Charming Shoppes, Inc. Q4 2009 Earnings Call Transcript

Charming Shoppes, Inc. (CHRS)

Q4 2009 Earnings Call

March 18, 2009 9:15 am ET

Executives

Gayle Coolick – Vice President, Investor Relations

Alan Rosskamm – Chairman, Board of Directors, Interim CEO

Jay Levitt – President, Fashion Bug

Eric Specter – Chief Financial Officer, Executive Vice President

Analysts

Scott Krasik – C. K. King

Jeffrey Stein – Stein Research, Soleil Securities

[Sabina Battia – Bosco Capital]

[Frank Bianco – Lazard Asset Management]

Presentation

Operator

Welcome to the Charming Shoppes fourth quarter and year end 2009 results conference call. (Operator Instructions) With us today are Alan Rosskamm, Chairman of the Board of Directors and Interim CEO of Charming Shopppes, Eric Specter, CFO, Executive Vice President and Jay Levitt, President of the company's Fashion Bug Brand. I would now like to turn the call over to your host, Miss Gayle Coolick, V.P. Investor Relations with Charming Shoppes, Inc.

Gayle Coolick

Thank you all for joining us this morning. Today's discussion will contain certain forward-looking statements concerning the company's operations, performance and financial condition including sales, expenses, gross margin, capital expenditures, earnings per share, store openings and closings and other matters. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those indicated.

Information regarding risks and uncertainties are detailed in the company's filings with the SEC including the company's annual report on Form 10-K for the fiscal year ended February 2, 2008. Our complete Safe Harbor statements and today's prepared remarks are available at www.charmingscoppes.com.

At this time, Alan Rosskamm, our Chairman of the Board and Interim CEO would like to share his remarks about our business, our financial condition and progress of our ongoing initiatives.

Alan Rosskamm

Good morning. I would like to briefly review our quarterly results and comment on our liquidity and cash position and provide an update on a number of the initiatives underway at Charming that we feel will not only enhance our cash flows but will also provide the focus to build an exciting and successful future based on our unique positions as the nation's largest specialty retailer serving the plus size women's apparel market, then Jay Levitt the President of our Fashion Bug division will provide his thoughts and plans on transforming Fashion Bug into a value apparel retailer focusing on a more sharply defined customer audience. Finally Eric Specter will provide a deeper review of our operating results as well as an update on our credit securitization program.

Although we will do our best to anticipate some of your concerns in our prepared remarks, we will then open the call for your questions.

Our fourth quarter results on an operating basis were in line with our November guidance. Improvements in the merchandizing margin at Lane Bryant and Fashion Bug and our aggressive management of expenses allowed us to meet our operating plan despite lower than planned revenues during the quarter.

We achieved our goal to end the year with clean inventories which were down 16% on a same store basis. Our plans moving into fiscal 2010 include continued focus on driving inventories down in order to drive gross margin improvement and increase inventory turns. This will also enable us to provide our customer with an exciting, consistent flow of new fashion product throughout the year.

Our strong liquidity position at the end of the year included $100 million in cash, cash equivalents and available for sale securities compared to $74 million a year ago. We generated approximately $26 million in cash in this very difficult climate through aggressive efforts to liquidate inventory, significant reductions in capital spending and realized cost savings from previously announced initiatives as well as from the sale of the non core Mrs. apparel catalogues.

We again ended the quarter with no borrowings on our revolving credit facility. This facility is committed through July 2010 and as of January 31, 2009 the available borrowing capacity on this facility was $206 million which is a source of liquidity above and beyond our substantial cash balances.

Looking ahead, we expect to generate positive free cash flow during fiscal 2010. Our analysis assumes growth in working capital through continued inventory management, gross margin improvement, further paring down capital expenditures and the achievement of substantial savings through our cost reduction program which I'll provide more color on in just a moment.

I'm pleased to announce today the renewal of our $50 million asset securitization funding facility for another year. When combined with other existing asset securitization facilities the availability for our credit card receivables program is expected to exceed our needs for fiscal 2010. Eric will provide additional details later in the call.

On a GAAP basis, we posted a significant loss for Charming Shoppes for the full year. Ironically, just two years ago we posted record earnings. I would like to spend the rest of my time on the call reviewing the aggressive actions we are taking to right size our expense structure and to improve our strategies for providing a merchandising and marketing program that will focus exclusively on our core brands and quickly return us to profitability.

In November, we announced a significant restructuring plan geared towards optimizing our cash flow and operating efficiency with a targeted total expense savings goal over two years of $100 million to $125 million with $75 million expected to be realized in the fiscal year 2010.

Results to date have been favorable and I am pleased to report that we are ahead of schedule. We now expect to realize cost savings of approximately $125 million in the current fiscal year. Our effort addresses all selling, general and administrative spend areas including corporate overhead, indirect expenses, store operations as well as store occupancy and supply chain.

At this time, I would like to offer more color on how we are getting there. Reductions in overhead are focused on right sizing our expense structure to reflect a leaner, simpler business model and have resulted in a meaningful work force reduction primarily at our corporate and divisional headquarter offices.

Savings pursued with indirect expenses will come from renegotiating all not for sale goods and services including everything from store supplies and services to printing and paper to professional services, and obviously many more.

In selling expense, significant savings are planned in store labor based on efficiencies planned from implementing new labor scheduling models and better leveraging and realigning our field management as a result of store closures.

Efforts in our supply chain include changes in frequency of store deliveries, cost reductions in domestic and international freight and reflect a reduced and smoother flow of merchandise receipts.

We have identified stores that are generating negative cash flow with the store level and have received a number of rent reductions from our landlords to enable many of those locations to become cash flow positive. We will reduce occupancy expense through more such rent reductions or by closing the majority of those stores where our rent reduction efforts are unsuccessful.

Currently, we expect to close approximately 100 stores; however this number will likely fluctuate relative to the degree of success we have in our discussions with our landlords.

We have made additional progress on our strategy to removed distractions and non core assets as we simplify our business. Our Figure Magazine which launched in 2003 has been discontinued and our last issue is on news stands now.

Our Lane Bryant woman's catalogue is in liquidation mode with the last catalogue having been mailed in February. We expect to move through the remaining inventory in the next few months. We've also made the decision to discontinue our on-line shoetrader.com business and expect to close the web site by September.

Much of today's discussion, quite appropriately focuses on playing effective defense including inventory controls, disposition of non core assets and the $125 million in cost savings. Beyond the actions we are taking to simplify our business and manage for cash in this difficult economy, we are also playing aggressive offense and believe we have meaningful business improvement opportunities unique to Charming Shoppes.

Last month, we announced that e-commerce's Bill Bass had joined us with responsibility for our direct to consumer and e-commerce businesses. He is also charged with the oversight of the development of an entirely new and upgraded e-commerce platform and the consolidation of our Charming direct business in Salem by closing the New York and Tucson direct offices, Bill's running and is finalizing plans to outsource the e-commerce platform.

All of our core brands will share this common infrastructure by this summer when we will begin launching our new web sites one at a time providing an improved online experience for our customers. Our objective is to improve customer conversion rates and substantially grow our brands' e-commerce penetration in the second half of the year.

As the experts in women's plus size apparel, our objective continues to be to offer unique and exclusive merchandise assortment for our customer at better values and with better gross margins. We have acquired leadership and design talent and have realigned our organizational structure and processes to better support this objective.

We have implemented product life cycle calendars that work on a faster cycle from product concept to in store selling. Staff training has commenced and will continue for the next several months as increased flow of fashion deliveries to our store are expected to begin this fall, with the process more fully implemented by the spring of 2010.

Our international sourcing division will of course play a critical role in increasing our percentage of merchandise source directly. This week we announced the appointment of Visa Vei as President Asia, overseeing our multi-country sourcing operations. During her extensive 25 plus year career in international sourcing, our which 19 years were in direct sourcing with the Gap, she has developed the critical and expertise required in order to oversee the transition and the growth of our international sourcing operations.

On March 31 of this year, we will officially launch a preferred vendor selection program. During the first stage of this program we will seek to identify key suppliers both overseas and domestically to support growth innovation and savings which will be beneficial both to Charming Shoppes and to our vendors.

Incumbents as well as new vendors will be evaluated to determine which can best support our strategic goal to provide a unique fashion point of view with brand appropriate quality, on time deliveries, appropriate speed to market and cost.

Finally, it is will within our control to improve our merchandising strategy. We brought in highly qualified and seasoned executives to read our core retail brands. Brian Woolf, Brian J. Levitt at Fashion Bug and Carol Williams at Catherine's and we promoted Mary Ellen McDowell to lead our outlets business.

Each of our brand leaders has developed improved strategies in order to better hone the fashion point of view for their brand and provide a merchandising and marketing program that will focus exclusively on their defined target customer. Most of the benefits of those efforts will become apparent by the second half of this year.

Last quarter, Brian Woolf joined us on this call to speak about the exciting merchandise initiatives that were in process at Lane Bryant. Hopefully, some of you have already seen his efforts in our recent March Mag log which has been expanded to 34 pages of outstanding fashion merchandise. We also added for the first time a 1-800 number to give our customers one more convenient way to shop us at Lane Bryant.

When I hired Jay Levitt in September we brought him in with the mission to reinvent Fashion Bug, our most neglected brand. Jay and his team have been working with a tremendous sense of urgency and I am delighted at this time to introduce Jay to share some of their progress with you.

Jay Levitt

Good morning. I'm very pleased to join the call today and provide my observations and forward plans for our Fashion Bug brand. Since taking the helm at Fashion Bug last September, I have been very impressed with the loyalty of our Fashion Bug customer and the strong passion of our team to bring a broad range of customers across multiple age and size ranges.

Ultimately, we laced the clarity and focus to attract new customers into today's highly competitive retail climate. One of our first actions was to evaluate our current market position to establish a more focused brand. As we evaluated our products, I would make a number of call outs.

Our assortments were too broad and we were over assorted with too much old inventory. We consistently carried too much inventory and front loaded too much of our buys in the first and third quarters, making seasonal conversions difficult.

We were too concentrated on the week end casual lifestyle such as jeans and T-shirts while underplaying the dress up, business casual and active lifestyles where we can excel. We lacked consistency in our styles carried between Mrs. and plus sizes, and our approach to product development was not competitive with vertical retailers.

Now, we are narrowing our focus in a number of ways. We will be targeting a 35 year old larger Mrs. and plus size customer providing her lifestyle needs in current and stylish clothing at the lowest possible price. As we look at the competitive landscape, we see our pricing on par with Target, Kado and Old Navy and below an Avenue, Dress Barn, Kohl's and J.C. Penney's.

We have eliminated the juniors and girls department and have liquidated that entire inventory. Combined, these businesses represented only $61 million or 7% of our sales and we were not a competitive factor in these businesses.

Starting with June deliveries, we have eliminated Mrs. size zero, two and four to focus our brand on sizes six through 30. Also beginning with June deliveries, we will start to shift our brand message exclusively to a Fashion Bug label, eliminating Getana, Studio 1940, L.A. Blues, Elements and the Enchanted off brand names.

When I joined the company last fall, we had a high/low pricing model with most of our initial retail starting too high for our target customer. This spring, we have introduced winning price which supports our new positioning with much more compelling up front ticketed pricing.

As we go forward into fall, we have negotiated significant cost reductions with our suppliers which will allow us to provide even sharper pricing and value to our customers.

Initially, I worked to define the merchandise themes, ideas and colors in advance of the season and conducted workshops with our top resources to create our lines more collaboratively. They did a terrific job of following our direction and we have a much tighter, more cohesive line for this fall.

Additionally, one of the key initiatives we are aggressively implementing is the execution of the company's vertical strategy which will start to impact deliveries to our stores in December, and this will enable us to create true proprietary product with a distinctive and consistent esthetic, and drive true value for our customers.

We have made several strategic improvements to our organizational structure. Late last year we hired an executive to lead our design and product development. More recently, we hired a senior merchandizing executive and promoted another. This has allowed us to reorganize our org chart and planning and buying to change from a Mrs. and plus orientation to the four lifestyles of dress up, business casual, weekend casual and active wear.

This means that when one of our customers visits our stores starting in August, instead of seeing Mrs. on one side of the store and plus on the other, they will see a store organized based on their lifestyle needs with dress up and business on one side of the store and casual and active on the other. Our marketing and in store signage are being strengthened to reflect our messaging on sharper prices and value proposition.

One last point is, I sent a letter to our customers recently to communicate our value pricing and received over 3,000 responses on the first day, mostly thanking us for taking such action during these difficult times.

In closing, I want to share my enthusiasm for our vision of the Fashion Bug brand. In my 30 years in the business, never have I been so excited about an opportunity as I am with the one that we have with this company. We are solidly on a path to transform ourselves with a more focused brand positioning, strengthened value proposition, improved processes and a realigned organization to support our objectives.

I'm very confident with the management team that we have in place. They are passionate, committed and capable leaders and together we'll energize this company and excite our customers.

Eric Specter

Good morning everyone and before we open it up for Q&A I do want to make a few comments about the fourth quarter and the full fiscal year. Our results today include a number of complex accounting issues and non cash charges and I'd like to cover some of these announcements in a little more detail.

We continue to receive questions about the funding needs and capacity of our credit card receivable asset securitization program. As Alan mentioned, we are pleased that our $50 million asset securitization funding facility has been renewed through March 30, 2010. When combined with other existing conduit facilities, our total funding capacity through bank conduit facilities is $155 million through 2010 and combined with our current outstanding term series facilities, our current funding structure provides availability of $655 million.

Next month, our $180 million term facility is scheduled to begin amortizing and we plan to meet amortization needs through our fully available $155 million of bank conduit facilities. At January 31, 2009 we had $536 million of secured ties credit card receivables outstanding. We expect this to be the peak level outstanding for the fiscal year of 2010 with a range of $490 million to $510 million of outstanding securitized credit card receivables throughout the year. As such, our availability is expected to continue to exceed our funding needs during fiscal 2010.

Additionally, we are extremely pleased with the continuing strength of our overall liquidity including increased cash balances and undrawn and fully committed revolving line of credit and a demonstrated ability to generate cash in one of the most challenging economic environments this past fourth quarter.

The performance, shifting now and talking a little bit about our credit card performance during the fiscal year as well as fourth quarter, credit operations continued to meet our plans even in this difficult climate. The contribution from credit operations of $38.5 million during the fiscal year 2009 slightly exceeded the previous year's performance, largely driven by higher interest revenues and reduction expenses which were more than offset by higher charge off rates.

We maintained a very healthy net excess spread in the mid teens during the entire fiscal year of 2009, and unlike general purpose credit cards with typical balances in the thousands of dollars, Charming Shoppes private label program which is used exclusively in our retail stores and websites have average balances of approximately $300.00.

Shifting now to some of the charges, one time non recurring charges we took in the fourth quarter, and I will just elaborate on some of the more significant ones here. As part of our annual review, we completed our good will and asset impairment testing as required by GAAP. Based on the macro economic climate and its performance outlook, we recorded a pre tax non cash good will impairment charge of $43.2 million related to the good will for the acquisition of Catherine's Plus sizes.

We also recorded a non cash store impairment charge of $16.6 million and an intangible asset impairment charge of $1.5 million related to the impairment of trademarks and trade names.

Shifting now to finally talk about our outlook for first quarter, for the quarter ending May 2, and it includes a number of items. On a non GAAP basis, we are projecting a diluted loss per share from continuing operations in the range of $0.03 to $0.07. This includes a tax provision for income taxes of approximately $0.02 per diluted share.

On a GAAP basis, we are projecting a diluted loss per share in the range of $0.09 to $0.13 which includes charges of approximately $7 million or $0.06 per diluted share for the execution of our business transformation initiatives, the majority which are non cash charges.

Additionally, the accounting rules for convertible debt which was issued in April 2007 has recently changed and our projections do not include the non cash impact of the adoption of this rule change which is effective at the beginning of fiscal 2010.

Our projection for the first quarter does assume net sales from continuing operations in the range of $535 million to $545 million compared to net sales from continuing operations of $641 million for the period ended May 3, 2008. This assumes decreases in consolidated comparable store sales in the low double digits for the company's retail store segment.

Additionally, we expect double digit reductions in inventory during the first quarter of fiscal year 2010 in order to benefit our operating performance including improved gross margins as well as the continued generation of free cash flow throughout the quarter.

We do not expect any borrowings during our first quarter which typically is a time that we do borrow, and in fact a year ago, we did have borrowings at this time although there were no borrowings at the end of the first quarter.

Additional financial assumptions for fiscal 2010, now this is full year assumptions, we're planning our net capital expenditures and we're projecting those at approximately $24 million for the full year. Our depreciation and amortization is projected at approximately $80 million for the full fiscal year.

As far as store activity, we're planning six store openings. These are leases that were entered into well over a year ago. Some of them were fall out from 2008 and will now open in 2009 and we're projecting 12 relocations primarily at our Lane Bryant brand and 100 store closings as we previously announced in November.

Just to make a final comment on the outlook, there is a GAAP to non-GAAP reconciliation at the end of our press release that we issued this morning.

With that, I will turn it back to open up for Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Krasik – C. K. King.

Scott Krasik – C. K. King

I missed some of the comments on the credit card file. Did you say what the net benefit to the income statement was in the fourth quarter, and I know you mentioned the lower average balances but what's the outlook in terms of where it goes from here?

Eric Specter

The comment I did make was for the full fiscal year where we did record a contribution which again, for those on the call, the contribution of our credit operations is an offset and reduction to our selling and general administrative expenses. I did mention that for the full year. It was slightly up from prior year of $38.5 million. For the quarter we generated a little over $7 million of credit contribution that's recorded in our fourth quarter. That was on our plans and for the fourth quarter, slightly below where we had recorded contribution from a year ago.

As far as the outlook, I'll only speak to right now as we delivered a first quarter outlook, we are seeing although slightly a very modest increases in our charge off rates. We were well within our plan for both the full year as well as the fourth quarter. Those slightly increased charge off rates are more than being offset by reductions in the credit card operating expenses as well as the interest and fee revenues that we're receiving off of the proprietary card file, and we expect that to continue as we move through the first quarter of the fiscal year.

Scott Krasik – C. K. King

I guess maybe talk about how quickly you think you can get back to acceptable gross margins at Fashion. Do you need to implement the vertical strategy or just with a merchandising changes, can you get there before that?

Jay Levitt

I would say that my focus has really been cleaning up the inventory and you could see in our fourth quarter results the impact of that and in terms of where we are on our carryover from a year ago, we're much cleaner and then it really comes down to the impact of our transformation initiatives. I think it's going to take some time and I'm confident that we'll get there.

Scott Krasik – C. K. King

This idea of what acceptable margins are, is that just tied to the vertical strategy or, because I'm sure that's going to take several years to fully implement.

Alan Rosskamm

Appropriately and aggressively we've got the inventories right so the first, the immediate opportunity is that we shouldn't need to repeat that level of mark downs as we get to the second half of next year. From a top line and a fashion point of view, things will get progressively better.

We're excited about a whole new presentation in the stores that begins in August, but I think the vertical strategy Jay really doesn't, won't begin in impact, a meaningfully until spring.

Scott Krasik – C. K. King

Maybe touch on, I would think the biggest impact you're going to have in terms of managing your occupancy would be with Fashion Bug. Are you seeing flexibility in some of your Lane Bryant strips or malls and what's the approach there?

Alan Rosskamm

It's very much across the board. Some of our biggest opportunities are in malls probably because the rents per square foot are much higher there, but we're seeing real traction in the rent reduction

initiatives across the brands.

Scott Krasik – C. K. King

Can you generally quantify how big an impact that could be in maybe 2010?

Eric Specter

It's still very much a work in process. In terms of, it's a meaningful part of our $125 cost take out. We are touching 100's of stores as we speak relative to speaking to the landlords. Clearly the strategy of going after leases that are coming to expiration either in 2009 or 2010, we're seeing greater success rate.

That's not to say we're going after rent reductions on leases beyond those two years, but just to give a data point, we have over 200 stores over the next 18 to 24 months that have lease trigger dates or expiration dates. Those are the ones we are aggressively going after and many of those we have executed rent reductions and its part as I mentioned meaningful part of our cost take out that Alan touched on in the opening remarks.

Alan Rosskamm

I would just elaborate that we are also however, looking at all leases in all stores with negative cash flows and we're pleased that we're getting landlord cooperation and support even in some further out leases where we're struggling. So we've gotten so far very good cooperation from the landlord community and are looking for more.

Scott Krasik – C. K. King

Is it a situation where some of these stores are cash flow negative but with the help from the landlord you may not look to close them because it can be so dramatic?

Alan Rosskamm

Precisely. Certainly we want to give our landlords the chance to keep those stores open by turning them cash flow positive with their cooperation.

Scott Krasik – C. K. King

On the convertible debt, I know there's that quirky provision based on the price of the stock. Is there any other way for it to be pushable back to you and how do you expect to handle the revolver for the July 10 expiration.

Eric Specter

Let me just clarify the convertible debt. We have stated that there are no financial covenants but as we disclosed in our filings in our 10-K's and Q's, there are within the document what you're alluding to a fundamental changes. There are a handful, three or four of those fundamental changes the typical ones, the change of control, we trigger.

The one you mentioned is there is a requirement as would be expected in a convertible security to stay listed on a regional or national stock exchange and that really is the additional fundamental change that you were alluding to. So as long as effectively all we need to do is maintain on the stock exchange and again, the two or three other changes I mentioned.

There are no other provisions beyond those that the bondholders could put that debt back to us.

Scott Krasik – C. K. King

Are you approaching the revolver for the July 10 expiration now, or are you just waiting to play that out?

Eric Specter

It's actually a little premature to go into a discussion on a revolving facility that has another 16 months to go. Clearly we will be proactive. I can assure everyone on the call, we will be proactive well in advance of the July 2010 time period to address that, and we'll have more to say as we move through the fiscal year on that.

Operator

Your next question comes from Jeffrey Stein – Stein Research, Soleil Securities.

Jeffrey Stein – Stein Research, Soleil Securities

Fashion Bug, that business has been moving more towards the plus size business now for many years and I think it's about 70% plus size now. Why not just convert that business to plus size? And second is just on direct sourcing and how you see the strategy affecting your speed to market and your ability to continue to compress the supply chain?

Jay Levitt

First of all, as we look at our business by customer segment and also by size, what our analysis showed is that we really had two customers that we felt were our core customers. The one that I spoke to which is the 35 year old target, pretty much splits 50/50 between Mrs. and plus in terms of our actual results.

Our more mature customer that we have had, which is still a significant part of our business is supported by our Essentials brand. That brand is only carried in plus sizes, and that skews our total business to be a little bit greater in plus than in Mrs. But the Mrs. segment of our business is not inconsequential and actually our second most important selling size would be a Mrs. size 16.

The other thing, these assortment decisions were absolutely researched based based on literally charts by what we were selling by size. And what was very interesting was that we had a substantial portion of our customers that were actually crossing over between Mrs. and plus, so the ultimate decision was that the larger Mrs. sizes and the range of plus sizes was really the sweet spot for Fashion Bug.

And very interesting, surprising, but very interesting the number of customers that were crossing over, buying a top that was o n the Mrs. side and a bottom on the plus side or the other way around.

Jeffrey Stein – Stein Research, Soleil Securities

And the sourcing issue, how is this going to affect speed to market?

Jay Levitt

Speed to market is very important. Our approach to sourcing is really evolving here. Fashion Bug was purchasing most of our styles, about three quarters of our styles from domestic suppliers, many of them junior suppliers making multiple size ranges. And they're pretty fast people but what was happening is we really weren't having a good look at the overall assortments all in one sitting, so as we moved towards this vertical model that we talked about, we're going to have a much more organized approach to our assortments and our purchases.

Our intention is to shorten the window as much as possible but to be more organized and more strategic in our approach towards our total assortments.

Jeffrey Stein – Stein Research, Soleil Securities

Do you think you'll be able to maintain your inventory turns or improve your inventory turns with the new strategy or is it a step back with the trade off being a better margin?

Jay Levitt

Significant improvements in inventory turnover.

Alan Rosskamm

And that's driven by, Jay has brought an entirely new philosophy in terms of product flow, in terms of floor sets. He alluded to it in his comments, but we should also have a lot more faster turns and a lot more freshness and excitement for our customers.

Eric Specter

To back that up with a data point for the fourth quarter when we reported our overall inventories down 19%, they were significantly down at Fashion Bug at approximately 25% and those are the kind of reductions that we're going to see from Jay's strategy as we move through this fiscal year, a significant amount of inventory taken off the floor.

As you well know, Fashion Bug historically was a very slow turning business and we believe there is very substantial opportunities on the turn side. The way we flow the merchandise into the stores, what we're trying to do is exit out and we did come out of the fourth quarter cleaner than we ever had in the history of Fashion Bug relative to fall clearance inventories.

Those numbers were down even more substantial. We had approximately 40% less clearance inventory opening up February than we did in the prior year and that mix also will help improve the gross margins.

With all that said, the fourth quarter results relative to gross margin and even with all the heavy inventory liquidation and mark downs we were taking, we still had in excess of 100 basis point improvement in Fashion Bugs gross margin year over year in the fourth quarter.

Again, we had a depressed year two years ago but we were able to with better inventory management and even though we were clearing through a substantial amount of that fall inventory, we still were pleased with the improvement in margin and we should see that throughout 2009.

Operator

Your next question comes from [Sabina Battia – Bosco Capital]

[Sabina Battia – Bosco Capital]

Going back to the convert, have you given any thought on maybe buying these back? Right now you have a tremendous opportunity in this market to buy these back at a deep discount, and you are in the process of cutting costs and de-levering yourselves, and I thought this would be a great opportunity for you to do it. Any thoughts on that?

Eric Specter

It certainly, we're well aware of where the bonds are trading and we do agree that they're at a very attractive price, but again as we reiterated back ahead of the fourth quarter and today, we are putting our flex, our financial flexibility in terms of preserving cash and having ultimate flexibility of liquidity first and foremost.

That's not to say that these kinds of discussions are not going on at the Board level periodically as we meet with out Board. These kinds of changes or suggestions relative to our capital structure are periodically reviewed. There are no plans as we speak today, but clearly what we want to be able to demonstrate which we feel very good about coming out of this fourth quarter in a very challenging environment that we were able to generate cash flow.

We like to see the balance sheet strengthened further through an execution of our business initiatives, through what I would characterize as still a very challenging macro climate, and clearly there's tradeoffs there, and the question you've asked is something that we will continue to discuss and analyze, but ultimately it will be a Board decision if we would move in that direction in buying any of the convertible debt back.

[Sabina Battia – Bosco Capital]

Anything new of the sale of the Figis business? I know you're trying to work on that too?

Alan Rosskamm

I really at this stage can't comment in terms of any significant developments with Figis. We still are actively marketing that business and we'll comment further in an active process at this stage on speculation of what may happen. But clearly no changes in our direction or strategy to divest a non core asset such as Figis I will though say that as part of the fourth quarter results, Figis results held up extremely well.

They were only slightly below their sales plan and slightly meaning very low single digit percentages. It's operating performance was basically on plan during the fourth quarter so we were pleased in a very challenging climate in the fourth quarter where our retail brands were under a lot of pressure with our comp store sales decreases.

Our Figis food and gift business held up extremely well, so we are in an active process now. There are interested parties in the business, and we'll have more to say in a future conference call.

Operator

Your next question comes from [Frank Bianco – Lazard Asset Management]

[Frank Bianco – Lazard Asset Management]

Regarding cash restructuring charges, what percentage of that is cash?

Eric Specter

Of the $69 million of total one time non recurring charges. Only $5 million of that $69 million that we recorded in the fourth quarter are cash. The other $64 million which make up the comments I made regarding our good will impairment, store impairment and trademark impairment represent the other $64 million, so $5 million is the answer for the cash component of our charges that we recorded in the fourth quarter.

[Frank Bianco – Lazard Asset Management]

How about for '10?

Eric Specter

We've given in our outlook here for first quarter that there would be approximately $7 million of charges that we would record during the first quarter to execute now our business transformation initiatives. The majority of those charges are non cash. They related to the company needing to write down certain assets as we now exit the Lane Bryant women's catalogue business that Alan alluded to in the opening remarks as well as there are some non cash asset write downs as we transform our e-commerce platform from an in house platform to an outsource platform.

Those make up the majority of the $7 million charges and there are $2 million of cash expenses built into that.

[Frank Bianco – Lazard Asset Management]

I heard everything you said about the credit card funding base, but do you have any plans to expand that whether it be new conduits or even a term arrangement?

Eric Specter

Certainly, and again I wanted to reiterate that our strategy for this fiscal year is now set with the renewal that we announced this morning of our $50 million conduit. We now have $155 million of conduit facilities. Those combined with our 2007-1 term series that's outstanding at $320 million, those combined are more than adequate to fund our credit card receivable program throughout the fiscal year.

Certainly we will be active if the credit markets reopen up where there would be an ability to do a term series whether it be later in the year or next year, but at this point we have now committed facilities as well as our term series facility we issued in 2007 to adequately fund our credit card receivables for the fiscal year.

Operator

Your next question comes from Scott Krasik – C. K. King.

Scott Krasik – C. K. King

Can you track either through the proprietary credit card or some other loyalty list, are the comps from your loyal members, your most committed members, are those better than the declines we're seeing overall, the same or worse?

Eric Specter

The answer is yes, we have a very extensive customer data base that we maintain all of our retail brands. We tract customers whether they are proprietary card, using a general purpose card or cash in terms of collecting information at the point of sale to update that data base.

As you well know when our main marketing and advertising to our customer base is through direct mail, which largely is driven from that data base. What we're seeing, and I'll just as an example us Lane Bryant, which although had a challenging fourth quarter in terms of top line, what we are seeing is the core customers responding at a greater rate than the more casual off the mall, off the strip center customers.

So for instance, the Mag logs that we've been sending out by direct mail, and incidentally, Alan did comment on a newly expanded direct mail offering that has just hit the customer base this March which also includes an additional channel for that consumer to shop in by calling a 1-1800 number, but my point is we are seeing very healthy responses, and I should say improved responses year over year from the direct mail which is largely made up of our core customers.

Some of the other metrics that we're tracking, the average dollar transaction in each of those customers is at or above last year's level and as I mentioned the response rate. So what we are still challenged with in terms of why we're still at negative comp store sales, both from fourth quarter and the outlook is the more casual customer that would typically be shopping off the mall, off the strip center, the traffic to those centers is off from the prior period.

Scott Krasik – C. K. King

But there's clearly some of your competitors doing better than you. How do you get back that casual customer? Or how do you generate incremental because it seems like your loyal customers are still spending.

Alan Rosskamm

It starts with really updating the assortments and it starts obviously with the offer to the customer depending on the brand both the fashionability of the offer, the consistency of the offer and of course in this environment the price value relationship. So we're working on all of the above.

You're aware that we have new leadership in all of our brands. Each of them brings their own unique experience, unique insight, but not to go over a lot of history, but our research showed that our brand positioning had blurred. The brands had kind of blurred together and the new brand presidents are staking out much more clearly defined and differentiated positions for their brands, updating the product. And that's where it begins.

Scott Krasik – C. K. King

But in a more magnified level, how do you do that? Do you increase direct mail to files of customers that haven't shopped there? Do you increase national advertising? What's the approach and when do you start to ramp that up?

Alan Rosskamm

It starts by, first before you start talking about it, you really need to be able to deliver it in the stores so first of all we don't want to get ahead of ourselves. The vast majority of our promoting does go through direct mail and does go to existing customers. We do reactivation programs to go to lapsed customers and we want to excite the customer walking by with more exciting product in our windows for starters.

As we begin to get traction and as we begin to reinvent the brands, that will be the time to consider more public shouting of that new positioning, but right now, like everything else, we're being a little bit conservative in our ad spend and focusing those dollars on our people assets.

Scott Krasik – C. K. King

It sounds like its realistically spring 2010?

Alan Rosskamm

I think that's probably correct.

Operator

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Alan Rosskamm

Thank you for your participation this morning. I'd like to be bold enough to close the call with something that I've been saying internally to the troops here. Challenging environment, challenging numbers we announced today, but under the surface a lot of good forward momentum and my feeling is that at least at Charming the glass here is half full. We look forward to being with you again in roughly 90 days.

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