Tween Brands Q4 2008 Earnings Call Transcript

Tween Brands, Inc. (TWB)

Q4 2008 Earnings Call

February 25, 2009 09:00 AM ET

Executives

Rolando de Aguiar - Executive Vice President and Chief Financial Officer

Michael W. Rayden - Chairman and Chief Executive Officer

Julie Sloat - Vice President, Corporate Finance and Investor Relations

Analysts

Kimberly Greenberger - Citigroup

Thomas A. Filandro - Susquehanna Financial Group

Tracy Kogan - Credit Suisse North America

Richard E. Jaffe - Stifel Nicolaus

Rick Patel - BAS-ML

Adrienne Tennant - FBR Capital Markets

Linda Tsai - MKM Partners

Marni Shapiro - The Retail Tracker

Dana Telsey - Telsey Advisory Group

Stacy Pak - SP Research

Presentation

Operator

Good morning and welcome to the Tween Brands Fourth Quarter Earnings and Webcast.

Before we get started, I've been asked to remind you that today's call will include statements about Tween Brands' future expectations, plans and prospects for the company.

A slide presentation toward company's today's discussion is available at www.tweenbrands.com as indicated at the end of the press release that was issued yesterday afternoon. Such statements are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors including those listed in the press release and in our SEC Form 10-K and Form 10-Q. Copies of the release are available at the corporate website, tweenbrands.com.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded and will be available for replay at 877-660-6853.

It is now my pleasure to introduce your host Ms. Julie Sloat, VP of Corporate Finance and Investor Relations. Thank you, Ms. Sloat. You may begin.

Julie Sloat

Thanks, Edward. Good morning everyone and thank you for joining us today to discuss Tween Brands' fourth quarter performance.

With me here today are Mike Rayden, Chairman and CEO; and Rolando de Aguiar, Executive Vice President and Chief Financial Officer.

Before we begin this morning, I want to remind you that our discussion today will include statements about Tween Brands' future expectations, plans and prospects for the company, which constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors including those listed in today's press release and in our SEC Form 10-K.

I'll now turn the call over to Rolando for commentary on the fourth quarter performance and then Mike will make a few comments on the state of our business and the transition to Justice. Rolando?

Rolando de Aguiar

Thank you, Julie. Good morning everyone and thanks for joining us today.

This morning, we reported a fourth quarter loss of $0.37 per share excluding a $0.19 restructuring charge versus the $1 we earned last year. We reported a full year loss of $0.21 excluding a $0.48 restructuring charge versus the $1.81 in earnings last year.

The reconciliation of fourth quarter and full year 2008 loss per diluted share on a GAAP basis to a loss per diluted share on a non-GAAP basis can be found in today's earnings release.

Net sales for the quarter were down 16%, driven by a 23% decrease in comp store sales compared to last year. This is comprised of an 11% comp store sales decline at Justice and a 27% comp store sales decline at Limited Too.

The fourth quarter and full year were the most difficult in our company's history, as we attempted to maneuver a formidable economic landscape. The year-over-year comparison on all fronts from comp store sales to expense margins was particularly daunting, as we were going up against the best holiday performance posted in our history in 2007.

During the period, we made the conscious decision to move units via deep promotional activities, such as the buy one get one free we ran at Limited Too from late November through December as well as promotional activity at Justice. This allowed us to bring cash in the door, begin the spring season with clean stores and be in the best position possible to facilitate the successful transition to the Justice brand at our Limited Too store locations in particular.

The cost to the promotional strategy came in the form of margin compression and de-leveraging, which was already amplified by the dismal consumer sentiment and it was particularly evident in the Limited Too fleet. Specifically, gross income was 58.4 million for the quarter and gross margin was 21.9%, down substantially from the 122.4 million and 38.7% in the record-setting 2007 period.

As you would expect, merchandise margins declined by 36% to 113.8 million and 42.8% of sales this year from 178.3 million and 56.4% last year respectively. While our buying payroll cost declined $2.9 million, total buying and occupancy expenses increased 3.1 million from the fourth quarter of 2007.

The increase was a function of higher occupancy expenses associated with the 92 stores opened since the end of the fourth quarter of 2007.

SG&A expenses excluding restructuring charges were down 12.7 million year-over-year, largely due to a decline in payroll, driven by head count reductions. Despite the decline in sales, SG&A as a percent of sales remained flat at 25.1%.

Net interest expense was down approximately 600,000 to 1.9 million, due to lower interest rate as we engaged in a swap agreement in December of 2007. We posted a net loss of $9.1 million excluding restructuring charges or $0.37 per share. Including the 7.5 million pre-tax restructuring charge recognized during the period, we posted a loss of $13.9 million or $0.56 per share.

Weighted average shares outstanding on a diluted basis were 24.8 million for the fourth quarter of 2008 compared to 25.1 million in 2007.

On a much more positive note, I am pleased to share with you that we have amended our credit facility to provide us with additional flexibility on the leverage and coverage financial covenant ratios. Specifically, the maximum leverage ratio moves from 4.5 times to 7.65 times, and testing of this covenant does not begin until the fourth quarter of 2009. The minimum coverage ratio moves on 1.5 times to one time and the testing begins this quarter.

As part of the amendment, we have provided a security interest in our assets to the lenders. Additionally, we accelerated the amortization of the term loan, which stands at 166.25 million today. However, the maturity date remains the same at September 2012. The accelerated payments consist of monthly payments of $500,000 during the month of February through December beginning at the end of this month. A principal payment of 8.75 million will be made at the end of each January, which is consistent with the original amortization schedule.

The pricing on the amended facility does increase to LIBOR plus 350 basis points, up from the 80 basis points spread we have been paying, which as many of you know was very much below market today. It is important to also note that the amended facility language does govern our capital investment levels net of tenant allowances to a maximum of $10 million in 2009, 15 million in 2010, 20 million in 2011 and 30 million in 2012.

The undrawn revolving credit facility declines from 100 million to 50 million. We have never drawn on this line in the past and do not currently have any plans to do so. However, we like the added liquidity cushion that it provides, in the event that unforeseen circumstances arise. Complete details of the amendment are provided in the company's Form 8-K filed with the SEC earlier today, February 25.

With a cash and investment balance of 80 million at year-end and our 50 million revolving line of credit facility, our liquidity position stands at $130 million.

Taking a look at our balance sheet, you will see that our current ratio as of the end of the quarter was 2.4 and debt-to-equity ratio was 0.9 times. Cash flow from operations for the 12 months year-to-date was 41.1 million versus cash flow from operations of 111.7 million last year.

Before I talk about our expectations for the remainder of the year, I'd like to quickly mention that our total inventory at the end of the quarter was down 24.4% per square foot at cost from the end of the fourth quarter of 2007. In-store inventory was down 23.1% per square foot at cost, consistent with our expectations.

At the same time since the end of the fourth quarter of 2007, our total square footage has increased 8.9% to 3.8 million square feet. During the fourth quarter of 2008, we opened five Justice stores, we closed 16 stores, 14 of which were Limited Too locations and we remodeled two Limited Too stores.

Because of the continued economic malaise and the consequential likelihood that any forecast that we would provide will be incorrect, we are not providing earnings guidance for 2009 at this time.

We believe it is in the best interest of our shareholders for management to focus on the longer term success of our company with the rapid effectuation of the transition to Justice versus the managing to a near-term earnings number.

I can assure you that we've been diligent about our expense managements, very disciplined in our capital investment levels and are focused on the preservation of cash. As you read in our earnings release this morning, we have taken steps to further reduce our infrastructure cost with the elimination of 85 positions, of which 49 were populated. Mike will comment on this in a few moments. But, this is in addition to the 150 positions that were eliminated in August 2008 and another 20 positions that were recently eliminated to increase efficiencies in the field.

We expect that the reduced staff price will produce cost savings in 2009 in the order of 7 million before-tax and severance expense. This is in addition to the 25 million savings we expected to realize in conjunction with 150 positions previously eliminated.

Our CapEx for 2009 is expected to rest at approximately 10 million net of tenant allowances. This is the fraction of the 64 million gross investment or 53 million net of tenant allowances that we made in 2008. Clearly, the dramatic reduction in capital investment levels and recent amendment of our credit facility are indicative of our commitment to discipline.

Before we open up the call to your questions, Mike Rayden would like to make a few comments about our business and how the transition to Justice is going. Mike?

Michael W. Rayden

Thanks, Rolando and thanks to all of you who are joining us today on the call, or listening via the webcast.

I'd like to make a few quick comments this morning to provide you with an update on our business, and then we will get right to your questions.

2008 was the worst performance in our history, as our customer base was faced with financial pressures that have not been experienced in many, many years. As you know, aside from engaging in various promotional activities, there are very few tools available to generate sales in such a remarkable environment, where consumer sentiment continues to erode. With this acknowledgement, we at Tween Brands are focusing on those efforts and tasks that we can control, namely our transition to Justice.

We are able to make the transition our sole focus because we have taken several aggressive steps to secure our financial position in a way that will allow us to endure the ongoing economic pressures. Specific steps we have taken include the amendment of our credit facility, which gives us the runway we believe we need, to allow the storm clouds to clear and the financial discipline that Rolando mentioned a few months ago.

We made the very difficult decision to eliminate an additional 85 positions this week. And while we do expect to realize cost savings in the amount of $7 million as a result, such decisions are never easy to make, especially, at a company our size, where we are all familiar with everyone on the team. So with a heavy heart, I want to wish the best to those who left the company in conjunction with this recent reduction. However, we believe the infrastructure efficiency changes we have made will improve our opportunities for earnings growth in the future.

I want to take a few minutes to provide you with an update on the transition to Justice. The decision to clear units in the fourth quarter was done so that we could begin the spring season with a very clean inventory and minimal carryover. This would allow us to embark on the launch of Justice in the best possible manner. I'm happy to tell you that all proceeded as planned with fall apparel carryover inventory down 69% at the quarter end on an average store basis.

As you know, our key to a successful transition at the former Limited Too stores is predicated on an improvement in both transactions and units per transaction. This is due to the inherent pressure we would experience on our average unit retail as we move to the lower price points on Justice merchandise.

In fact, these anticipated trends have already begun to emerge in the first three weeks of February. Month-to-date at the Limited Too footprint stores, we have seen only a 7% decline in our average dollar sale and only a 17% decline in average unit retail. Conversely and as anticipated, we have also experienced an 11% improvement in units per transaction and a dramatic 68% improvement in transactions when compared to the fall trend. While these results include the brand launch event, we are seeing this trend change as we had anticipated in one of the worst economic environments on record.

Today, approximately 93% of our apparel inventory at all former Limited Too store locations is now currently spring apparel, featuring predominately fresh clean spring inventory. In addition, we have 187 stores that are offering the Limited Too layer just as we had planned.

Our first spring preview floor set was done on January 13, featuring the new Justice merchandise. The early signs indicate that we are off to a good start, as we have been beating our internal projections each week for our spring apparel sales.

Month-to-date, approximately 90% of our apparel sales have been comprised of new spring apparel compared to 78% last year, and spring apparel sales are up roughly 4.5% relative to last year on 30% less inventory, whereas the fall apparel sales are down 51% with 74% less inventory on an average store basis.

In our minds, this is empirical evidence that the customer is embracing the new Justice merchandise across our entire store fleet.

The brand launch party, we hosted at all of our stores over the five-day period, which began February 12 and extended over the Valentine's Day and President's Day weekend resulted in a significant uplift in traffic and conversions, as we had hoped it would.

The party featured 40% off the entire store as well as other gifts, purchase-with-purchase, and Sweepstakes opportunities for the girls. Our intention was to draw our customer, current customer base to the stores as well as other customers who had not shop with us in the past.

We believe the prominent brand launch event and sale signage was successful in catching the attention of and drawing in new customers. While only time will tell how successful we were in capturing new customers and keeping them, we were very pleased with the results over this five-day period.

As we had discussed with you, the catazines that had been sent to our dual and former Limited Too customers have included language on the front cover, stating that Limited Too is now Justice, Looks You Love for Less.

The cover language has also highlighted the fact that former Limited Too customers can enjoy prices that are now up to 35% less than the old Limited Too prices everyday on the same great quality merchandise.

The Limited Too and Justice websites were consolidated on January 12, 2009. Customers using the Limited Too URL were directed to a splash page on the Justice website that announced the conversion and provided a shopping path to purchase Limited Too and Justice merchandise.

Clearly, the Limited Too online customers are embracing the Justice brand as evidenced by the fact that approximately 40% of the online buyers are Limited Too customers and only 13% of their spend is for Limited Too only products. 30% of their spend is for Justice only products, and the remainder is for a mixture of Limited Too and Justice products.

The new site represents the excitement of the brand with fun, playful, creative elements along with an interactive Girls World of Fun section containing fashion guidance, games, media, downloads for wallpaper and screensavers and printable invitations.

The conversion rate of the new website is up 22% over last year, with demand up 15%. Store signage changes are taking place at a rate of approximately 40 per week with 294 stores reflagged as of today. You may recall that we had estimated the cost associated with the signage conversions to be roughly $5.5 million, and we are running right on budget.

As I have stated on many occasions since our announcement last August, we've taken a very aggressive approach to address the economic pressures our customers face with our shift to the more value-oriented Justice brand. The previous restructuring actions we have taken are already yielding cost savings and the further reductions we announced today will produce incremental benefits in the months to come.

In summary, there are many positive things happening as we move and look forward. One, the early success of our new merchandise as seen in our spring selling to date. Two, our amended credit facility which provides us with the run rate we need to get through the transition in this difficult economy. Three, access to substantial cash and our general liquidity. Four, greatly reduced inventory levels; and five and finally, our reduced cost structure has positioned us for a bright future.

I'm more confident than ever that this is the right course of action for the sustainable success of our company. And with that, I'd like to open up the call to take your questions.

Julie Sloat

Thanks, Mike.

So that everyone has a chance to participate, we ask that you limit your number of questions to one and one follow-up on first go round and then you will be placed in a listen-only mode after your follow up. In this way, we will have a better chance to getting each questioner in the time allotted, and you're welcome to get back in the queue in the same way you did originally.

Edward, please open the call for questions at this time.

Question-and-Answer Session

Operator

Thank you, ma'am. (Operator Instructions). Our first question today is from Ms. Kimberly Greenberger with Citigroup. Please proceed with your question.

Kimberly Greenberger - Citigroup

Mike, I noticed you had a 40% off coupon for that President's Day weekend brand launch. Can you just remind us what that anniversaried from last year and then my follow-up will be on the balance sheet.

Michael Rayden

Let me just give you a little synopsis of what the marketing was in the first three weeks of February last year versus the marketing in the first three weeks of February this year, so that you can understand the differential. Last year, we mailed 3.8 million catazines of our spring one catazine. It was good for 15 days and it cost us $2.4 million to mail. The discounts were 25% in Limited Too and 20% in Justice.

In 2009, during the same period, we only mailed 2.2 million spring one catazines and it was good for only nine days in the month, since part of it started in January and did cost us $1.25 million to mail. And we added a postcard of 3 million for the launch party that was good for five days at a cost of $780,000.

So, what we have is last year's cost for mailing of marketing was $2.4 million; the cost this year was $2 million for the marketing, and the number of days on sale were identical and the primary differentiation was the higher focus this time, and the fact that the offering for the postcard was open to the public and not just our direct mail customers.

Kimberly Greenberger - Citigroup

Great. That's really helpful, thanks. My follow-up is on the balance sheet. There were three fairly large adjustments to some of your accruals in accounts receivable, accrued expenses went down by $25 million, supplemental retirement and deferred comp went down by 20. And your accounts receivable went up by over $20 million, does seem like fairly large adjustments. Was there an underlying strategy behind those or if you could address those Rolando, that would be helpful?

Rolando de Aguiar

As far as the receivables, because of our loss, we have a fairly large receivable from the income tax services that we'll... the IRS that we'll be receiving in two chunks; one in the spring and one in the fall.

As far as the accrued expenses, we had reversals related to incentive compensations, as there will be no payout this year. And there was also a 3.6 million offset in the restructuring charge and then a bunch of little things. There was no particular strategy. And Kimberly, can you tell me the last one, I didn't write the third one down.

Kimberly Greenberger - Citigroup

Yeah, I think you may have addressed it. It was, accrued expenses were up $25 million, supplemental retirement deferred comp was down by 20 also. The accrued expenses were down 25 and supplemental...

Rolando de Aguiar

Yeah. And that's you know, the accrued expense of $6.7 million and IC accrual $2.9 million and 401k contributions since we eliminated that at year end. And then there is $2 million in home office and relocation accruals that we didn't use, got $1.5 million in new store accruals that we are not since we are not opening stores, and $3.6 million increase in the restructuring charge.

Kimberly Greenberger - Citigroup

Okay. So, can we assume that that all benefited SG&A in the quarter?

Rolando de Aguiar

Yes, a lot of it did. Yes, ma'am.

Kimberly Greenberger - Citigroup

Thank you so much.

Rolando de Aguiar

Yeah.

Operator

Thank you. Our next question comes from line of Tom Filandro with SIG. Please proceed with your question.

Thomas Filandro - Susquehanna Financial Group

Hey, thank you. Question for Mike. Mike, a couple of things. You stated that the spring apparel sales that they were up 4.5%, you said the Limited Too footprint average dollar sale was off only 7%. And I think you alluded that transactions were 68% better than fall. That's a lot of numbers. Can you kind of simplify what that actually translates to in terms of the season to-date comp? And can you spend a moment or two on the current $10 and under sale. Is that a planned event? What implications does it have on when you say large (ph) and can we expect similar events to woo shoppers in this obviously value-centric environment? Thanks.

Michael Rayden

On the Limited Too side, I think what we are saying in the transactions is that, we were running incredibly heavy loss of transactions. In the fall season, Limited Too's transactions were down in the mid teens. And so what I am really saying is if you extrapolate the map that we have cut back to a number in the low single-digits. So, the transactional erosion has greatly dissipated in the Limited Too brand since we have launched the new Justice product, which is telling me that the customers are purchasing the new product and appreciating the new price points.

On the ADS side, where I mentioned the idea that the concern in the marketplace clearly is that we have to sell a lot more units in order to make up for the lower price points. What I'm saying is that, obviously, early on, our average unit retail month-to-date is down about 17% instead of the fall of 25% to 30%. But our units per transaction are up 11% and that gets you to only a 7% decline in the ADS.

So, as we said, the success of Limited Too conversion over time and clearly we're really only into three solid weeks of the transition with less than half of our stores even with the signing conversion, I think it's showing to me that clearly we are not going to get the ADS erosion based on transactions and UPS et cetera that the world seem to be forecasting and we were not forecasting. So, I hope that answers that.

And on the $10 and under, we believe that we need to offer continued value in Justice even beyond the historical Justice great value price points. This particular event is meant to foster more point-of-sale opportunities, instead of just giving opportunities to our direct mail audience, so that we can get new converts into the brand. And it was a planned event and you will find that in May, there'll be another planned event. They're running for somewhere between 12 and 14 days when nothing else is going on. And they are providing value on particular areas of merchandise in the stores.

Thomas Filandro - Susquehanna Financial Group

Thank you very much. Best of luck to you, Mike.

Operator

Thank you. Ladies and gentlemen, our next question comes from the line of Tracy Kogan with Credit Suisse. Please proceed with your question.

Tracy Kogan - Credit Suisse North America

Thanks. Good morning. Two questions. First, could you just talk a little more on the month-to-date performance that what categories you're seeing improvement in, and which ones are still lagging behind?

And then, secondly, can you talk a little bit more about your recent negotiations with landlords. Have you been able to get better deals and of the stores you closed and plan to close, how much had to pay to get out of the leases or are these all rolling off lease? Thanks.

Michael Rayden

On the categories that are working, I'll tell you that currently our worst category is Webkinz. As a particular business, it's running off at probably in the 50% range. And that obviously was a large portion of the business in the end of the last year and in the first quarter of this year.

The areas that are performing extraordinarily well are the entire active areas of our business, such as graphic tees and knit shorts, knit jackets et cetera. Our footwear business is pretty good and the balance of the accessory business is actually quite good, if you take the Webkinz component out of it. Casual tops and bottoms, especially casual bottoms, which is the woven short business is difficult. But the skirt business in the casual area is excellent, and denim is good period, especially in skinny and super skinny leg jeans. So we are feeling reasonably good on the apparel side.

As I mentioned, through the first three weeks of February, we're genuinely up versus last year on an average store basis in sales. And our negative, big negative is on the fall side where we have absolutely no carryover merchandise of any consequence since we had eliminated it last year and still typically do a nice business through January, February and the beginning of March on fall clearance.

On the landlord side, we continually are negotiating on our stores as they come due. The closures basically cost us nothing, they were all malls that were up for renewal that we did not renew. We closed the smaller amount than we originally had forecasted, based on much better landlord co-operation and we continue to see much better landlord co-operation as we move forward.

Just to remind you, we have 120 stores of our fleet this year and 120 stores of our fleet next year. So, 240 stores, which either come due for renewal or have a kick out clause that offer us the opportunity to adjust our fleet with really no issues related to having to buyout leases et cetera to reconfigure ourselves as appropriate and necessary. And I think you will find that the community of landlord and tenant at least with us has been much more co-operative than I've probably seen in the past.

Tracy Kogan - Credit Suisse North America

Great, thank you very much.

Operator

Thank you. Our next question comes from the line of Richard Jaffe with Stifel Nicolaus. Please proceed with your question.

Richard Jaffe - Stifel Nicolaus

Thanks very much, guys. I guess a follow-on Mike regarding the real estate and what appears to be a favorable opportunity in negotiating with landlords. Looking at the store count, the portfolio of former Limited Too stores, is there an opportunity to readdress those stores and consider reducing the store base in malls? The signage not being complete suggest to us that may be that this part of your thinking hold off and see if there is a better deal to be struck? And if you could comment --?

Michael Rayden

I think our current thinking on real estate is that we currently have about 914 stores and we would expect to close somewhere between 30 and 40 stores this year. Mostly, related to those 120 stores where we have an opportunity with no cost to make those adjustments and the number at today is not higher but obviously always open for discussion.

We have a larger number than 30 or 40, somewhere in the -- I don't know, less than 100 stores that depending on the forecast going forward of comps might be cash flow negative. So, we are looking at all of those with constant negotiation and since we have really very few new stores planned in the docket, at the maximum four with maybe three remodels. This is our sole focus at this point and is renegotiating and realigning the fleet in the most cost effective manner.

Richard Jaffe - Stifel Nicolaus

And just a quick question, your asset-backed securitization. At the inventory valuation, I assume the inventory is the asset provided. Is that a monthly evaluation and at what values the inventory priced at today?

Rolando de Aguiar

Yes, the inventory valuation is at cost and it's fixed 60%.

Richard Jaffe - Stifel Nicolaus

Fixed 60%?

Rolando de Aguiar

Correct.

Richard Jaffe - Stifel Nicolaus

It's not re-evaluated monthly or quarterly?

Rolando de Aguiar

No, just the balance sheet value.

Michael Rayden

And the account receivables are also part of that.

Rolando de Aguiar

Correct.

Michael Rayden

And that's fixed at 80%.

Richard Jaffe - Stifel Nicolaus

Thanks very much.

Operator

Thank you. Our next question comes from the line of Rick Patel with Bank of America. Please proceed with your question.

Rick Patel - BAS-ML

Hi, good morning.

Michael Rayden

Good morning.

Rick Patel - BAS-ML

Could you provide some color on how the Justice mall stores did during the quarter against the legacy strip center stores? Was there any notable differences in the performance after the conversion?

Michael Rayden

The conversion as again said did not happen until January 13th, with a small mailing of 2 million. And the only thing that is obvious today as we are tracking the Justice footprint versus the Limited Too footprint, is that we have 22 mall stores that are overlapping in the same mall and those stores are having the most difficult time. And of the 30 and 40 closures that we are planning, we are coming to a very strong conclusion that it's not a lot of stores, there is only 22, that in malls we probably only need one location.

As for the shadow stores, which is a larger group of stores, which are stores that are within half a mile radius, there is no conclusive evidence today that there are any issues with the conversion of cannibalization that we can see from the data in the four weeks or so, or five weeks that we've been looking at it since January 13th.

So the mall stores will probably end up at the end of the year, end up with one and what you'll find right now is the Justice stores that existed there are still doing better than the Limited Too stores that existed before, as they were.

Rick Patel - BAS-ML

Okay. And then on the inventory, can you just talk to us about what we can expect over the next few quarters. And have you already made purchases for the summer and back-to-school lines?

Michael Rayden

We bought our inventory for the summer floor set, which is in April to get that timing correct. We have not placed any orders for our June-July yet. Matter of fact, we will start to approve those in the following week and we have planned our inventories for the season down almost 30% on an aggregate basis. So, we are planning our inventories incredibly tight. Through the third week of February, our overall inventory levels are down somewhere in the mid 30% range on a dollar basis. And I will tell you for sure, that is a lot greater than what our comp stores are running at the moment. So, we're quite happy with our inventory position at this point.

Rick Patel - BAS-ML

That's helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Adrienne Tennant with FBR Capital Markets. Please proceed with your question.

Adrienne Tennant - FBR Capital Markets

Good morning. Thank you. So, when we think about the Justice store economic model, like how should we think about the split between increase in UPT versus transaction? And do we need that to be a little bit higher to get to the same core (ph) and the reason I am asking that is the rent higher in the A, B malls of the existing Limited Too than it was in the older Justice stores?

Michael Rayden

If you remember and it's obviously very early for us is that, as I mentioned units per transaction in Limited Too footprint in the three weeks of February with really not a lot of additional marketing other than a discount differential, it's up 11% already. And Limited Too is really just starting to build inventory and as of last week, the Limited Too inventory was down almost 40% from last year. So, it's running positive spring, comp store sales on the spring side of apparel with appreciably less inventory. And when I'm talking about UPTs, I'm talking about the overall business. On the apparel side, they are even running better. And we are hoping that as we get to warmer weather, closer to spring break in March, where there is more of a need to buy new apparel that UPT growth will even accelerate.

What we're really seeing, and what we explained originally was where we had mall stores of both Limited Too and Justice in the same mall that the true differential for those for Justice did perform better, where the transaction levels were much higher and as I am mentioning to you now the Limited Too transaction negative is a much better place than the base Justice stores are and a clear improvement over anything that has happened in either the third quarter or the fourth quarter of last season, even with the high promotional activity that should have driven transactions in the third and fourth quarter.

Adrienne Tennant - FBR Capital Markets

Okay. So, as a combination of transaction and UPT, you think that you should be able to get higher than that 30% price differential to compensate for the rest?

Michael Rayden

Well, what's happening is the price differential as I mentioned, and I will say it again, that the average unit retail through the first three weeks of February in the Limited Too footprint stores is running down 17%. What it's really saying is that the reason it's not higher is because the mix of merchandise has changed.

We're selling a much higher percentage of spring goods at a much higher retail than last year what we sold in fall which would have been very low clearance price points. And with the Webkinz business at a low average unit retail being greatly down and the apparel penetration growing, our average unit retail is actually nowhere near down what could be expected if everything sold as it did last year.

So we are not forecasting or expecting to have a 25% AUR decline in the Limited Too brand in the spring season.

Adrienne Tennant - FBR Capital Markets

Okay. That's very helpful. And then Rolando, can you just repeat the -- on the gross margin what you had said about merchant margins versus de-leverage on the occupancy please?

Rolando de Aguiar

Well, the issue is that the fact that our buying and occupancy expense is even though they were lower on a year-to-year basis, that was more than offset by the increased trends from the 92 stores we opened in last year. So that resulted in de-leveraging because of that. Okay?

Adrienne Tennant - FBR Capital Markets

Okay. Can you break that down, the 1,700?

Rolando de Aguiar

Yeah. I think what we talked about is that buying and payroll came down 2.9%, but the occupancy increased 3.1 year-to-year. So, those were the two numbers that offset each other.

Adrienne Tennant - FBR Capital Markets

Okay, great. Thank you and good luck.

Rolando de Aguiar

Yeah.

Operator

Thank you. Our next question comes from the line of Linda Tsai with MKM Partners. Please proceed with your question.

Linda Tsai - MKM Partners

Yes. Hi. Taking into account that gross margins were artificially low for the quarter, because you were focused on becoming clean, over time where do you think your normalized gross margin could pan out? And then, just in terms of the head count reductions, what areas did those come out of?

Michael Rayden

The head count reductions that we just took, as we took in August were really across all functions in the business. But the largest number of head count change were in merchandise designs, planning and allocation. In August, we made no head count reductions in allocation and planning since we were really still running two businesses and we made the adjustment in those two areas now.

But there were people taken out of finance, IT, real estate and every function. So it was really a pretty much another review of the business and wherever we could live without the people and become more efficient, that's what we were looking to do. And I don't remember, if there was another half of that question.

Linda Tsai - MKM Partners

Oh, it's just about the gross margins. I mean the fact that they were kind of artificially low for the quarter because you were just focused on keeping inventories clean just over --

Michael Rayden

Gross margins as we're looking forward to spring, without being specific, if you would understand, the mix is that the IMU is going to come down even though it is positive to historical Justice levels.

So, it's up to historical Justice levels and the markdowns will also come down for spring and the markdown plan is based on a higher levels in Justice and an appreciably lower level for spring than Limited Too. And clearly, Justice last spring actually had a pretty darn good season and so the mix of margin on the merchandise side will be a slightly down on a rate basis from last year. The big issue in the business is the top line sales.

Linda Tsai - MKM Partners

All right. Thank you.

Operator

Thank you. Ladies and gentlemen, our next question comes from the line of Marni Shapiro with The Retail Tracker. Please proceed with your question.

Marni Shapiro - The Retail Tracker

Hey, guys. I wanted to actually congratulate you because I thought the financial was good and I have to say that your sales people have done a phenomenal job in the stores and explaining it to very confused customers as I stood in there and watched them explain everything.

But to follow-up on that, I had two quick questions for you. On the additional layouts that you've done, can you just talk about what had already been planned because of the integration of Justice and Limited Too and what was done above and beyond because of the environment? Because clearly, you were going to get rid of a lot of these functions as you merged.

And then if you could talk a little bit more on the product side, Mike. It seems as I walk through your stores that some of the more special items like the Splatter Paint or destination items like Swim, seem to be selling better than more of the core merchandise. And I am curious if you could talk a little bit about that, and how it would play out over the season?

Michael Rayden

The head count changes are constantly, and expense changes are constantly looked at in the light of day of current day. So to be honest, we had not had an official plan for a head count reduction in February and clearly the continued decline in the fourth quarter and the current expectations of a difficult spring for sure, made us look at a bit in a new light and therefore all those reductions were made just based on the judgment of where we could run our business with operating us long-term and that was really the whole basis there. So, it's not based on plan versus the other. We're flexible and we will continue to adjust the expense base with the revenue base.

On the product side, you're right the Paint Splatter has been unbelievable. Peace Signs have been unbelievable and we are finding an incredible acceptance to our sort of interesting fashion. That does not mean that our core business is not good. On the five-day launch party weekend, we still course if it was free. We found our customers stocking up and buying must be and it seems like the whole seasons need. So, our units per transaction and conversions were phenomenal. But we are finding a great acceptance to the fashion product and the Limited Too product that's in the 187 stores is also doing quite well in those locations. And we see more opportunity to expand in product categories there beyond collection.

Marni Shapiro - The Retail Tracker

Great. And could you just follow-up on one comment I heard a few associates talking about. They were telling some of the women, you just wait until we get the boys product in the store. And I didn't know if this is confusion on their part, if you were planning there some, if you could just comment on that?

Michael Rayden

Well, whoever said that, it's obviously a confusion. We've got one focus and that's on getting through the transition and dealing with our Tween girl audience and regaining our position of market leadership. So we have not wasted one ounce of energy discussing boys or anything to do with them. Our entire focus is on the Tween girl and the Tween mom, and providing the appropriate value in an economy where there are clearly trading down and looking at prices from as the predominant category.

One thing interesting and I will share it with you is MTD data through December is that Wal-Mart had an incredibly large gain in market share in the Tween apparel business. Wal-Mart's Tween apparel business for the last number of years had been eroding and a matter of fact through October it had eroded as well. In one sell swoop in one quarter Wal-Mart gained 521 basis points of market share in the fourth quarter. That tells me that our entire call on price, they didn't become brilliant merchants overnight. But that this consumer all of a sudden to gain 520 basis point of market share at Wal-Mart who was down in market share in October and for the previous year, just is a testament to price value not skills of merchandising. So, price, price, price and I think with our environment and our singular focus and our ability to do fashion right as well, I think we can gain back our market share.

Marni Shapiro - The Retail Tracker

Well, good luck and I am glad to hear you are not doing the boy's business.

Operator

Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Dana Telsey - Telsey Advisory Group

Good morning, Mike and Rolando. I wanted to catch up with you at the message of value and that whole equation is definitely clear. As you think about Justice going forward and the new environment that we're in, are there any adjustments to current prices somewhat you'd seen originally for the Justice model? How is this impact on margins both gross and SG&A and given the slower sales pace that everyone has, what source, how is your sourcing operations going overseas, and any margin implications there? Thank you.

Michael Rayden

Okay. Right now the Justice locations, just to give you an idea, we have pretty much maintained our pricing thoughts on Justice and not feeling that there is need to be a major adjustments. For the first two weeks of February, the AUR in Justice, including the launch event is down 1%. So basically, the AUR on the Justice business in its entirety is only down 1% including that 40% off event.

So, we are not looking to lower our price points in Justice, but we are looking to offer more point-of-sale opportunities and value as we move forward. So, the major change and I guess, can we bring in the other half.

On the sourcing side, we've increased our penetration. We are going to go from under 30% of our sourcing base to somewhere around 45% and that enables us to gain a margin leverage by basically avoiding the middle man, and a big portion of that change came from the elimination of Mast, which was the sourcing arm at Limited and we have converted to predominantly ourselves and Lee Fung (ph).

The other aspect of the souring is that with the decline in the Webkinz business, there is more product for us to source on our own that is more relevant to our own brand. So that helps on the margin side and we continue to look to push that to even higher level, but we are not looking to be our own sourcing on completely without Lee Fung (ph) and some of other critical partners.

Dana Telsey - Telsey Advisory Group

Thank you.

Operator

Thank you. Our next question comes from the line of Stacy Pak with SP Research. Please proceed with your question.

Stacy Pak - SP Research

Hi, thanks. Couple of questions. One is, can you just say if you didn't, I think I missed it, what the comp is February month to-date. Second of all, can you talk some about the response to the new Justice product in great malls like the South Coast Plaza versus sort of more B and C malls like Hillsdale, (inaudible), something like that.

And then finally on the SG&A dollar growth, should we expect in '09 something like you did in the fourth quarter here, or can you comment on that? Thanks.

Michael Rayden

Well, first of all, we didn't talk about comps month-to-date and we at this point don't plan to. Just tell you that we're currently through yesterday beating our internal projections that we are guiding our business with. So, we're excited that we are ahead of what we forecast from the most dire state and the improvement is on the spring apparel side of the business and that spring apparel acceptance is across the board in Limited Too regardless of type of mall. We've seen no difference between a South Coast Plaza and a C mall in (inaudible). So they seem to like the product and they seem to like the price points.

Stacy Pak - SP Research

Okay, great.

Michael Rayden

And on the

Rolando de Aguiar

As far as the SG&A, we will see an impact from both restructurings that we did, obviously the one we just did which is 7.5 and net amount --would be net of about 1.7 million of severance cost, that will be impacting us over the next 11 months. And the $25 million of SG&A savings as compared to last year will be again impacting us every month till August. So I think you will continue to see a trend of reduced SG&A as we go forward.

Stacy Pak - SP Research

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Tom Filandro with SIG. Please proceed with your question.

Thomas Filandro - Susquehanna Financial Group

Hey, Rolando. You just highlighted that $25 million in savings again, can you just walk us through the components of that for us for better clarification. And then just a follow-up question on the IMU. I think Mike alluded to the IMU being under pressure a little bit in the spring season as a result of the Justice conversion. But I'm wondering to, is that something that will occur during the fall season or do you begin to see some sourcing economies of scale to benefit or offset from the lower AURs. Thank you.

Rolando de Aguiar

Yeah. Firstly, the $25 million, I mean, it was the number that was an after-tax number we reported last year and it's composed of $21 million with buying and home office payroll. This all relates to the restructuring last year and it's comparing how we were versus how we are this year. $8 million, we are talking about field positions in Limited Too, we are talking about 7 to $10 million of marketing cost and another 1 million of related cost, which are cell phones, BlackBerry, travel and all that. That's the composition of those costs. So, we're going to see 25 million of that this year impacting SG&A.

Michael Rayden

And Tom

Rolando de Aguiar

It's also in B&O and Julie point to me, it's both SG&A and B&O in both places.

Michael Rayden

Tom, on the other side, I do you see the sourcing helping us. I will tell that our sourcing partners whether they are the factories that we deal direct with or lease on or any of our other key suppliers have all stepped up to the play with additional help for us during this difficult 2009 transition period of a brand, over and above what we would have done historically. And that was done through talks and negotiations and we actually get that in our other gross margin line. That coupled with the reduction in the IMU rate in spring, brought the reduced markdowns in the spring. We actually expect our internal gross margin for getting buying and occupancy to be at a level that's really very close to what it was last spring.

Thomas Filandro - Susquehanna Financial Group

Thank you very much.

Operator

Thank you. Ladies and gentlemen, we have time for one more question today. That comes from the line of Kimberly Greenberger with Citigroup. Please proceed with your question.

Kimberly Greenberger - Citigroup

Okay, thanks. I just wanted to see if can get the transaction metric for the fourth quarter by brands. Thanks.

Michael Rayden

Say that again.

Rolando de Aguiar

Transaction

Kimberly Greenberger - Citigroup

Transaction metrics for Justice and Limited Too in the fourth quarter?

Michael Rayden

You can, and I will get that for you, so that I can quote the right number. And I have it right here. Transactions in Limited Too in the fourth quarter were down 18% and transactions in Justice were down 13%. What I would like to just call out to you in the Justice, and I'm going to share these numbers and I probably wouldn't normally is that almost the entire transaction declined to get to that number. Or the big number was January, where we did not have fall merchandise and clearance merchandise to generate those transaction sales.

So, where for the fourth quarter, we were down 13 in Justice, transactions in January were down 26%. And I will tell you that in February we're not running anywhere near what they were down in January. And on the Limited Too side, that big decrease in transactions was again heavily skewed by January where we had no fall goods and the January transactions in the Limited Too average store were down 27%, where for the quarter they were down 18.

Kimberly Greenberger - Citigroup

The other metrics might be the average dollar sales and AUR UPT?

Michael Rayden

I would like not to give every minor detail of the number, I mean to be honest with you. The fourth quarter, I mean I don't know how to say it nicely, sucked and we as a company, are moving forward and would like to look it where we are going as opposed to where we have been.

Kimberly Greenberger - Citigroup

Okay. Thanks and good luck.

Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. This teleconference will be available for replay at 877-660-6853. Once again, this concludes the conference and you may disconnect your lines at this time. Thank you for your participation.

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