Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Jean Fontana - ICR, IR

Brendan Hoffman - President & CEO

Keith Plowman - EVP, Finance, CFO & Principal Accounting Officer

Analysts

Edward Yruma - KeyBanc Capital Markets

Jonathan Hart - Buckingham Research

William Reuter – Bank of America Merrill Lynch

Daniel Barnes - Imperial Capital

Karru Martinson - Deutsche Bank

Carla Casella – JP Morgan

Grant Jordan - Wells Fargo

Hale Holden - Barclays Capital

The Bon-Ton Stores, Inc. (BONT) Q4 2012 Earnings Call March 12, 2013 10:00 AM ET

Operator

Good day and welcome to The Bon-Ton Stores, Incorporated Fourth Quarter Fiscal 2012 Results Conference Call. Today’s conference is being recorded. Now at this time, I’ll turn the conference over to Ms. Jean Fontana. Please go ahead.

Jean Fontana

Thank you. Good morning, and welcome to The Bon-Ton’s fourth quarter and fiscal 2012 conference call. Mr. Brendan Hoffman, President and CEO and Mr. Keith Plowman, Executive Vice President and CFO will host today’s call. You may access a copy of the earnings release on the company’s website at www.bonton.com. You may also obtain a copy of the earnings release by calling 203-682-8200.

The statements contained in this conference call, which are not historical facts, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those projected in such statements due to a number of risks and uncertainties including those set forth in the cautionary note in the earnings release and all of which are described in the company’s filings with the SEC.

I would now like to turn the call over to Mr. Brendan Hoffman.

Brendan Hoffman

Good morning. And thank you for joining us today. I will begin with some highlights from the fourth quarter followed by an overview of our focused areas and opportunities going forward. We were pleased with the progress we made on several key initiatives during the fourth quarter. Total sales grew almost 3% and our comp store bases grew 1% excluding the impact of the extra week.

Our gross margin rose 160 basis points to 36.2%. We lowered our SG&A rate to sales in excess of 70 basis points on a 13-week comparable basis. To achieve these results, we executed a more balanced merchandise assortment and our inventory composition continued to better reflect our loyal customer base as well as energized last customers.

Our strongest category for the quarter included almost all zones of ready to wear which continues the turnaround we talked about in the last call. We are very excited we were able to get our ready to wear business so healthy so quickly so this bodes well for spring performance. Shoes continued to show outside growth as the category benefited from the floor moves we made which provided increased floor space across-the-board and more visible real estate where possible. In addition, men’s tailored clothing and furnishings as well as cosmetics outpaced the company’s growth.

We were also pleased with the growth in our private brand business for the quarter with much improved gross margins following a tough three quarters this year. As costs start to circle back in our favor, this becomes another weapon for us to drive top and bottom-line in 2013.

Our e-commerce business continues to show outside growth. We’ve nearly tripled our investment in digital marketing and it is clearly paying dividends both for e-commerce sales and is a way to drive customers into the stores. During the quarter we dramatically changed the look and feel for our website, including adding functionability such as size and color filters to increase conversion rate. Status partners including Coach and Michael Kors have launched with us since November and are off to a fantastic start. We will continue to launch new vendors throughout 2013.

Last time I spoke about the changes we were making in our markdown cadence both at the beginning of the product lifecycle and the end of it, in order to improve our gross margin rate. As you can see by our results in the quarter, we made real progress in this area across-the-board. Although we have increased our usage of coupons, we've adjusted our pricing so that the out the door price is equal to or greater than in previous years. We then reworked our Yellow Dot process to allow us more flexibility within the cycle, spending the markdown dollars in the categories that need to go deeper in order to move through the inventory.

Finally, as I discussed last time, we launched our first clearance stores of both tactically floors within underperforming and/or over-space stores that allow us to liquidate prior year’s merchandise in a proper season and thus achieve a higher out the door price than in years past. It appears that all three elements are working and are combined to give us an opportunity to continue to raise our gross margin rate.

The key to continuing this process once we anniversary it is to more proactively manage our inventory levels with greater discipline. Over the last few years we have led our inventory grow much quicker than our sales especially as we funded smaller doors. We will be more disciplined in the way we flow the goods in order to achieve higher gross margin rates.

Our year-end inventory level did not accurately reflect the progress we’ve made in our inventory management and we will continue to make. If you look at the same calendar week, the 53rd week this year, the week one last year, our retail inventory was up 3.6%. A large portion of the inventory increase was related to e-commerce. In addition, we have far less backwards inventory, in this case, small carryover compared to the prior year. So we feel very comfortable with our inventory levels as we enter the new year.

As I quickly look back in what we have accomplished during 2012, I think we have stabilized our performance through a number of key initiatives. We were able to bring traffic back into the stores through customer -friendly events centered on our use of the savings coupons. This included adding or strengthening signature events like friends and family, quarterly Black Friday events as well as investing more heavily in CRM under new leadership.

We identified franchise businesses that deserved a bigger presence both in stores and in our marketing vehicles led by lady shoes. We recognized we had moved too fast and too quickly in trying to attract a younger more updated customer. We reacted and believe we have a more moderate and traditional merchandise mix that appeals to our core customer as evidenced by the recent ready to wear results I shared earlier.

At the same time we emphasized a portion of our assortments devoted to the younger customer that we expect to attract over time. We also renewed emphasis on national brands including Calvin Klein, Ralph Lauren, Michael Kors and Coach as well as cosmetic brands like Estee Lauder, Clinique and Lancôme that aren't available elsewhere in many of our markets.

During the fourth quarter we reduced expenses to better reflect the current size of our business giving us the flexibility to fund the areas that we think will give us the greatest growth in the future. This includes of course e-commerce and the acceleration of digital markets.

As we look towards spring, we are excited about the progress we've made on all of our initiatives and we will continue to tweak them as we gain additional insight into the business. One initiative is focusing on the smaller doors that have been underperforming in recent years. This continues to be a priority of ours as I believe there’s tremendous potential.

Unlocking this opportunity is complicated, however the potential is larger than I anticipated. The key is finding a way to localize our assortment and communication in these smaller regions beyond what other competitors are doing. We still operate under seven different banner names that use the house buying offices in St. Cloud, Minnesota for Herberger's, Des Moines Iowa for Younkers, Dayton, Ohio for Elder-Beerman, and York, Pennsylvania for The Bon-Ton just to name a few. And hiring in these central organizations was an understanding of the lifestyle of their customer base.

As we have consolidated into one central office in Milwaukee, we have lost the appreciation of what makes a customer in Fargo, North Dakota different from one in Allentown, Pennsylvania which is different from suburban Chicago. Rather we assort the stores mostly based on volume and history and have marginalized our customer profile. We need to develop a process that allows us to localize our assortment and marketing efforts while maintaining our central organization. We need to develop localization as a core competency both to unleash the potential of our current store base and give us a way to open new regions that can increase our overall store count. This won’t happen overnight but it will be a priority during 2013.

In summary, we’ve made great strides in many areas of our business, including better balanced merchandise assortment, more disciplined inventory management, enhanced marketing and upgraded e-commerce. We have more work to do in these areas as well as focusing on our smaller store opportunity. While these changes will take time, we expect to see evidence of our progress in our financial performance. We also believe the changes we continue to make will pave the way for sustainable long-term growth.

With that, I’d like to turn the call over to Keith to review the financials.

Keith Plowman

Thank you, Brendan and good morning everyone. Some notable points for the fourth quarter. Comp store sales increased 1%. Our gross margin rate increased 160 basis points to 36.2% compared with 34.6% last year. Operating income increased $14.9 million to $95.3 million compared with $80.5 million last year.

Adjusted EBITDA defined as earnings before interest, income taxes, depreciation and amortization, including amortization of lease-related interest, impairment charges and loss or gain on exchange and extinguishment of debt, increased $16.4 million to $122.8 million as compared with $106.4 million in last year’s fourth quarter. As a reminder, for a reconciliation of adjusted EBITDA to net income or loss, please refer to our earnings press release.

Our excess borrowing capacity under revolving credit facility was approximately $518 million or $80 million above the prior year level and on January 23, 2013 we issued a notice of redemption for $65 million aggregate principal amount of our outstanding 10.25% senior notes through 2014 at a redemption price equal to 100% of the principal amount of the notes. The redemption was completed on February 22, 2013 and approximately $69 million aggregate principal amount of the 2014 notes remain outstanding.

And our new proprietary credit card partnership with Alliance Data continues to perform very well, delivering increased card usage, higher new account approval rates and excellent customer service. Trends dramatically improved in the fall versus the spring of 2012 after Alliance Data became the provider for our proprietary credit cards.

Credit sales as a percent of total sales grew from 43.5% in 2011 to 45% in 2012. On February 14 of this year we announced the launch of a revamped and reinvigorated loyalty program. We are looking forward to a productive year with our new partner.

Some details of the fourth quarter which ended February 2, 2013 and consists of the 14-week reporting period in accordance with the National Retail Federation fiscal reporting calendar include the following. Comp store sales increased 1%. Total sales of the 14-weeks ended February 2, 2013 increased 3.2% to $1,015.1 million, compared with $983.2 million in the 13-weeks prior year period.

Gross margin dollars increased $27.6 million to $367.3 million. Our gross margin rate increased 36.2% of net sales compare with 34.6% in the prior year period. The increase in the gross margin rate is largely attributable to decreased net markdowns partially offset by increased delivery fees associated with e-commerce sale.

SG&A expense, including the 53rd week was $263.7 million compared with $259.4 million in the prior year period. The increase in expense was due to the inclusion of the additional week in January of the current year. The SG&A expense rate decreased 26% of net sales compared with 26.4% in the prior year period and without the extra week our SG&A expense of 2012 was below 2011 and as Brendan noted that the 2012 rate to sales was in excess of 70 basis points lower than the 2011 rate.

Our net income totaled $74.4 million or $3.71 per diluted share, compared with the net income of $78.2 million or $4.00 per diluted share for the fourth quarter of fiscal 2011. As a reminder, fiscal 2011 included $18.2 million or $0.93 per diluted share for the one-time gain on repurchasing a portion of our 2014 senior notes at a discount. Our net income for the fourth quarter of 2011 adjusted to exclude the gains on the share repurchase would be net income of $3.07 per share.

A few comments regarding the fiscal 2012 full year financial results. Comparable store sales increased 0.5%. Fiscal 2012’s total sales for the 53-weeks increased 1.2% to $2,919.4 million. Gross margin dollars increased $8.2 million to $1,045.5 million and our gross margin rate was 35.8% of net sales compared with 36% in the prior year period. The 2012 gross margin rate on merchandise before e-commerce delivery costs increased above the 2011 rate.

Including the 53rd week, SG&A expense of $936.2 million in 2012 was almost flat compared with $936.1 million in the prior year. The fiscal 2012 SG&A rate decreased to 32.1% of net sales compared with 32.4% in the prior year period. And our adjusted EBITDA in fiscal 2012, inclusive of the $7.9 million of severance-related costs and the gain of $3.1 million related to company’s sales of certain Rochester, New York locations was $168.8 million compared with $170.1 million in the prior year. Adjusted EBITDA in fiscal 2012 excluding the severance related costs and gain on sale as noted previously, was $173.7 million.

Some balance sheet comments, our total inventory at the end of the fourth quarter increased 8.4% as compared to the prior year. This inventory, which includes inventory comprising our clearance strategy, increase in transit merchandise and inventory related to the support of e-commerce sales growth. For meeting these items inventory was approximately 3% above the comparable 2011 level.

Our fiscal 2012 capital expenditures before netting certain contributions were $73.8 million compared with $67.2 million for the prior year period. The increase reflected expenditures for strategic initiatives, visual support and point-of-sale equipment. The components of our debt at the end of the fourth quarter of 2012 were as follows: senior notes due 2014 $134 million; senior secured notes due 2017 $330 million, revolving credit facility $154 million, CMBS facility $225 million, and mortgage notes and capital leases $57 million for a total of approximately $901 million of debt. And our LCs outstanding at the end of the period were approximately $3 million.

Moving to 2013, our guidance is as follows: EBITDA on the range of $180 million to $200 million, including all charges; income per diluted share in the range of $0.40 to $1.00 and cash flow as defined in note to our press release in the range of $20 million to $40 million. Key assumptions assumed in our full-year guidance are comparable sales, comparable store sales in the range of 2% to 3.5%, gross margin rate in the range of 36% to 36.4% and SG&A expense, including increased performance incentives flat to down two-tenths of a percent as compared to fiscal 2012.

Some other minor assumptions, other income will be up about 0.1% of sales, depreciation and amortization ignoring any type of impairment charges will be somewhere in the range of $91 million to $92 million and interest on a normal run rate somewhere in the range of $75 million to $76 million. Our Form 10-K for fiscal 2012 will be available by April 18 and at this time I’d like to turn the call back to Brendan.

Brendan Hoffman

Thank you, Keith. We’d now like to entertain your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll hear from Edward Yruma with KeyBanc Capital Markets.

Edward Yruma - KeyBanc Capital Markets

Brendan, you spoke a little bit about the small stores, more market opportunity, I was just wondering if you could just dimensionalize for us what does that represent as a percent of your store base and maybe some performance metrics around those stores and kind of where you think that can get to over time?

Brendan Hoffman

Well, they represent a large portion of our store base more than what most other retailers would make up probably as I think about 170, 180 of our 270 plus stores. It’s something I have been talking about since I got here in terms of the need to get those stores back on track. I think what crystallized for me over the last six months was just how different these stores are because of their locations and how we have – while we kept the banner names we’ve lost that individuality of those regions in those stores. I was in our store in Grand Junction, Colorado last month, which is about four hours west of Denver. A very good and productive store for us, yet the merchandise mix in there could've been any store in our chain that was of that same size. And yeah that's a region that is much more casual, much more Western than what our East Coast stores represent. And we haven't properly adjusted and aligned the merchandise mix, and I think in order to really break through on the topline we need to figure out how to get this done.

Edward Yruma - KeyBanc Capital Markets

Your comp guidance is 2% to 3.5% and I think would imply this is the strongest comp in many years. How should we think about the trajectory of the comp improvement, will it be back end weighted as you kind of continue to make merchandising changes?

Keith Plowman

Ed, this is Keith. From the standpoint of performance, we see that we have some good opportunities during the spring season. As you know we were down 1.3% in the first quarter and essentially flat in the second quarter. So we certainly think we have opportunities but also time is an ally to us as the initiatives that we put in place take hold, we see continued improvement as we move forward. So we really just see that we’ll get benefit in both the first half and the second half of the year. Specific items that we see driving, it is e-commerce, it’s going to be a significant growth factor for us again.

As Brendan mentioned earlier and we achieved the goal he had set out there that we would grow e-commerce about 3% of our total sales. We see that approaching up towards 5% as we go through 2013. Additionally, we have opportunities from the private label credit card program, ADS has shown to be a very good partner. And when I talked about our penetration of credit sales growing from 43.5% to 45% through 2012, I will tell you we were negative in the spring season and all of that growth came and offset the negative numbers we had in the spring as well took us to a growth in our private label credit card program. The merchandise mix, the marketing message, everything we're doing here to impact the company we believe will have benefit to us as we go forward in 2012. So I do think you’re going to see growth in both the spring and the fall but I also think the initiatives that we have in place are going to help us drive our comp above our performance over the past couple of years.

Edward Yruma - KeyBanc Capital Markets

And the final question, how should we think about the NOL, obviously you guys have been I think in a three year cumulative loss position, how and when does that get unlocked and how should that flow through those in P&L and cash flow statement?

Keith Plowman

Ed, that’s a tough one. Essentially we are as you said, and still in a position, we have realized as you call the three year cumulative loss and because we have losses in the last two years we have to show that we can get ourselves back out of that. So I don't see substantial impact from the standpoint of the valuation allowance we have against our deferred tax assets in 2013. Certainly we drive towards the guidance that we’ve given here. There will be some benefit to the taxes in 2013 and I don't anticipate that we will have any kind of significant cash payments in 2013. So if you’re looking from a cash flow standpoint even though we’ve guided to a 39% rate we really do not see a significant impact as far as cash taxes in ’13 but it’s going to take a couple of sustained years, growth year sequentially in our earnings per share before we’re going to start realizing a significant benefit on those deferred tax assets and the valuation allowance that we established.

Operator

And now we’ll move to the question from Jonathan Hart with Buckingham Research.

Jonathan Hart - Buckingham Research

I haven’t been at Bon-Ton for a year and gotten through the all important holiday season, I was wondering if you had any updated thoughts of perhaps increased confidence in your longer-term plan of $3 billion plus in sales and 10% EBITDA margin that the company established last fall, particularly given what turned to be a very strong momentum in e-commerce, clearance strategy and a much larger than expected opportunity in your small market?

Brendan Hoffman

Well, thanks Jonathan. I feel very good about us taking through that, that is our goal. I am not ready to give a timetable on that because we need to get more -- better foundation, better jumping off point. I think we’ve made great progress on SG&A. I think we've made great progress on gross margin, particularly in this last quarter. We obviously need to continue both of those and then we need to unlock the sales potential. And it will take all three of those components for us to achieve the $3 billion and 10% EBITDA margins. And I think that the Internet is going to be – lead the way towards the topline growth. I think we are doing a lot of good things in our bigger stores right now to some of the brands we've been able to add and the rebalancing on the merchandise mix but as I just said over half our stores are small stores and in order to really be successful we need to unlock their potential. And that's really what we're going to spend a lot of time trying to figuring out in 2013. I think we will make some strides just based on some of the blocking and tackling we are doing and being -- just being aware of this opportunity but I think it’s going to be something that we'll have to continue to work on over the next few years in order to really achieve that upside.

Jonathan Hart - Buckingham Research

And just a follow-up for Keith, I’m just wondering what sort of flexibility you have on SG&A this year if the fields don’t play out as expected.

Keith Plowman

Jonathan, there is no question, we have flexibility in SG&A. We will continue to control it very tight. You know we were in round terms $1.066 billion back in 2007, you’ve seen what we pulled down the SG&A. Where we believe we are today and in those SG&A numbers I have given we do have investment whether it be IT, marketing, technology, things that we’re looking that we feel are longer-term benefits to the company, we’re going to continue to invest in those areas. But we know there is other costs that we can take out for efficiency and we’ll continue to search for those. So we do believe we have opportunity going forward, we can't be specific at this point. We need to do more review but certainly we have some flexibility.

Operator

And now we’ll take the question from William Reuter with Bank of America Merrill Lynch.

William Reuter – Bank of America Merrill Lynch

Your fourth quarter of 2011 you guys were negatively impacted based on warm weather and this fourth quarter was pretty warm as well. I guess I am curious on a year over year basis how either outerwear or cold weather apparel impacted your same store sales on a year over year basis and you guys did talk about inventory being in good shape but whether you had any excess inventory of jackets and such.

Keith Plowman

Yeah, that was one that certainly we got pulled but I think other retailers did. We anticipated anniversaring those soft cold weather numbers and having a more normalized winter and selling season there, and it just didn't happen. I mean we actually did okay in the outerwear department, and outerwear actually showed some nice growth that was up double-digits but all the related categories really were disappointing. And so I think as we circled – as we think about 2013 we’re not going to make those assumptions anymore. We’re going to assume the last couple of years as the new norm and then if we get surprised we can always chase that business. I think we probably negatively got hurt on top of that by the snowball we got particularly in December and January where last year we got none, this year we got quite a bit and it seemed to fall on inopportune times like the day after Christmas, which is a big selling day for us.

So -- but that’s probably something we should anticipate in the future too, it probably wasn't realistic to think we would go with the precipitation as we did in ’11. So I think in the end we actually got hurt based on the weather and especially compared to our assumptions. So we won't make that mistake again this year.

William Reuter – Bank of America Merrill Lynch

And then in terms of – I don’t know if you guys will comment anything regarding recent performance but there has been such a mix of information out there in terms of how the consumer is performing. I am curious, Keith, you just mentioned that your comps are pretty easy in the beginning of the year, the first couple of quarters, if you guys did make any comments regarding consumer trend that you guys are seeing or behaviour?

Keith Plowman

Bill, as you know we really can't get into 2013 other than there is no question, everybody reads about what’s going on as far as payroll taxes, tax refunds and everything. We’ve seen now good response in certain events and we’ve seen other ones that can be tough. We’ve also seen some weather impacts. So I think right now there is a lot of noise out there and as we go forward we’ll get a lot smarter but I just don’t think there is a lot we can comment on ‘13 yet.

William Reuter – Bank of America Merrill Lynch

And then just lastly, you talked about the reallocation of space towards categories such as shoes, positively impacting performance. I guess can you remind us when -- actually and I will come it once, but when these were generally made and whether you have the opportunity to still continue to reallocate space in 2013?

Brendan Hoffman

I mean it really was an ongoing process throughout the second and third quarter. Some of it was capital-intensive, others that were what we called muscle moves where the stores just figured out how to do it themselves. So I think a lot of that specific issues has been done. There is other categories now like outerwear and dresses that we’re looking to circle back to this year in spring and fall. And then I think the real opportunity for the stores is changing the assortment around the way they merchandise the stores based on some of these changes. I think it just can't be that we’d expand shoes and just please other things. There has to be a domino effect that as the add customer patterns change we make other changes at the store level that we might not even be aware of sitting in corporate. And I think that's one cultural change we've made over the last 12 months is empowering the stores to have that flexibility to do so. So I think this is something that will continue to give us upside.

Operator

And next we will hear from Mary Gilbert with Imperial Capital.

Daniel Barnes - Imperial Capital

This is Daniel Barnes for Mary. What do you expect average revolver borrowings to be this year?

Keith Plowman

I don’t see a whole lot of change in the average borrowings, so you see what our cash flow is as we go through the year, it really depends on what we do with the senior notes and the time it’s due. So I would say at this point taking the cash flow whether it be the $20 million or $40 million and the bonds themselves the $69 million that are sitting out there assuming we don't do anything else to refinance those bonds you’d end up with somewhere in the range of having a $30 million to $50 million impact to the excess borrowing as compared to this year.

Daniel Barnes - Imperial Capital

Now apologize in advance if I missed it earlier but how many stores that you remodeled by year end and what were the comp sales trends for those remodeled stores?

Keith Plowman

I don't think I know off the top of my head how many stores we remodeled and I couldn't give you the comp sales, it’s something we could follow up on.

Brendan Hoffman

And as I said we did hard remodels, where actually – that were capital intensive but pretty much every store did some sort of change particularly when it comes to expanding lady shoes. So as I did with the stores, that’s the first thing that drag me over to is to see what they've done on their own with their shoe expansion. So – but Keith can follow up on that.

Daniel Barnes - Imperial Capital

Again, closely following on from the shoes, what should we think about in terms of the category mix for all those remodels, indication for on your margin?

Keith Plowman

I think that as I said we need to do a much better job understanding these stores at their local levels, and whether they’re remodels or not. And so that’s going to have a big impact in those going forward, but it’s something we need to figure out how to develop the right processes and put the right tools in place in order to really gain the upside that I think is there. But that’s a process that's really just in its beginning stages right now.

Daniel Barnes - Imperial Capital

Could you talk a little bit about the initiatives (ph) and how you’re looking to balance attracting younger customers, engaging the customers that might delay (inaudible) if you will?

Brendan Hoffman

Well, I think that was our problem last time, we tried to do it too quickly and tried to do it overnight and we’re going to be much more methodical about at this time. We’re going to love the customer we have and right now, I said in categories like ready-to-wear which are real bellwethers for us. She seems to be responding and that's really positive for us. So we’re going to continue to feed her while at the same time work to attract new and younger customers and part of that will be through reengineering our whole juniors category which has been – as has been for others in the department store industry is very disappointing and trying to make certain items more of a young contemporary area that has a broader reach to it, that can rather than be setting apart from our ready-to-wear business as it is today can just be adjacent to it and just be a natural growth off of our core ready-to-wear business. And we think by attacking it that way will continue to nurture our loyal customer but also start to attract that younger and updated customer over time.

Daniel Barnes - Imperial Capital

Are you able to share little bit more on just what is over time – are we thinking –

Brendan Hoffman

I am not going to tie myself to that right now because I think we are still learning and it will be done as I said, surgically and more methodical than this company has had patience to do in the past.

Operator

And Karru Martinson with Deutsche Bank has the next question.

Karru Martinson - Deutsche Bank

When we look at the comp guidance here 2% to 3.5%, what’s kind of the assumptions in terms of price, traffic and mix in going into those – that growth number?

Keith Plowman

I think at this point, we don’t see a whole lot of change from what we've experienced in 2012. We’ve seen the transactions have gone down a little bit, but the amount per transaction has gone up. The number of dollars and average retail so forth has increased. So at this point we’re not assuming any change until we see more macro evidence that it might impact that change, we really don’t think there is anything we want to put in there.

Karru Martinson - Deutsche Bank

And you referenced the senior notes here and you took care of the $65 million of that, why not do the entire piece here given the excess liquidity and borrowing capacity that you have?

Keith Plowman

I mean from the standpoint there is no question, Karru, we could take it all out of our revolver, and we hired at this point, but we also have some debt stipulations out there as to the level of debt that we can have that are outstanding at that time as well as baskets that we can use to increase. Right now the company feels we’re at a prudent level on the senior notes that are out there almost $400 million. We will continue to evaluate our options as we go through the year here, we’ll make some assessment and determine whether we want to use a revolver or go to some other options that are available to us.

Karru Martinson - Deutsche Bank

And then just in terms of the clearance for us, certainly sounds like they were successful this year and what’s the outlook for those expansion opportunities or are we going to keep those things like we tweak about at the model?

Brendan Hoffman

Well, no we were pleased and we think as part of the reason we are able to drive more an increased gross margin and we will do so in the future. We are opening up our first standalone clearance store later, I think it’s in April, it officially opens. So that’s kind of the next -- the progress we’re making to test the difference between having a standalone store and the impact and versus doing it within our own boxes. And we learned a lot this past year, on the categories that can sell, the timing, the pricing. So while it was accretive this past year we think that there is continued upside in 2013 and beyond and particular are excited about the standalone opportunity.

Operator

And next we will hear from Carla Casella with JP Morgan.

Carla Casella – JP Morgan

One question on your stores, what are your opening plans for this year? I had two store openings, is that third quarter?

Brendan Hoffman

That is correct.

Carla Casella – JP Morgan

And then can you talk about the promotion environment, if you see any changes since JCPenney gone back to be more promotional and then also just update us on how many of your stores overlap with JCPenney?

Brendan Hoffman

We really haven’t seen any noticeable change, as they’ve moved around in the strategy. But obviously we continue to monitor that. We have about 90% overlap with JCPenney, about 70% are actually in the same malls. So they are our most direct competitor.

Carla Casella – JP Morgan

So have you been able to quantify the benefit you had this year from their declines in sales?

Brendan Hoffman

We do look at it – I think that it’s a bigger opportunity going forward. You have to remember particularly in the first three quarters of the year we were not operating at our finest theater. We had made merchandising mistakes. We were changing around a lot of our conversation with the customer. So I think we weren’t giving ourselves the true read on our opportunity to capture that volume. But we certainly are thinking about that as we move forward in terms of where we focus our renovations, how we change around some advertising etc. and try to make sure we can service that customer.

Carla Casella – JP Morgan

And then have you thought where you expect part of them could go to as a percentage of sales?

Brendan Hoffman

I haven’t said it but I think I said in the past I think it will be right around the same place it is now which is more or less 20% of the business, might go a point or two, might drop a point or two, it really depends on the performance of the private brand itself, so with the tough year overall private brand but improved performance in Q4, so we think we've reset some of the brands in their proper place and their proper level and we expect private brand to be a real weapon for us moving forward.

Carla Casella – JP Morgan

Just one last quick one, your view on free shipping for e-commerce and do you do that just periodically or do you see that is necessary around the holiday times?

Brendan Hoffman

Yeah well, we absolutely do it quite a bit on a regular basis, particularly around the holiday times and it’s something that – it’s noticeable in the overall gross margin rate even though from an EBITDA standpoint the web will be very accretive for us. We brought in last year Luis Fernandez who worked with me at Neiman Marcus.com to head up our e-commerce and marketing and he has just taken this light years ahead. One example was we just added in a promo code for free shipping, which means that now when we offer it you have to enter in a promo code to receive the benefit and the beauty of that is about 30% of the customers don't bother entering in a promo code. So we are able to collect that revenue from them.

So there are things we're doing, we’re also looking at our charts to make sure they are competitive and we think there is opportunity there to try and negate the impact of free shipping, but I think it's just part of the expectation of the customer now is the free shipping aspect.

Operator

We’ll now hear from Grant Jordan - Wells Fargo

Grant Jordan - Wells Fargo

On the inventory you finished up on the year about 8%, you talked a little bit about e-commerce was part of the driver there. But how are you thinking about in terms of planning your inventory going forward?

Keith Plowman

We would look for inventories Grant, to be where sales are. We definitely want to bring the inventories in line, turnover will help us as we go forward. We do expect that e-commerce will continue to have some growth because of the sales growth itself but the base brick-and-mortar stores we want to get more additions just that where we can take some of those.

Brendan Hoffman

I think while the inventory overall will stay fairly close to the sales comp, or probably right below the sales trend, we will reallocate the way we flow it both – we have – too much to go to the bottom doors at the expense of the bigger doors that can drive more volume. We’re also looking into things like locker stock so that we can post distribute things and just become much more efficient in the way we manage our inventory flow.

Grant Jordan - Wells Fargo

And then my next question, if you can just give us any commentary around specific product categories and where you’re investing your dollars this year a little bit contemporary sportswear or just kind of how you’re thinking about the various categories?

Brendan Hoffman

Yeah, well again it starts with lady shoes for us so that, that would be number one. Where as I said very excited about the growth that we’re seeing in ready to wear, specifically in area like dresses and in women's sportswear as well as rebalancing the messy (ph) sportswear. And then going after this young contemporary business which maybe won’t be a growth area much to the like of juniors but it's been such a deteriorating business over the last few years I think for all of us, really trying to hit the customer with something that’s more appropriate for who’s shopping our stores. So I think that – and then obviously just the internet overall is going to be such – it’s going to dwarf all our other opportunities that making sure we fund the categories there and on there I think we have an opportunity in the soft goods. We kind of launched our site as a home goods website and continue to do terrific business there. But we’re seeing tremendous growth on the apparel and the accessory side and the margins and repeat business that, that can bring on the e-commerce side.

Grant Jordan - Wells Fargo

Just to follow up on the e-commerce, have you done any work to figure out your sales are coming from existing long time customers or penetrating new customers?

Brendan Hoffman

We’re looking into that very closely now and right now it’s both. But I will tell you that we're doing a great job now in the stores making sure customers know that we are multichannel organization. We more than doubled our collection of e-mail names from where we started at the beginning of year to where we ended, we launched an app that has 40,000 customers already that downloaded the app four or five months. Our friends on Facebook and followers on Twitter continues to grow exponentially. So I think a lot of that is new – is current customers but also as we get more and more out there in the digital space will be new customers as well.

Operator

And now we will hear from Hale Holden with Barclays Capital.

Hale Holden - Barclays Capital

I just have one question. The localization plan has been better than the 2013 guidance if not in addition to or may change later in the year.

Brendan Hoffman

Well, the localization, again most of that is going to be laying the groundwork in 2013. While I think we will get some upside just by being more aware of it and focusing in on it, I think it’s going to be a lot of heavy-lifting in 2013 to really go after that opportunity in future years.

Operator

And this will conclude our question-and-answer session for today. I’ll turn the call back over to Brendan Hoffman for closing remarks.

Brendan Hoffman

Thank you all for your questions and your interest in The Bon-Ton. We look forward to speaking with you about the financial results of our first quarter 2013 in our conference call in May. As a reminder, we will be presenting at Bank of America Merrill Lynch 2013 Consumer and Retail Conference tomorrow. Our presentation is at 1:30 PM Eastern Time and will be webcast at bonton.com and just note that this is a time change from a previous announcement. So again it’s at 1:30 PM Eastern tomorrow. Thanks again for joining us this morning.

Operator

Ladies and gentlemen that will conclude your conference for today. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Bon-Ton Stores' CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts