is, before we reach more into the sun belt, we really think there is more opportunity to maximize the kind of markets where we have consistency of business and where we can really be a significant destination for herself, not to say we are ruling out, but on the short term, as we are opening limited stores, certainly our first priority would be to open in more of our existing markets, which is why our dual store will be in an existing market, where we have brand recognition and can leverage it. Certainly, longer-term, we believe that the outlook channel is one that we should be in, and we have said in previous calls that we have to make sure we are getting our operational efficiencies and things in order before we can contemplate that, but that is a longer-term thought.

Margaret Whitfield - Sterne, Agee & Leach

E-commerce just began, did it contribute? Presumably, it probably lost some money this year as it was a startup, can you comment?

Lorna E. Nagler

I am not going to speak specific to it; what we said again is, we put some internal goals together with some stretch goals and we achieved it, and it was one of our better performing stores when we think about it as a store.

Margaret Whitfield - Sterne, Agee & Leach

Okay. And finally, where do you think marketing spend might come in this year and any thoughts about brining it up a little bit to go forward?

Monica L. Dahl

Yes, as we have said on previous calls, we have targeted our annual spend at about 1.5% of sales. I think as we continue to learn and test, I think it's how effectively we use those dollars. I think our focus will be on, besides supporting the needs of e-Commerce, I think, these grass-roots events, and I think a renewed focus and attention will be on our CMM segmentation strategy. So, I think it's how effectively we use them, and right now, we're budgeting, but I think there are learnings for us to use and leverage those marketing dollars more efficiently as we go forward.

Margaret Whitfield - Sterne, Agee & Leach

And planning and allocation, I guess, the benefits this year we're seeing in the Hot Sun stores, anything yet to come Monica?

Monica L. Dahl

Yes, we continue to benefit by using it obviously; it’s going to be key again as we analyze and dissect at a classification level, use it to manage inventory, and are planning all the way through next year as we get disciplined and controlled even more and lessen our inventories, the allocation, discipline and accuracy becomes ever important at how we can segment stores based on their performance. So, all of the things that we talked about in the call on inventory management are really only possible because of the systems and the team that we have put in place. So, it will continue to benefit us well into fiscal '10, and we look forward to utilizing it more efficiently then too.

Operator

We will take our next question from Crystal Kallik with D. A. Davidson & Co.

Crystal Kallik - D. A. Davidson & Co.

Thank you so much for some of that historical information, that's really helpful. It sounds like there'll be a fair amount more information in the 10-Q tomorrow like prior historicals for last year as well by quarter?

Michael Lyftogt

Last year we filed an 8-K on 12/31 that showed historical information, the last year is for the six months ended August 30th.

Crystal Kallik - D. A. Davidson & Co.

Right. I don't think you broke it up by quarter though.

Michael Lyftogt

No. While in the press release we have the first and second quarter fiscal 2009, and that will also be in the 10-Q and then I'll add in as well the fourth quarter of fiscal 2008, and that would give you what you need.

Crystal Kallik - D. A. Davidson & Co.

Okay. That's helpful. Could you tell us, just in the short term, I know Acorn was a pretty small piece of the pie, did it have a meaningful impact to historical same store sales as we are looking at our models this afternoon? Just trying to figure out how much of an impact, if any, Acorn had to yours, same store sales results over the past several quarters, now that it's a discontinued operation, should we think about that as impacting same store sales by a few hundred basis points or is it really immaterial?

Michael Lyftogt

The impact from Acorn on same store sales is really negligible.

Crystal Kallik - D. A. Davidson & Co.

Okay great. I am assuming that we have a bit more of discontinued Op charges in Q4 with the final store closings, is that correct?

Michael Lyftogt

Yes, very well.

Crystal Kallik - D. A. Davidson & Co.

And then just finally, Monica, I know you guys have worked quite a bit on, both you and Lorna, the merchandise lead time; could you tell us how the progress has been made there, and certainly with the amount of reduction you've made in your inventories, it seems like you have been achieving some pretty significant reductions in lead times at this point.

Lorna E. Nagler

I think, it's not as much a reduction of lead time, it's more making sure that we're constantly looking at it and monitoring it, and I think also, I would say that our new sourcing structure really has improved our capability and flexibility, and I think we shared with you on previous calls that now we're combining both brands, we have flexibility in common fabrics, we would harmonize that, so that allows us to be flexible and react to the business. It is going to continue to be something that we will look at on a very very regular basis and we feel very good about the progress our sourcing team and our new sourcing structure allows us to do in order to be as flexible as we can in this interesting environment.

Crystal Kallik - D. A. Davidson & Co.

That means you guys have made some pretty significant reductions in your cost structure, Monica and Lorna, are there any other major holes in your executive team at this point or any other areas that you feel that you need to invest in, or is this the point you are set with where you are going to be for the next year or two?

Lorna E. Nagler

Yes. We are really not looking. We have no holes on our current leadership team. We had filled a new Head of Stores and Logistics VP in July of this year, and we have a team in place. So we are not at this point looking that we need to be adding. That doesn't mean that as we constantly look at our teams as the business evolves that we wouldn’t repurpose or re-look at existing headcount, but right now, I don't have any holes. Obviously, we are in the search for a CFO, well obviously, Mike is a very capable interim CFO, and we have hired a national search firm to really look at both internal and external candidates and our goal is hopefully to complete that search and fill that position by the beginning of our fiscal ’10.

Margaret Whitfield - Sterne, Agee & Leach

Thank you so much and good luck in Q4.

Operator

We will take the next question from Barbara Wyckoff with Buckingham Research Group.

Barbara Wyckoff - Buckingham Research Group

Sort of to further Margaret’s question, you’ve talked in the past about Billings CJ’s penetration to the total store base given that you’re opening only 5 stores and have this test store, are there existing doors that could handle CJ capsules in the stores the way they stand right now, and if so, how many should we be thinking about? And then the second question is, as you combine the brand design and product development initiative, can you kind of quantify how much the reduction to the SG&A has been? I presume you’ve reduced your cost structure from two organizations to one in this section of your business.

Lorna E. Nagler

We’ll answer your last question; we have a merchant team for CJ and a merchant team for CB. So, we do not have one division, I think that’s the beauty of making sure you have a team that is really focused on the plus size customer different than Missy although they are coming out to filing. There is uniqueness to the plus size consumer. Your question is very good. We certainly see the opportunity, we’ve grown our CJ business, and we frankly think that the dual store concept could allow us to get CJ into more market pucker factor, but we also are looking at our current portfolio and have some plans to redeploy stores that were CB stores and make them CJ where we think would be more effective, and we’re also looking at some of our older footprint stores that may have this footage where we can do exactly what you’re saying and put a capsule of plus and with Missy. So, all those things are in consideration as far as quantifying the impact of that, not able to do that, but that’s the kind of thinking besides looking at our actual sites as we really come through and say how do we maximize productivity per store; those are exactly the kind of things that we’re looking at as well as an opportunity to really grow that CJ brand in spite of not a lot of new stores being opened.

Operator

We will take the next question from Robin Murchison with Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

I just wanted to follow up also, the average store size has tended to be about 3300 or 3500 square feet?

Monica L. Dahl

Yes, it’s around 3400.

Robin Murchison - Suntrust Robinson Humphrey

And the combined store size, I note the prototype, I don’t want to get ahead of things, but how large would that be?

Monica L. Dahl

5000 square feet.

Operator

At this time, I would like to turn the conference back over to Ms. Nagler for any additional or closing remarks.

Lorna E. Nagler

In closing I would just reinforce I think we’re really effectively managing the current environment without losing sight of the long-term opportunities that we think our strategy has for our customers, our associates, and our journalists. So, I thank everybody for their participation on today’s call and for your interest in Christopher & Banks. Thanks, everybody.

Operator

That does conclude today’s conference. We appreciate your participation and you may disconnect at this time.

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Source: Christopher & Banks Corp., F3Q09 (Qtr End 11/29/08) Earnings Call Transcript
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