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Saks, Inc. (NYSE:SKS)

Q4 2008 Earnings Call

February 25, 2009 10:00 AM ET

Executives

Stephen I. Sadove - Chairman and Chief Executive Officer

Kevin Wills - Executive Vice President and Chief Financial Officer

Ronald L. Frasch - President and Chief Merchandising Officer

Analysts

Michelle Clark - Morgan Stanley

Deborah Weinswig - Citigroup

Lorraine Maikis - Bank Of America

Karru Martinson - Deutsche Bank

Adrianne Shapira - Goldman Sachs & Co.

Emily Shanks - Barclays Capital

Dana Telsey - Telsey Advisory Group

Robert Drbul - Barclays Capital

Todd Slater - Lazard Freres

Christine Chen - Needham & Company

Michael Exstein - Credit Suisse

Operator

Good morning, my name is Latika and I will be your conference operator today. At this time I would like to welcome everyone to the Fourth Quarter and Fiscal Year-End Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Steve Sadove, Chairman and CEO of Saks Incorporated, you may begin your conference.

Stephen I. Sadove

Thank you. Good morning, this is Steve Sadove, Chairman and CEO of Saks Incorporated. I'm joined today by Ron Frasch, President and Chief Merchandising Officer; Kevin Wills, our CFO; and Julia Bentley, our Senior VP of Investor Relations.

I'd like to thank each of you for taking the time to join us. Today, we'll discuss the financial results for the fourth quarter and fiscal year ended January 31, 2009; our outlook for 2009, and update you on several other matters. At the end of the call we'll be glad to respond to your questions.

Let me ask Kevin to briefly comment on the fourth quarter and year-end results and the balance sheet.

Kevin Wills

Thanks Steve, and good morning, everyone.

First, let me note that some of the comments on the call today as well as some of the information presented in our release related to future results or expectations are considered forward-looking information within the definition of federal securities laws. The forward-looking information is premised on many factors and actual consolidated results might differ materially from projected information if there are any material changes in our assumptions.

For a description of the meaningful risk and assumptions related to these projections, please refer to the release and our most recent filings with the SEC, including our most recent Form 10-K.

As you are aware, the fourth quarter was very challenging for the retail industry as a whole and specifically for Saks. Our financial results were well below our initial expectations due in part to the actions we initiated to address the increasing imbalance between inventory supply and consumer demand in the luxury channel.

Primarily due to weak sales and gross margin performance, Sacks recorded a fourth quarter net loss from continuing operations of $82.9 million or $0.60 per share. The quarter included after-tax items totaling $11.2 million or $0.08 per share primarily related to asset impairment and severance charges. The company's fourth quarter operating loss excluding certain items totaled a $102.2 million this year compared to operating income excluding certain items of $56.5 million last year.

For the full year, the company posted a loss from continuing operations of a $122.8 million or $0.89 per share which included $26.2 million or $0.19 per share of certain items. Our operating loss excluding certain items for the full year totaled $113.8 million compared to operating income excluding certain items of $143.5 million last year.

We began the fourth quarter with year-over-year comparable store inventories up 4.4% and the expectation that we would end the fiscal year with a low single-digit comparable store inventory increase, through aggressive and targeted promotional activities, and by closely partnering with our vendors to return product and cancel orders, we made significant progress in reducing our inventory levels during the quarter.

Our consolidated inventories at year-end totaled $728.8 million, a 15% year-over-year decline on a total basis, and a 14.6% decrease on a comparable store basis. Additionally, we ended the year with clearance inventory approximately 45% lower than last year. Although we've made substantial progress improving our inventory position, we still face a disconnect between inventory levels and expected consumption trends in the first half of 2009.

At year-end, we had approximately $10 million of cash on hand and approximately $157 million of direct outstanding borrowing on our $500 million revolving credit facility. Recall that $84.1 million of senior notes matured in mid-November, and we retired the notes for drawing on the revolving credit facility.

Year-end funded debt including cap leases and borrowings on the revolving credit facility totaled approximately $640 million and debt to capitalization was 39.9. I'll make some additional comments regarding our capital structure and liquidity in a few moments. Steve?

Stephen I. Sadove

Thanks Kevin. The fourth quarter of 2008 was the combination of an incredibly difficult year and our operating performance reflected the rapidly deteriorating macroeconomic conditions.

The comp store sales declined 15.3% in the fourth quarter which compares to a 9% comp stores sales gain reported in the same period last year. We continue to experience weakness across all geographies, merchandise categories, and channels of distribution.

Soft performance continued in the New York City flagship store which represents approximately 20% of our company sales. Women's apparel continue to be the most challenging merchandise category. On a year-over-year basis, the number of transactions increased while the average dollars per transactions declined from last year's fourth quarter.

Saks Direct posted a 1.3 comp store sales decline in the quarter versus an increase of over 40% in last year's fourth quarter. Saks Direct's comps grew by approximately 16% for the full year on top of a 40% growth for 2007. OFF 5TH's comp store sales performance continued to show relative strength, although sales trends slowed over the last few quarters.

We posted a 20.8% gross margin rate in the fourth quarter compared to a 37.1% in the prior year. This substantial rate decline was driven by incremental markdowns as we reacted to the rapidly deteriorating economic conditions and aggressively worked to clear high inventory levels.

The year-over-year decline in gross margin rate was the principal reason for our operating profit decline. So let me give you some additional color on the gross margin performance. As we entered the fourth quarter, Saks had excess inventory based on most recent sales trend.

Simply stated, there was material imbalance between supply and demand. This imbalance existed not only at Saks, but throughout the luxury channel at both vendors and retailers. Our sales trends during early November continued to deteriorate further from weak October trends which were down 16.6%, and the inventory imbalance worsened.

At that time, we developed a contingency plan to implement a much more aggressive promotional program if consumer demand continued to decelerate. When our customers did not respond to our annual private night sale in early November which offered 40% discounts on certain merchandise, we made the decision to execute the contingency plan and accelerate our post Thanksgiving Day sale activity by one week, in effect taking already reduced product to 70% off and to advance the sale break of our designer product by one week to meet competition.

It's important to note that we did not discount new receipts as we only increased the depth of markdowns or accelerated the markdown date on certain products. The increased discounts were very successful in reducing total inventory, and we were able to sell-through a high percentage of our clearance product.

Our principal focus for the quarter was to better align our inventory with sales trends through our aggressive markdown actions and receipt reductions. We reacted and responded both timely and appropriately. Much of our product is seasonal and it's imperative that we sell the majority of this product in season. The actions we took, clearly came at a price, but we were successful in monetizing our inventory, gaining share and better positioning our stock levels as we entered fiscal 2009.

On a positive note, we diligently managed our SG&A expenses during the quarter, reducing expenses by nearly $33 million, a 14.3% decline from the prior year excluding certain items. SG&A as a percent of sales excluding the certain items was nearly flat on a year-over-year basis, with SG&A at 23.3% in the current fourth quarter compared to 23.2% last year.

While 2008 was extremely difficult, we continued to make progress on several of our key initiatives, better positioning ourselves for the future. We completed several strategic capital improvements including the opening of over 100 vendor shops, the completion of several other key store projects including the renovation and expansion of our Naples and Boston stores, and the renovations of the South Coast Plaza, Bal Harbor, Miami Dadeland, and Houston flagship stores.

The introduction of our 1022 Shoe concept in five other key markets; Beverly Hills, Houston, Phoenix, South Coast Plaza, and San Francisco and the partial renovation of our New York City flagship store including the first floor handbag area, several cosmetic areas and our women's Fifth Avenue Club. In addition, we're well underway with the total renovation of our third floor women's designer area which will showcase over 35 designers and will be finished by mid 2009.

We reduced our operating expenses by approximately $50 million excluding certain items in the second half of 2008. We began to implement certain strategic reductions in our cost structure to more appropriately size the organization through a smaller sales base. We completed on schedule the rollout of our planning and allocation and organizational and process changes in September.

The strengthened planning organization and streamlined roles and responsibilities across the merchant universe enabled the company to navigate through numerous plan changes and inventory management issues that were necessitated by the economic environment.

We meaningfully improved the customer experience through the completion of the rollout of our point-of-sale clienteling system to the entire store base. In addition, various in-store and support process improvements have been implemented in 28 of our stores, and will be rolled out to nearly the entire store base by the end of 2009.

We continue to grow the Saks Direct business by substantially increasing the breadth and depth of our product offerings and by redesigning the site, improving the overall shopping experience by enhancing product information, imaging and functionality.

We completed the repositioning of the OFF 5TH business, as a channel of distribution that includes not only clearance merchandise, but also direct from vendor product and more private brand permitting more control of store assortment.

We opened four new OFF 5TH stores each patterned after our new prototype store design. Even in this difficult environment, we've been pleased with the results of these stores. We discontinued the operations of our Club Libby Lu specialty store business in the fourth quarter and the store closing process went very smoothly. Club Libby Lu was not profitable and its discontinuation should add modestly to the company's EBIT performance going forward.

Expenses associated with closing the business including severance, inventory liquidation and lease termination expenses are reflected in discontinued operations and totals the low end of our original estimate.

Let me turn it over to Ron to make a few comments about merchandising, service and marketing. Ron?

Ronald L. Frasch

Thank you, Steve. First, let me say though, although it's very challenging this environment creates a tremendous opportunity for change. Our merchants, our stores and the vendor community all know that change is required, we are all collaborating closely and truly energized about the prospects that lie ahead. As you heard me say, we view our business like a three-legged stool with the three legs being merchandising, service and marketing.

While we remain focused on executing our long-term merchandising, service and marketing strategies, we're making appropriate adjustments to our plans in the short and moderate term. We remain steadfastly committed to luxury and we'll continue to offer our customers an assortment of merchandise from accessible luxury to designer products.

The planned 20% reductions in the 2009 inventory purchases will not necessarily be across the board. Our nine box grid model will continue to guide us, as we deliver an appropriate assortment of good, better, best product by store. We are working closely with a number of designers to develop their own array of good, better, best product to assure we offer the right balance of price appropriate luxury.

In 2009, we will rebalance our product assortments by brand and by store. We will cut some brands and add and intensify others. We have to justify our matrix, both the points of distribution as well as the level of investment that we make. We must assure that we only invest and focus on business categories that yield strategic and financial value to the business.

We are demonstrating our commitment to luxury through such actions as a renovation of our New York flagship third floor women's designer floor. The recent opening of our new Men's key time shop at our New York flagship, and the recent opening of our Men's store in Palm Beach. Our commitment to accessible luxury goes hand-in-hand with our reinvention of women's bridge area what we are referring to as our new wear department and the expansion of well priced moderate assortments in the men's zone. Several of the product offerings will be exclusive to Saks 5th Avenue.

We are continuing to strengthen our vendor relationships. We realize there's been a lot of press about strained vendor relations resulting from actions we took to balance our inventories. The fact is that our vendor relationships remain very good. We appreciate the recent collaboration of working through our inventory issues and know that they will continue their support as we strive to appropriately merchandise our stores going forward.

We are also continuing to work diligently with our vendor partners over the timing of the procurement cycle, in other words, reducing the risk in the process by taking extraordinary long lead times. We also need to better manage the content of each delivery window and are strategizing with our vendors to deliver a higher degree of wear now product within each delivery.

Let me turn to the stores. Our goal is to win with an enhanced service model. Our staffing and service levels have been adjusted appropriately to reflect the changing environment. Clienteling and exceptional service are more critical than ever. We are reinforcing these with expanded and improved utilization of our new point of sale clienteling systems.

As Steve noted, our comprehensive program of various in-store and support process improvements have been implemented in 28 of our stores and this will be rolled out to nearly all of our stores by the end of the year. In these 28 stores, roles and responsibilities have been refined and there is a significant change in the on-floor management presence and a major shift in the focus on clienteling, individual coaching of associates.

Back of house initiatives have delivered increased efficiency, reduced process workloads, and provided quicker delivery of merchandise to the selling floor. Local marketing remains a huge focus for us. We have developed and are implementing very detailed outreach programs by store. In our marketing efforts and our materials, we are reinforcing our value proposition which is not just about price but about quality and product design as well.

Through a better alignment of our inventory levels by store, our clienteling and the service programs and our revolving marketing efforts we expect to drive more full priced selling overtime which should yield improved top-line and margin improvement in the future. Steve?

Stephen I. Sadove

Thanks Ron. We expect that the economic environment will remain extremely challenging through 2009 if not beyond, and we're planning accordingly. We continue to focus on what we can control; expenses, inventory receipts, and capital spending. And I'm pleased with how our organization has risen to the challenge. I'm confident we have taken and will continue to take the decisive actions needed in response to the environment and to better position the company for the future when economic conditions improve. As Ron noted however, we're continuing to focus on and make targeted investments in our strategic merchandising marketing and selling initiatives.

A significant component of our 2009 cost reductions relates to the previously announced reduction in force and changes to compensation and employee benefit plans. We also identified additional non-employee base cost reductions primarily in the areas of procurement, information technology, distribution and logistics, travel and marketing.

The cost reductions and eliminations are expected to total between $50 million and $60 million in 2009. Approximately $10 billion will be reflected in the cost of sales where merchandising and distribution expenses are classified, with the balance classified in SG&A expenses.

Reductions in SG&A expenses are expected to more than offset and approximate $15 million increase in 2009 pension expense. Incremental expenses related to new Off 5TH stores, more normalized incentive compensation, and certain inflation driven expenses. We'd lower our planned capital expenditures for 2009 to approximately $60 million, a decrease of over 50% from the 2008 spending level.

The 2009 expenditures primarily will be related to the completion of the women's designer floor in the New York City flagship, the finishing touches to the renovation projects in other stores.

Investments in routine store maintenance and corporate infrastructure projects, some store renovations that were on the tentative drawing board will prudently be postponed until the environment improves. We're continuing to execute all necessary maintenance capital spending. Our physical plant is in excellent condition and we intend to keep it that way.

The current macroeconomic and retail landscape perhaps is the most challenging that the company has faced in its 84-year history. It remains impossible to predict the future, sales and gross margin performance with any degree of certainty. We outlined our assumptions for 2009 in this morning's press release.

Variation from our expected sales trends up or down could materially impact these assumptions. Let me highlight a few of the assumptions; we expect a comp store sales decline for the full fiscal year of low double digits comprised of a decline in the range of 20% for the first half of the year with the first quarter weaker than the second quarter and a decline of mid-to-high single digits in the second half of the fiscal year.

It may appear that we are expecting a significant improvement in the fall 2009 sales trends, but keep in mind that our fall expectation are from a lower 2008 sales base. When reviewed against the more normalized 2007 period or two year run-rate, spring and fall 2009 performance is expected to be similar. Comp store inventory levels are expected to be down in the low-to-mid teen percentage range at the end of the second quarter of 2009 and through the second half of 2009.

Based upon current inventory levels, planned merchandise receipt flow, and the company's promotional calendar and permanent markdown cadence, we expect gross margin to decline to the 32% to 34% range in the first half of 2009. We expect substantial year-over-year gross margin recovery in the second half of the year, with gross margins in the 35% to 37% range.

Based on our SG&A reductions, which should more than offset increases in pension expense, incremental expenses for the new Off 5TH stores, more normalized incentive comp and certain inflation driven expenses, absolute SG&A dollars excluding certain items for the full year of 2009 are expected to be down $20 million to $30 million from the prior year.

SG&A expenses expected to be decreased in the first half of the year and increase modestly in the second half of the year for several reasons. SG&A in the first half of 2009 will reflect expense reductions that we implemented in the second half of 2008. These expenses will be anniversaried starting in the fall of 2009 with little or no year-over-year savings in the second half of '09.

Additionally, we'll experience a higher level of variable expense flex in the first half given the weaker comp sales projections, and there are a number of timing differences between the first and second half including changes in incentive based compensation expense.

Based on these assumptions for fiscal 2009, I will now ask Kevin to comment on our projected capital structure and liquidity position.

Kevin Wills

Thanks Steve. We're fortunate to have flexibility under our existing debt facilities. A revolving credit facility does not material until September 2011 and we have no short-term maturities of senior debt. A $500 million revolving credit facility has secured the inventory and account receivable. The revolving credit facility has no covenants unless the availability falls below 60 million at which time the company would be subject to a fixed charge coverage ratio of at least 1:1.

As we reduced our aggregate inventory levels throughout 2009 the capacity on the revolver will at times fall below 500 million, a maximum amount of the revolver. Based on our current projections we expect to have ample liquidity under revolving facility throughout 2009 even though the aggregate capacity will fall below 500 million in certain periods due to reduced inventory levels and outstanding letters of credit that are routinely issued in the normal course of business.

Additionally, we do not anticipate that availability on the revolving facility will fall below 60 million in any period. Therefore, we do not anticipate being subject to the fixed charge coverage at any time during 2009.

The company is very focused on cash flow, and the actions we've taken to reduce expenses, inventory and capital expenditures are all designed to ensure that we are free cash flow positive in 2009. As it relates to our senior debt, the company currently has a 192.3 million of senior unsecured notes and a 2%, $230 million convertible debenture outstanding.

The next debt maturity is 45.9 million of senior notes in December 2010, followed by 141.6 million of senior notes maturing in October 2011. The $230 million convertible debenture matures in 2024. I would also note that the company had significant value inherent in certain of its own Saks Fifth Avenue store properties. We own nearly 70% of our square footage including the New York flagship store. A real estate basis unencumbered which provides the company with significant additional flexibility if needed.

Steve?

Stephen I. Sadove

Thanks Kevin. We're intensely focused on the future and positioning the company to be an even stronger organization when the economy improves. Although we're staying the course with our long-term strategies, we're making necessary adjustments to our organization and our operations in response to the environment.

One last comment, there have been a lot of rumors circulating about the company including bankruptcy. While it's our policy not to come on rumors, I will note that all of the actions that we have outlined are very much focused on improving our operations, ensuring we are free cash flow positive in 2009 and on positioning us to the future. Bankruptcy would destroy shareholder value, our intent and focus is to enhance and increase shareholder value.

At this time, we'll be pleased to entertain your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michelle Clark from Morgan Stanley.

Michelle Clark - Morgan Stanley

Good morning.

Stephen Sadove

Good morning.

Michelle Clark - Morgan Stanley

Two questions, the first is if you look at your tables to inventory ratio; it went from 21% last year down to 12% this year. Just wondering what the key driver is behind that decline? And then the second question, would like to get your thought if things worsen beyond your expectations, any thoughts on possible asset divestitures? Thank you.

Stephen Sadove

Kevin, do you want to talk about tables?

Kevin Wills

Sure, good morning, Michelle. The decrease in the AP leverage is principally due to the reduction in receipts this year versus last year that we initiated in the December and January period. As we noted earlier, in an effort to get our inventory more in line, we took the markdowns but we also reduced receipts. So you've got reduction this year versus last year and that's what's driving the decrease in leverage.

Michelle Clark - Morgan Stanley

Okay. But there is nothing there in terms of the relationships with vendors or tightening of terms?

Kevin Wills

No, we have not changed any terms with the vendors and their payable terms and vendor relations continue to be consistent with past practices.

Stephen Sadove

And I'd also comment that we feel very comfortable relative to the currency in the inventory. As it relates to the second question which is, if the environment were to continue to worsen; we've looked at any number of scenarios in terms of what happens to the environment, what happens if the trends are worsened, we have contingency plans. We'll look at expenses, we'll continue to look at receipts in this environment. In terms of asset sales, we are not going to be selling off businesses. We certainly have unencumbered real estate that we always could take a look at. But I think that we are much more focused on the day-to-day operation of the business.

Michelle Clark - Morgan Stanley

Great. Well thank you and best of luck.

Kevin Wills

Thanks.

Operator

Your next question comes from the line of Deborah Weinswig from Citibank.

Deborah Weinswig - Citigroup

Good morning. Steve very impressed with your cost reduction efforts in 2009. Can you dive in some details in terms of what you're doing to reduce cost of procurement and also distributional logistics?

Kevin Wills

Sure Deborah, this is Kevin, good morning. As you are aware, we have been working really pretty hard during 2008 and certainly in the back half to identify cost reduction initiatives. We brought in Alex Partners. They have helped us through this effort. Some of those expenses we got out in the back half of 2008, others we'll see in 2009. But it was really a comprehensive program looking at all areas across the company.

You mentioned distribution, we're currently conducting a more comprehensive strategic analysis of our distribution. As it relates to the cost reductions, we have not seen much reduction right now in distribution, but we're optimistic as we complete the strategic plan we'll see bigger opportunities there. But the company is very focused on cost containment and control, and I am pleased with some of the actions that we've been able to deliver in 2008.

Stephen Sadove

Deborah, I'd echo Kevin's comments in terms, I feel really good about the disciplined focused. The Alex project was very successful in identifying procurement opportunities across every area. It could be in purchasing, ranging from paper purchasing to bags and boxes and really all elements of everything that we purchase beyond the products that we sell. I'd also say that we haven't captured the savings that we think are potential in distribution. Yet all of the dollars that were taken to the bottom line in '09 do not reflect the work that we're doing. We were working with Sam Delaney right now in terms of longer-term logistics opportunity as well as some of the opportunities to capture savings in the SAKS Direct business. Some of our practices there; it grows so quickly that we really have been more focused on growth in some of the cost savings and we do believe there is an opportunity there.

Deborah Weinswig - Citigroup

Okay, very helpful. And Steve you had said during your prepared comments, you hope you'd gain market share. Do you think it's permanent and how do you measure that?

Stephen Sadove

When I say gain market share, I think that that really has to do with it. You just look at what happened during that narrow period of time during November, December, January. If you'd look at our three months comps, let's say versus the Neiman three months comp sales and we were very promotional during that period. If I were to look at our top-line sales over the course of all of '08, I think that they where outsized relative to some of the competitors as well. This is on a top-line basis. If I were to look at it on a profitability basis, I don't feel good at all in terms of what we delivered in terms of profits during the period.

Let me just use this as an opportunity to make one comment. We had a material imbalance in supply and demand and we had to take some serious actions in terms of decreasing the inventory level. When we projected the policies in the fourth quarter, we were up 4% in inventory and we thought we would be low-single digits at the end of the year. By being aggressive in the markdowns and it did grow the share if you want to call it that relative to the sales. We got ourselves into a minus almost 15, 14.6% comp inventory decline at the end of the quarter. That's a material change in terms of the position that we were in coming out of the year.

It came at across in terms of gross margin. I don't feel good about the gross margin level, but I do feel good about where we came out relative to the product and the inventory levels. So, as a little bit... do I think that we can gain or keep the share long term? I think that's going to be about the execution. It's going to be about the service. It's going to be about the environment that we create in our stores. How we adapt to the new world and what Ron talked about in terms of how we buy store added and create the appropriate nine box so, that's going to be a longer term question.

Deborah Weinswig - Citigroup

And then last question, if you anecdotally add a lot of retailers at service levels have really send some part. We actually haven't heard that exactly for that ever has kind of continued on part. Can you talk about what you're doing specifically to maintain service level?

Stephen Sadove

It's an important topic and if that is the environment, that's how good I feel about how the store looks and how the service levels in the... that we're maintaining. It's a part of... it's all part of the, what we call the clientteling activity in the point of sale or project maximizer where we change some of the roles and responsibilities. We're focused on service. Our department managers are on the floor and are working with the associates. And we're talking about service all the time. In fact I just taped a video yesterday, where that's going to grab the entire organization that the focus is about service levels and I think it's customer expectations in this environment. Everybody is a little bit on edge right now. They feel horribly, they've seen their 401(NYSE:K) or their net worths are down by half and there is a little bit of taking it out in the environment and going to stores with a very high expectation. And what we're trying to do is get people to understand that people are coming in and aren't feeling as good as they did and we want to try to create a cheery environment for them.

Deborah Weinswig - Citigroup

Great. Steve, thanks so much, and best of luck.

Stephen Sadove

Thanks.

Operator

Your next question comes from the line of Lorraine Maikis from Bank of America.

Lorraine Maikis - Bank Of America

Thank you, good morning.

Stephen Sadove

Good morning.

Lorraine Maikis - Bank Of America

Did you have any stores at this point that are cash flow negative and are there any that you are considering closing in the near term?

Stephen Sadove

Yeah. We have a handful of stores, few stores that are cash flow negative. There are a couple of stores handful again that if I had a choice that I might be able would prefer to close. But it's not as simple as just saying let's go close the store. We have operating covenants. We have long-term relationships with the developers. We will continually discuss with the developer community. Are there opportunities for us to close an individual store? Examples, we did that in Fort Lauderdale earlier or last year where it was appropriate for us to close the store.

So we certainly are bashful to do it if it makes sense, but again these require discussions, negotiations with the developers. Clearly if a lease is ending and it's a cash flow negative store, then of course you would close it if it makes sense. But these are the kinds of things that we work with the developers on. But I wouldn't expect to see and the question is, are you going to be closing lots and lots of stores. In the near term, I just don't see that as being in the cards in the near term largely because one there aren't that many that are going to fall into that bucket, but it's also a question of what's able to be done with the developer community.

Lorraine Maikis

Thanks. And then you mentioned you are working with some of your vendors to try to lower price points. Is this encouraging them to put more at the entry price point or actually taking pricing down on existing products?

Stephen Sadove

I am going to ask to Ron to talk about because it's a very important topic.

Ronald Frasch

Lorraine hi. It's Ron Frasch. I think over the past four months, our entire industry has been working on the subject and trying to define the value. And I think right now the definition of value that we're working with is trying to redefine the opening price points based on what the consumer behavior is. So across the board, we've been working with the vendor community or identifying optimum retails or which product would perform best, creating levels of business that they haven't... in ranges as they probably haven't been at before, looking for classifications in categories of products that we can put out of the good price. You got to realize that this is all happened so quickly and obviously the supply chain lead times are long. So, the people are working as energetically as I have ever seen. And I hope there are some changes happening for spring and we hope to have more meaningful changes going into the fall and into the fourth quarter. But it's a high priority for everyone in this industry.

Lorraine Maikis

Thank you.

Operator

Your next question comes from line of Karru Martinson from Deutsche Bank.

Karru Martinson - Deutsche Bank

Good morning. Just following off of the long lead times for inventory, obviously, far enough feeling all that creative wealth where we are given sales trends here in the spring. But how are you approaching your buying for the second half of the year and I would say into 2010. Are you seeing changes on tightening those lead times or the ability to do so?

Stephen Sadove

I think you can see in the comments that we made relative to receipts that we're planning our receipts down about 20%. And that's our expectations going into the fall and the lead times on product are -- let's call in the six to nine month range overall. So our expectations are that we're going to get our inventories in line and clearly you're seeing our plan percent change consumption is not going to be as dramatic as that. So we think we're going to see some improvements in turn, as a result of that.

But I think that the reality is that I don't believe in the near term you're going to see dramatically shortening lead times. Everybody is talking about it. We're working very closely with the vendor community to try to make improvements in that. It's going to be an area of focus. But in this industry, I wouldn't expect that you're going to see a dramatic change in the near term.

Karru Martinson - Deutsche Bank

Okay. And in terms of the real estate here, you said some thoughts of monetizing if need be. I mean kind of what's the trigger for you all to make that decision? Where do we start to approach that as the source of liquidity?

Stephen Sadove

Kevin, do you want to take it?

Kevin Wills

Sure, as we look at 2009, we indicated we believe we're going to have ample capacity under revolving credit facility. We believe we are going to be free cash flow positive but we also realize that if we needed to do something, we have a very valuable real estate that provides us flexibility. We have not given our comment to a specific point that we will be making any type of decision or specific operating performance that would drive that, but rather we're just making sure everyone understands that we do have the unencumbered real estate.

Karru Martinson - Deutsche Bank

I think last quarter you had done some credit card promotions with HSBC. Wondering if there is kind of an update on the promotional activity approval rates, defaults and everything else that we have been reading about in the paper overall?

Kevin Wills

If you recall, HSBC owns the portfolio but we certainly were close with them. We believe our portfolio continues to perform very well for HSBC on a relative basis, no different than some other companies. We have seen some deterioration in some of the credit metrics. But on balance, the portfolio remains very healthy and we believe that HSBC certainly on a relative basis pleased with how the portfolio is performing.

Karru Martinson - Deutsche Bank

Thank you very much guys.

Operator

Your next question comes from the line of Adrianne Shapira, from Goldman Sachs.

Adrianne Shapira - Goldman Sachs & Co.

Thanks. Steve, you had mentioned not much of the margin deterioration, the function of the imbalance between supply and demand. On the heels of the aggressive discounting though how do you think about weaning customers off the deals as you try to move back to full priced selling, especially since inventories are obviously down pretty sharply?

Stephen Sadove

Alright, I think it's an important question and its one we certainly talk about all the time. I think it's important to step back from it in terms of understanding this industry, that luxury goods have a fashion season and that every year and every season you see markdowns taking place.

Now this season, the imbalance was much higher in terms of supply demand than you historically might see and so the discounts were deeper and there was more product. But if you were to... and it was very similar to; I would say what happened post 9/11, when you saw some very, very big discounting going on because you had this very sharp decline in consumption in a short period of time. I think that, I do believe that when you see more of a balance between supply demand, your products that people want to have, that they are going to be back in their buying cart. Now, if the demand is going to be as high as it was, clearly in the short-term it's not, and the supply is going to be lower. So when you get more of a balance at the end of the season you are going to see the traditional markdowns taking place as you do every year.

But I would anticipate that if you have more of a balance between the supply demand you're not going to see the kinds of discounting or it's unlikely you would see the same kinds of discounting going on just because you wouldn't have to. Whether the consumer is going to be buying at a full price, I don't know that we've trained them into a... they've managed to get... they were able to get some very good deals during the season, not just because Saks had a lot on sales, the entire industry had product on sale because the demand dropped off so fast.

This will be a question that will be resolved. We'll find out overtime. People are going to want different products overtime. I do believe that value and you heard it in Ron's remarks, value is going to be very important, but value is not just price. Value is quality, it's design, and it's the experience that people have and overtime people want brands, they want to have and I do believe that that won't go away. They're going to want a good shopping experience and that's all going to play itself out, but it's not going to immediately just go back to a normal environment.

Adrianne Shapira - Goldman Sachs & Co.

Thank you, that's helpful. And just on the heels, the discounting you did in the holiday season and then how you got a jump on your competition. Perhaps the lessons you learned what made sense, what worked well, what didn't work well and how you'll apply those lessons especially in the first half of '09 in terms of how you think about the promotional cadence. How deep you need to go, the categories and especially given the fact that your inventory is a little bit cleaner?

Stephen Sadove

In the hindsight, I think that we had to be more promotional. The industry had to be more promotional. We bought these products nine months in advance when we were growing double-digit. We went from a double-digit decline to a... well into the double-digit, I mean double-digit growth to double-digit decline. So when you have a discontinuity of 20 points, you are going to see that kind of products.

Remember, we didn't jump the competition also. What we did was we followed the competition in terms of timing, our competition broke before us. We made a decision once competition had gone that we would follow, but we were going to be much more aggressive in the amount of the decline. So I think that what we learned was that you have to follow the competition and you have to be aggressive.

In certain categories, we probably didn't have to go quite as deep. In apparel, we did have to go as deep. If you looked at even at the end of the season, while our clearance inventories were down and they were down across the board, there was still apparel that you could find, after all of this discounting went on. Where you probably instead of 70 or could have gotten away with 55 or 60 up might have been in the shoes and the hand bags. You can make an argument, we got wiped out in the shoes and hand bags relative to the clearance inventory. So we probably could have gone a little bit less aggressive in those two categories, but the bottom-line on it, I don't have a regret about being responsive and clearing our product. We are not going to liquidators, we're down 45% on the clearance inventory. We came into the season much cleaner and I think that while the vendor relationships, I got to tell you, Ron and -- I give him enormous credit having to -- working with the vendor community, it was an ugly period.

We ruffled some feathers, I think people -- when you go through the facts understood what we did, but it was a tough period relative to dealing with it. So the lessons learnt in terms of how you are going to operate on a go-forward perspective, I feel totally differently about -- one of our competitors made a comments in terms where this was a unique period in the fourth quarter, some actions were taken, they could probably never see again because I doubt in our lifetimes you're going to see, ever see a bigger disconnect between supply and demand as you did during that fourth quarter. Nobody would have ever expected that to have happened.

So I think our lesson learnt is to operate, act appropriately when you have to. The kinds of promotions that we're going to look at, I am not going to talk in terms of promotions, but we're going to be doing the appropriate thing recognizing what kind of an inventory position we're in.

Adrianne Shapira - Goldman Sachs & Co.

Thank you.

Operator

The next question comes from the line of Emily Shanks with Barclays Capital.

Emily Shanks - Barclays Capital

Good morning. Can you please give us what the revolver availability was at the end of the year and what the amount of letters of credit were as well? Please.

Kevin Wills

We had outstanding approximately 156 million on the revolver and there was about 25 million any point of time outstanding under the LC and the capacity was 500 million.

Emily Shanks - Barclays Capital

Okay, capacity was 500 million?

Kevin Wills

Yes.

Emily Shanks - Barclays Capital

Okay, great. And then, as we look at the gain on unutilized assets during the quarter, can you please indicate which line item on the P&L that gained, and then secondly, where exactly were those properties?

Kevin Wills

We had a couple of excess properties held over from the department store group. The mall properties that we disposed off during the quarter, and things -- they were not related to the Saks Fifth Avenue business. Had a Des Moines office building that was one of our facilities that helped the Yonkers operation. And we had a very modest mall interest in one of the department stores that we decided to sale. And I am sorry what is the other question?

Emily Shanks - Barclays Capital

Just where it fell in the P&L?

Kevin Wills

Give me one second.

Emily Shanks - Barclays Capital

Thank you.

Kevin Wills

It would be in the other income.

Emily Shanks - Barclays Capital

Okay, great. And then if I could, as you spoke about your unencumbered real estate. Are you guys looking at sale lease backs at all specifically, and do you feel that there is capacity in the markets for that right now?

Kevin Wills

We've made no comments on anything that we may or may not be looking at. We do have some ability to do a limited amount of sale lease backs within a revolver and senior notes. But we're not making any comments on anything that we may or may not be looking at. Again we're just trying to point out that we do believe there is significant value in here in our real estate.

Emily Shanks - Barclays Capital

Okay. And can you comment on what that capacity is?

Kevin Wills

Under the sale lease backs?

Emily Shanks - Barclays Capital

Yes.

Kevin Wills

We can do 50 million a year plus half of the prior year $50 million basket if we did not utilize it in the prior year.

Emily Shanks - Barclays Capital

Thank you. And then if I could squeeze in one last one quickly, what percent of your stores are mall based and have you seen any difference in performance of those that are traditional mall based versus others?

Stephen Sadove

I don't think we're seeing dramatically different performance one versus another. The vast majority of our stores are mall based.

Emily Shanks - Barclays Capital

Thank you.

Operator

Your next question comes from the line of Dana Telsey, from Telsey Advisory.

Stephen Sadove

Hey, Dana.

Dana Telsey - Telsey Advisory Group

Good morning, everyone. Can you talk a little bit about, as you think about the current environment in the merchandising vendor re-alignments going forward, what do you see as the ultimate mix, whether it's based on price and brand and how do you work through getting there? And also in the current quarter the complexion of sales traffic versus transactions how do they differ from where the business started to where it ended? Thank you.

Stephen Sadove

Let me answer the first one, when we say current quarter, we're going to talk about fourth quarter.

Dana Telsey - Telsey Advisory Group

Exactly.

Stephen Sadove

Okay, let me give you a sense because it was really pretty substantially different than historical patterns. So for example, if you'd look at the third quarter, our units would have been up about 2% and our dollars per unit would have been down about 13%. If you looked at the fourth quarter, our units were up about 15% and our dollars per unit were down 27%. So... and that's a biggest swing that I have seen for us and the pattern that you saw earlier in the year would have been more aligned to what you saw in the third quarter.

So, what happened in the fourth quarter was we drove an enormous amount of units out the door and that's then reflected is going from a plus 4 comp inventory to a minus 14.6. And it came at a price which was $1 per unit going from minus 13 to minus 27. And the minus 13 was in a little bit more of a promotional environment as well when you're in the third quarter. So not much, but it was a little bit more than normalized, normally you would be seeing.

So that's what went on in terms of in the fourth quarter. If you saw from a traffic perspective, I would say that you are staring to see a deterioration in the type of the overall economy going on. So traffic trends for example in New York were much weaker in the fourth quarter of this year than they were in the last year. Part of it is driven by the tourism decline in the New York economic environment. And as we stated, New York was performing more poorly than we had seen in the rest of the portfolio. So traffic trends were deteriorating during the course of the quarter.

Let me turn it to Ron to talk about how he's thinking about merchandise mix and how that plays out during this environment.

Ronald Frasch

Hi Dana, it's Ron.

Dana Telsey - Telsey Advisory Group

Hi.

Ronald Frasch

It's a $64,000 question that you're asking. It's one that our team and our brand partners are collaborating on. We do think that everything you have seen over the past few months is still launched brands, as you're still buying brands. And what we're selling is interesting, and she is buying, but she is buying less. But they are still looking for things that are emotional that are colorful than have... they are clothes that she doesn't have in her wardrobe. As she's shopping her closet which is probably something everybody's written about. So there is a lot of, what we call closet shopping and a lot more item business. So with that knowledge what we've been working on with our brand partners is to try to find the components that can fulfill their wardrobe needs.

At the same time, we're trying to work with our brand partners on more exclusives, because we do believe that one thing that's going to separate our company going forward is in addition to our service and our marketing, we have to have great product. So I think this company, Saks has a team of really terrific merchants and we have great vendor relationships, and we are very energized by working with our team. So there is a lot of creative development going on. The categories as I mentioned earlier for price points and for exciting product, we delivered at the right time.

Stephen Sadove

Ron why don't you just give two examples for data. Talk a little bit about the Men's initiative and wear, because I think those are great examples.

Ronald Frasch

We have two programs that are important because our goods zone of business is really a foundation zone for Saks Fifth Avenue, one that we really service customers very qualitatively forever, this is the core business. And with the deterioration of the bridge business, we elected over this past year and we are working to redevelop and relaunch, which we actually are doing this week. We have in our catalog, in our February catalog. We have been working with brands to bring much more exciting product to them. We have rebranded bridge and cotton wear which gives a lot of clever marketing handles that we can play with. There should be an article tomorrow in Womens Wear daily about it, but it's bringing great value. It's not the bridge of old, it's the wear of now and we have interviewed lot of folks, focus groups, our own employees, try and get a better understanding of what they are looking for and what they want, because they want fashion. All of our stores are rolling that this week, and it's very interesting we are getting a lot of feedback from the stores, from people who are used to selling design and who are excited to selling some of these products that have been developed in this area. And we've created two exclusive lines that are now on the selling floors there, we are working on more with domestic designers.

The second one is our Men's clothing business where we have over the past 24 months have put together we think a very exciting program of tailored clothing, furnishings and sports wear, where they could be centered around kind of suitings from 995 to say 1195 is the bulk of them. And we have that rolling in some of it now. Some of it rolling in June and the big part of it is rolling in the fall with major brand names. So I really don't want to get into the obvious because they haven't... like our confidentiality with merchants. But we think it's going to be big hit and we're pretty excited about it and pretty confident, so those are just two examples of it.

Stephen Sadove

Then across the store you are seeing, using the good, better, best understanding of how we want to play within it and coming up with whether it's -- and the wear one is very exciting, because it's what you wear on the weekend, what you wear at work, what you wear when you're going out. It's very exciting and the product looks terrific. So we see that as being indicative of how we have to work across the good, better, best down the business.

Dana Telsey - Telsey Advisory Group

Thank you very much.

Operator

Your next question comes from the line of Bill Reuter from Bank of America.

Bill Reuter – Bank of America

Good morning guys.

Stephen Sadove

Good morning.

Bill Reuter – Bank of America

Just quickly following up on Emily's question, with the sale lease back capacity, is the ability to do sale lease back the same in your credit facility as the covenants in your senior unsecured bonds?

Kevin Wills

Yeah, there's a little bit of difference, but for evaluation purposes, again we can do we believe $50 million a year I think up to a cap of $250 million over an extended period of time, with again $50 million could be increased in any one year up to 25% of the prior year basket that we did not use.

Bill Reuter – Bank of America

Okay. I guess I was wondering whether your bonds gave you significantly more capacity than your credit facility for that?

Kevin Wills

It really doesn't matter. The one we are giving you is a lower threshold. So that's why ...

Bill Reuter – Bank of America

I guess, I was just wondering in the event that at some point you guys were to refinance your credit facility whether that would... you would have that incremental capacity?

Kevin Wills

Probably, I don't know. If we went to refinance, there will be a number of discussions that would occur relative to any type of new facility. So it'd be impossible to speculate now to how that might playoff.

Bill Reuter – Bank of America

Okay. I guess given your guidance for buying this year, purchasing as well as sales, what are you guys assuming for working capital for the year?

Kevin Wills

We have indicated we will be taking purchases in inventory down about 20%. So you should see a significant improvement year-over-year in the working capital.

Bill Reuter – Bank of America

Okay. I guess lastly given where you guys are planning on taking inventories. Do you have an assumption for where you think the lowest borrowing base in your credit facility could be?

Kevin Wills

We have not provided any comments relative to projected monthly capacity or unique points during the year. But the low points and availability would correspond to our inventory balances which tend to be lower at the end of second and fourth quarters. But as I stated earlier, we certainly believe that we've got ample capacity as we move throughout the year at any point in time.

Bill Reuter – Bank of America

All right. Thanks guys.

Operator

Your next question comes from the line of Bob Drbul from Barclays Capital.

Robert Drbul - Barclays Capital

Hi good morning. The question I have is can you give us the comp for the flagship in the fourth quarter? And how are you planning the flagship sales for 2009 over the progression of the year?

Kevin Wills

We don't break out the comp for the flagship for the quarter. I would tell you that it was lower. It was poorer than the numbers that we reported in aggregate. So while it has been a substantial outperformer in '07, it was an underperformer in the quarter in '08. As we... on a go forward basis worst, we build that similar assumption going into '09 that for right now we're seeing -- and long term I think it will be fine. But if we look at what's going on with the financial community, what's happening in the New York City economy. Today, we're assuming an underperformance in the New York store.

Robert Drbul - Barclays Capital

Okay Great. A question for Ron; in terms of SKUs, is there a number on SKU reductions that you're targeting in 2009 with this decline in inventory that you're talking about as well?

Ronald Frasch

Bob, it's a good question. What we haven't done is, we haven't reduced on the SKU level. What we've done is we remodeled buys by store on a SKU level, so that we have... so once we take the inventory, recommended inventory reductions then we're remodeling the presentation by store, by brand based on the average retails that were forecasted for each brand going forward, so that we have the appropriate SKU, presentation in the stores.

Robert Drbul - Barclays Capital

All right. Thank you very much.

Operator

Your next question comes from the line of Todd Slater from Lazard Capital.

Stephen Sadove

Hey, Todd.

Todd Slater - Lazard Freres

Hi guys. Herculean job on the inventory. That's great news. Ron, I was hoping maybe you could close things out with a classic sort of early spring best seller recap in terms of what is selling now? What sort of casual versus dressy, dresses versus shoes may be premium denim trends, what brands are working here, or you feel comfortable talking about. Do you have enough, what colors are grabbing, gravitating to anything like that will be great?

Ronald Frasch

Well, what's interesting is what is selling. I think it's a good question. As I said earlier, what we are seeing, people are filling in their wardrobes, particularly women are filling in their wardrobe and they are not shy about fashion. They are buying, we have sell-throughs in some of the runway deliveries and more fashionable deliveries right now that are much better than the earlier delivery which is quite exciting. They're not buying as many for sure, but what they are buying are items that are important looking, that are a good statement, of interest our evening business happens to be very strong which I don't understand at all price points.

We're selling a lot of blouses, we're selling a lot of knitwear, we're selling a lot of color, we're selling a lot of threads and we're selling a lot of dresses. But it's all items when you take a step back and look at that, then you can see that there are items that are working within the current wardrobe and enhancing that.

They clearly are interested in color and they are clearly interested in novelty and texture. That would be the men's area. In the handbag area it's... we're still selling a lot of handbags between a $1000 and $1500, if they look at the price. Once we get over $1500 other than Chanel, it begins to slowdown. Although there is a really big push for novelty handbags under a $1,000. We're seeing a huge growth in our business there.

In shoes, if it's a plain shoe, it's not selling. If it is aggressive fashion shoe, it's up. So we're getting very good performance with some of the brands that have relatively smaller business as far as in footwear, like [inaudible], we've very aggressive shoe offers and it's exciting to see that. The men's business has been tough for sure although we're selling footwear to selling sneakers. Sneaker business is very strong. Contemporary business in men's wear is less worse. Does that give you a good flavor?

Todd Slater - Lazard Freres

Yeah, that's helpful. Thank you.

Ronald Frasch

Sure.

Operator

Your next question comes from the line of Christine Chen from Needham.

Christine Chen - Needham & Company

Hi, there. Thank you for taking my question. Just to piggyback on Todd's question I was curious if you could comment on how women are feeling about denim?

Ronald Frasch

They are feeling two ways. If it's a basic denim they are not feeling so good. If it's any of the new fashion denim, any of the tight leg, the narrow leg denim, it's very strong fashion denim, it's performing very well. We're very quickly trying to adjust our inventory model because as you probably know it's more weighted to replenishment goods in the basic category.

So we're working very quickly with the brands to reorganize the inventories but it's interesting that you mentioned because it plays into everything that we see selling, denim is exactly the same, there is a lot of interest in those skinny legged jeans, skinny legged leather pants etcetera.

Christine Chen - Needham & Company

Is it fair to say that you probably expect some sort of consolidation within that space and the leading brands will continue to take up more floor space, is that a fair assumption?

Ronald Frasch

No, I don't think so. I think it's really some try to derive it and these brands are very fast and the brands that can react the quickest and be able to adapt the models to what the customer is asking for, we are going to buy. And whatever they see in girls wear, in the men's style and all the other publications is a big influence for its customer.

So they generally, I don't see the space changing. I just see a constant newness coming on, the core brands will adjust their models and get back in the game and so I wouldn't see it that way.

Christine Chen - Needham & Company

And if the fashion is right, is price point an issue?

Ronald Frasch

We haven't seen that at all. Really hasn't played strongly in denim.

Christine Chen - Needham & Company

Great. Well, thank you so much for all the detail on product, that's really helpful.

Ronald Frasch

Sure.

Operator

Your next question comes from the line of Jonathan Boyar from Boyar Asset management.

Jonathan Boyar – Boyar Asset Management

Good morning. My question is just, you've said your intent and focus is to increase shareholder value and I just wanted to know how you reconcile this with this philosophy with the implementation of the poison pill that you recently have done. Thank you.

Stephen Sadove

I think that what we wanted to do was we have some -- just by way of background now, the poison pill would come into effect if anyone were to take a holding of in excess of 20% equity in the company and there were number of provisions that we had within our revolver that would indicate that we wanted to send the signal that we didn't want people to go in excess of 20%.

This was not targeted at any individual at all. And what we wanted to do is send a signal to the marketplace that it would cause us a problem. If in fact, they did go over the 20% level and trigger a provision that was in our revolver because it will make no sense to get into that kind of a situation. We always have the opportunity not to... if in fact for some reason it was appropriate, we don't have to put the tell into effect.

So that's something – is a safety valve for us to use if we want to use it. So I think it was really a conservative protection measure, one that we think was appropriate, but it was very important to us to let people know that this had to do with our covenants and our revolvers much more so and had nothing to do with anything that was specifically geared towards any investors.

Jonathan Boyar – Boyar Asset Management

You would listen to an offer if it came to you for taking a larger stake in the company?

Stephen Sadove

We'll always listen. I think we've always listened to anything I think we're very shareholder friendly and we'll continue to be shareholder friendly.

Jonathan Boyar – Boyar Asset Management

Okay, thank you very much.

Operator

And your next question comes from the line of Kelly Kie from Eaton Vance (ph).

Unidentified Analyst

Thanks for taking the question. I was just hoping to get a little bit more clarity on your pricing strategy and creating that good, better, best differentiation. Are you asking designers to create exclusive lines for Saks perhaps sub-brands? And secondly, is the magnitude of price decline that you would believe would drive greater sales like as an opening price point is that number 10% below levels that we've seen or is it 50% below, just a little color there will be helpful.

Stephen Sadove

Let me start it and then I'll turn it to Ron. First of all our good, better, best model is within luxury, it's very important that someone looks at our good, better, best we understand that we're a luxury player, that we're committed to luxury. And that our good is what we would call the bridge not the wear price zone, but just the bridge price down. Some people would say that's expensive stuff to begin with.

So, what we're looking at is a tweaking within the good, better, best understanding what's the right mix for every brand. Some major brands have always been doing good, better, best. The Louis Vuitton for example, does a wonderful job of assorting within a good, better, best model. So, I'm not so sure that it's driven by, we're going to move to good down 10% or X percentage. It's really understanding what is the appropriate mix for each of the brands that we sell and how do you want to evolve that mix. Ron, do you want just--?

Ronald Frasch

Yes, it's exactly what Steve said. It's both working with existing brands to ensure they have got a very balanced fashion and price point offer within their mix, especially within our good, better, best concept. And then within our good zone we're working very diligently with brands and yes we're working with some brands, we have had brands create exclusive collections for us. Our exclusive price points for us, this is a pretty big focus of what we're doing right now. And we're very energized by selling the brands quite frankly, we're very exited about this. We see an opportunity to really service their customer, engaged in customers through Saks Fifth Avenue.

Unidentified Analyst

Okay. So as you're looking to rationalize SKUs right now and you said that you're eliminating some brands and adding to some others, that's a separate discussion from pricing things correctly, right?

Ronald Frasch

Absolutely right.

Unidentified Analyst

So you're not trying to de-emphasize like the Coutureproducts.

Ronald Frasch

Well, it's not just anything. I think that the actions that we've taken this past year really underline the fact that we want to do better, which has been our foundation. Our New York store alone, the third floor, designer floor will be finished this summer. And then it will be the premier destination for designer women's apparel in the world we believe. And will have the same impact as our shoe floor has. At the same time, we're in the process of re-energizing the wear floor and please come over and see, because it's pretty exciting.

Stephen Sadove

What Ron's talking about some point, I was reading an article, I heard somebody was making a comment, Saks no longer is committed to luxury which is absolutely silly, because we are spending tens of millions of dollars on the investment on the third floor in New York and we just put in a key time shop which probably is the most expensive clothing in the Men's area. And we are around the country, but we are editing resources. And we are doing it at the good zone and we are doing it with the best zone. We need to improve, we are not happy with the gross margin where we're at. And part of getting us to an improved gross margin is going to have the right resources in each of the stores and taking actions. So of course we are going to be pruning and as the business is 20% smaller, then clearly you're going to have to do editing. It doesn't make sense to just doing it across the board cut. It makes much more sense to look at what are the brands that you can growth with. Where do you think the fashion is right, and where do you think you are going to be able to make an appropriate investment.

Unidentified Analyst

Okay. Great thanks for the clarification.

Operator

Your next question comes from the line of Michael Exstein, from Credit Suisse.

Stephen Sadove

Good morning, Michael.

Michael Exstein - Credit Suisse

I know it's been a long, long call so I will try to make it very quick questions.

Stephen Sadove

You are usually on earlier.

Michael Exstein - Credit Suisse

Well I am not always on anytime anyway. Just in terms of the... one of the things that has happened to luxury I'd be the interested in Ron's comments whether many of the brands been over distributed. Whether you hear any moves to restrict distribution or narrow distribution? From the sounds of you comments, it still sounds like Women's is weaker than Men's. Is that the right inference and if so, what do you read into that?

Ronald Frasch

So far we have not felt any impact of restricting distribution. I think the brands we are all talking about is, they are all looking... they want to protect their brands. So we've been really -- a lot of really great sessions with our brand partners in terms of what that means and how to be good partners with each other, both of in terms of the products that's being offered as well as the distribution that they have in the marketplace as where we are. So I don't think it's going to be an issue for us at all I think.

Michael Exstein - Credit Suisse

But how about for the industry as a whole? How are they are going to... do you think they are going to restrict distribution of that in terms of closing down from their own store funds?

Stephen Sadove

I think Mike let me just jump in for a second. First of all I think that there... it's going to vary all over the lot. Walk up and down Madison Avenue and look at the number of open empty shops that you see, and in this environment you are finding a number of the vendors are finding they are having a very tough time being retailers. And so you got to separate who you are talking about when you think about how they are thinking about distribution.

So in some cases, we're seeing vendors, for example, coming to us and saying that they want to play more heavily with us because they don't want to be doing as much in the way of retail. And other cases you've got the brands looking and saying what they want their distribution model to look like. I think Ron has done a terrific job of working with the vendor community, making sure they understand our commitments, working with them, investing quite a lot into a number of stores with -- as we have for the last period of time with renovations and putting in new shops and making sure that as they think about their distribution in a given city, that they factor in what our capabilities are. So it really does vary on a vendor by vendor basis in terms of what their needs are and how we can play into that.

As it relates to your question on Men's versus Women's, through the fourth quarter, our Men's business was holding up a bit better than the Women's business. But I would tell you that they are all weak. They've all been weak.

Michael Exstein - Credit Suisse

But normally, when we get recession, the Men's business falls out a bit much faster?

Ronald Frasch

I think there's so much that plays into that. The last time we went through this that was about ten years ago when we were ahead of the end of the 90s, when the dot.com boom. What was happening simultaneously was that was the change in casual dressing environment at works. So the Men's business really was hurt badly. It does seem to be a sense that men want to appear more appropriate, if I may say that. We are definitely seeing a interest in guys dressing appropriately, a lot of people may be looking for jobs, a lot of people may be wanting to look better in their own jobs. So they are not on the lists. But we're certainly seeing a much more stronger sense of a more formalized dressing for guys.

Stephen Sadove

We're going to expect to see you in a suit, next time Michael.

Michael Exstein - Credit Suisse

Well, I don't know what to say about that. Thanks a lot guys.

Stephen Sadove

Thanks.

Operator

Your next question comes from the line of Patrick Sellar (ph) from Decade Capital.

Unidentified Analyst

My questions has been answered. Thank you.

Operator

We have a follow up question from Adrianne Shapira from Goldman Sachs.

Stephen Sadove

Adrianne, are you there? Operator, I don't think Adrianne is on the line.

Operator

Okay. There are no further questions at this time.

Stephen Sadove

Great, well thank you all very much and we look forward to speaking with you next quarter. Thanks again.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Saks Q4 2008 Earnings Call Transcript
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