Bon-Ton Stores Inc. (NASDAQ:BONT)
Bank of America Merrill Lynch 2013 Consumer & Retail Conference Transcript
March 13, 2013 1:30 PM ET
Brendan Hoffman - Chief Executive Officer
Keith Plowman - Chief Financial Officer
Bill Reuter - Bank of America Merrill Lynch
Bill Reuter - Bank of America Merrill Lynch
My name is Bill Reuter, and I’m the high-yield retail and consumer products analyst here at Bank of America Merrill Lynch. I’m very pleased to have Brendan Hoffman, the CEO; and Keith Plowman, the CFO of the Bon-Ton with us here today. I’m going to turn it over at this point to Brendan.
Thank you. Good afternoon. On behalf of the Bon-Ton we appreciate being here today to update you on the progress we've made in 2012 and give you some thoughts on 2013, and Keith will walk you through our financials, if this work, I’ll keep it back.
Little company overview as you can see here on the map, Bon-Ton was founded in 1998 in Pennsylvania. Today we operate over 270 stores throughout 24 states in the northern part of the country. We operate under seven different banner names, including Carson Pirie Scott, Herberger's and Younkers.
In 2012, we generated just under $3 billion in total revenues. We have two offices -- home offices one in York, Pennsylvania, which has a lot of our back office function, including, finance, HR and IT, and our primary office is in Milwaukee where we have all merchants, marketing stores, et cetera.
We aim to be the dominant omni-channel retailer in the small to midsize communities that we serve, offering fashion merchandise for the family and home at compelling prices. We believe if we can do this we can achieve $3 billion in revenues at 10% EBITDA rate.
So looking back at 2012, our key initiatives, it was my first year at the Bon-Ton. I started in February of 2012. It was a real learning curve for me as we went about stabilizing the business.
I'm pleased with the progress we've made in our 2012 through our key initiatives. We rebalance the merchandise assortment bringing back in more traditional merchandise that being deemphasized in 2011 and 2012 in order to chase a younger more updated customer than we’ve been servicing.
When I arrived in February of last year, quickly became apparent that we had moved too far too quickly and we are losing our core customer, while not getting a new customer quickly enough to replace it. I feel that we are now more better balanced to service our loyal customer while we evolve into an assortment that will appeal or more updated customer overtime.
In addition, we began to prioritize certain core businesses such as lady shoes by increasing their square footage and where possible placing in the store, as well as increasing their exposure in our marketing efforts.
We reengineered our merchandise liquidation process and saw immediate payback as evidence by our gross margin rate improvement in Q4. Both through the addition of clearance stores and overhauling our in-store clearance process, we feel we've only scratched the surface on the opportunity.
We took over $30 million out of our SG&A as we become bloated for a business that shown little or no sales growth. We will continue the process of ensuring that we run a disciplined business in order to achieve our ultimate financial goals.
We brought in Luis Fernandez to oversee our e-commerce and marketing efforts. Luis work with me at Neiman Marcus Direct. He quickly put in place best practices in our e-commerce and digital world. We see immediate results with increased traffic conversion and vendor launches on our site.
We overall our -- we overhauled our promotional calendar reducing the number of events making each of them work longer and harder by focusing in on well-known promotions like Friends and Family, Black Friday which will afford them this year.
Also we made it clear both to our associates and to our customers that we are coupon friendly retailer and feel of being clear about this will provide us both sales and gross margin lift.
So as we look at 2013, much of what we are going to do is to continue the blocking and tackling that we started in 2012, including regaining the core customer I spoke about earlier while gradually attracting new ones, continuing to raise the gross margin rate, not only through new liquidation techniques that we began in 2012, but also raising the AURs by pricing more strategically and improving our turn, especially in the smaller doors.
Growing e-commerce by 50% from 3% of our sales to 5% of our sales, which will provide much of our 2013 growth, continued disciplined expense management that will enable us to achieve our financial goals will also providing us flexibility to invest in areas that can give us the biggest payback short and long-term, continue to strengthen our capital structure which Keith will elaborate on, further our marketing improvements by investing in CRM and other marketing techniques, including our allocation by media type with more moving into digital and new media which we have been slow to do.
Lastly, I want to talk about localization. My biggest learning in 2012 was just how complicated the business is because of the number of stores we run and in different sizes and different markets we compete in. Unlike most department stores we don't have a flagship store or flagship region. The biggest store we have is just over 1% of our business.
As you saw in the earlier map, we are in many different regions and they have their own personalities. We still operate under seven different banner names which represented seven different merchandising and marketing offices in the not too distant past.
Through our acquisition and consolidation while we have kept the names we have lost the understanding of the local markets that truly made these stores the hometown stores. We have homogenized these customers into too narrower profile that no longer represents any of our banners very well. In doing so we gave away business to the competition.
For us to show real store for store growth, we need to develop a way to localize these stores. We can't merchandise in marketed store in St. Cloud, Minnesota, the same way we do in one in Allentown, Pennsylvania just because the volumes are similar.
We are going to spend time and resources in 2013 to try and figure out how to think like multiple buying offices without actually having them. If we are able to solve this riddle we’re not only start pulling -- putting up meaningful comp store growth, but will also have a core competency that will allow us to open up new stores in regions that are underserved, like the store we opened up in Pocatello, Idaho last year. That gives us roughly a 60 mile radius to next closet store selling brands like Estée Lauder and Calvin Klein. We might not get the payoff in 2013 but it will lay the groundwork for future growth.
With that, I would like to turn it over to Keith to walk you through our financials.
Thank you, Brendan, and good afternoon, everyone. What I’d like to do is take a view of the financials really tieing back to where Brendan was on an earlier slide is that our objective, $3 billion retailer, 10% an EBITDA. And the way we are going to get there is obviously by focusing on the drivers of that which is going to be volume, sales and of course, the key drivers from our levers standpoint which should be our operating income, gross margin, excuse me, other income, gross margin and SG&A. And we want to look at it from the standpoint of Brendan made a comment earlier in the year, we want to have sequential progress, we want to sequential improvement.
As you look at the quarters here, what I’m going to do is, I’m going to look at the top half first which is comp sales and gross margin rates, and I want to talk about each quarters we go across and I'll come down and walk away through until we get all the key drivers that hit our EBITDA.
As we look at comp sale in the first quarter we were down 1.3% of gross margin rate was 120 basis points below the prior year, not where we want to be a very disappointing quarter and essentially drove us where we were about $11 million lower in gross margin dollars than the prior year.
Move to the second quarter, we are up about a 10% but the gross margin rate still down 120 basis points, gross margin dollars compared to the prior year down $7 million, so through this spring season we’re between $70 million and $80 million down on gross margin basis, which is driving our EBITDA down.
Third quarter, we get the sales moving in a better direction 1.9% in comp, gross margin rate does improve, it’s down 80 basis points now compared to the prior year from 120. Again not where we want to be combination of that is the gross margin dollars are down about $1 million so through the first three quarters we’ve not driven the gross margin where we wanted to be or the gross margin dollars which are very important to achieving our EBITDA.
Fourth quarter driving 1% in comp and now the gross margin rate 160 basis points improvement on a year-over-year basis that drove the gross margin dollars to be up about $27.6 million. When you take the full year together we are on a gross margin basis still down about two-tenths compared to the prior year but a strong recovery from where we were earlier in the year and additionally, the gross margin dollars improved by a little over $8 million, compared to the prior year, very important to driving the recovery that we had in the EBITDA on the year-to-date basis.
Moving down to the bottom left corner, selling, general and administrative expense, in the first quarter we were 140 basis points higher, gross margin dollars about $6 million higher. So, again, complicating that first quarter and driving the EBITDA well below where we wanted to be.
Second quarter we got about flat on the rate about $400,000 savings that’s when the initiatives came into play that we tabled about. We were able to reduce the SG&A expenses and start driving the company where we wanted it to be.
Get to the third quarter, gross margin, excuse me, SG&A rate improved by 220 basis points, $10 million reduction in the SG&A and then fourth quarter we had an improvement about 40 basis points. Again, I want to point out that’s with the 53rd week in there so improved the SG&A rate as a percent of sales.
SG&A expenses were up $4.3 million, including the 53rd week, if we pull that out, we would be down on a year-over-year basis. That result SG&A for the full year, we are about 100,000 up and 30 basis points improvement over the prior year in SG&A again including a 53rd week, so very proud of where we got ourselves in touching that trigger.
That all drives along with other income, which other income is going to arrive in the 2% to 2.1%, it’s not going to reflect a whole lot more than that as to the income percentage to sale, but as we look at adjusted EBITDA I just went through where we were in each quarter.
First quarter down about $18 plus million in our EBITDA, second quarter still another $8.5 million down, so through the spring season we are about $27 million in our whole -- in our EBITDA, come to the third quarter from the gross margin sales improvement we're up about $9 million and then fourth quarter we had another $16.4 million of improvement.
So when you put it all together, we came within about $1.4 million of the 2011 EBITDA dollars and the percent of sales was about 10th difference, so very pleased where we recovered the sequential improvement as we went through the year and very important as we start thinking about driving the company a $3 billion of sales and a 10% EBITDA margin.
Also very important to us in 2012 was looking at our capital structure and I think everyone remembers we had the 2014 note that we’re going to mature in March of 2014 and because of this spring maturity we would have actually matured in January of 2014, I would haven’t been address.
Very pleased that we are able to exchange $330 million, about 71% of those 2014 notes, for new 2017 notes that mature in July of 2017. They have no non-call provisions in this, so we have a lot of flexibility. We know the markets are very good. We continue to watch what’s happening in the markets. We are also working with our partners and advisors to determine the optimal time for the company to go and do something additional.
By doing this exchange, we took these senior notes that will mature in 2014 down from $464 million to $134 million and that we also announced in January recall $65 million of those notes using the excess capacity, that number was up about $80 million at year end to call those notes and take the amount of 2014 notes down to $59 million.
Important to point out that is the only significant maturity we have through to 2016, so it puts the company in a very strong capital position. We will continue to pay attention to it, it’s very important to us as Brendan said in his earlier slide, its something that will be a focus in 2013.
And then final slide here just to talk a little bit about 2013 itself in the guidance, we’ve given EBITDA guidance of $180 million to $200 million. That as a percentage of sales and the low end will be about 6.1%, on high end about 6.7%.
We have a ways to go to get to our goal but it’s the progress that we want to show as we go forward. There has been a lot of questions on the sale and the gross margin actually more on the -- have more opportunity in gross margin and you’re showing, and as your sale aggressive.
If you look at our run rate through the second half of the year we were 1.9% and 1%, the average goes together based upon the weighing of sale we are about 1.4% comp in the fall season.
Additionally, e-commerce, we grew from 2% to 3% in 2012. We see ourselves growing from 3% to 5% that’s something we feel very confident about, that itself will drive 1 percentage point of comp store sales growth. So that takes us well over the 2% range.
And then we feel additional between merchandise mix, marketing changes we put in place, the new partner with ADS on the credit card and also the Loyalty Program we launch. We think we have great opportunity to drive additional sales.
Beyond that in the gross margin, merchandise mix, marketing certainly will benefit us, but we also have private brand costs are coming down, our new clearance strategy and just overall management of inventory we feel very good that we’ll be able to drive sequential improvement in our gross margin rate as we go through 2013.
And with that, I’d like to open the floor for questions.
Bill Reuter - Bank of America Merrill Lynch
I’ll -- I guess I’ll start with one, I guess, for Brendan. You guys have been growing e-commerce more quickly than the rest of the business, and it sound like this is going to be continued to be a driver. Can you talk about quantifying this for us and then what the additional investments and functionality might be that you think? And then how it might be changing the customer base or how that customer is different than the brick-and-mortar customer?
Yeah. Well to quantify it, we get about $100 million last year which was the 3% of business that Keith and I referenced, and this year we think that can grow at about 5% of the business, that will be about $50 million increase this year alone.
As I mentioned, we brought in a new Head of E-Commerce and Marketing, who work with me, helping us drive neimanmarcus.com to it success, so he has brought in a whole new sense of, the whole new experience, the whole new sense of technique to our e-commerce team, which was mostly homegrown, so therefore hadn’t really seen best practices out there.
So, I mean, we will, well, our site he will then upgrade in technology. We weren’t utilizing the technology for simple things like we didn’t have a size and color filter on the website, everybody shops by size and color.
So we didn’t have a dynamic homepage, where we would show multiple images. We didn’t have landing pages for vendor boutiques. So lot’s of things that all we are doing is using best practices in the industry but for whatever reason Bon-Ton hadn’t implemented.
And executing those on the site allowed us to get Michael Kors to agree to launch with us this past February and Coach to agree to launch with us this past December and we are working on Ralph Rendell hopefully we announced that sometime soon. So those tree brands will drive tremendous volume both the business will do but just the halos that being able to market them on the site allow us on the website.
So very bullish and very confident about our ability to achieve those numbers and with that will come future investment need particularly on the fulfillment side, right now we are -- we do the fulfillment ourselves but it’s done through our three warehouses that service our brick-and-mortar stores.
So we know we need to build a centralized fulfillment centre and we are just trying to hold that as long as we can not because the capital investment scares us because we know we’ll have to make that, but we want to get a smart about our business as possible to really understand where the growth going to go from there and the more run -- the more background we have, the more predictable future growth will be.
And also others are doing things like fulfillment at our stores, so I’m interest to see how successful that is, to see if that something we should incorporate into our go-forward model. So I think there is nothing but upside for us and while we are little bit late to the party when it comes to e-commerce I think we will catch up quickly.
Bill Reuter - Bank of America Merrill Lynch
And the difference in the customers that you are seeing online versus in stores?
I think we are still learning about that. I mean our customer is changing so dramatically because of some of the things we’ve done in stores and now online. So I think as we get a little bit more history, we’d better be able to determine how different she is.
Even though we know she is younger, we know she is a little more updated, but we will be able to better match how similar, dissimilar she is to our core customer. But as I said earlier, part of our strategy for 2013 is to try to understand, how our core customers differs by market and what that means for us.
Bill Reuter - Bank of America Merrill Lynch
Questions in the Audience?
I have one or two. First of all, did you say that your 10.25%notes…
I’m sorry. I can’t hear you.
The 10.25 notes….
They were down to $69 million. We called $65 million, they were $134 million. We called $65 million or $69 million remaining outstanding.
Okay. And what does the balance sheet look like now?
So, when you said balance sheet, little bit more specific.
What’s you debt?
Our debt is about $901 million.
And your equity?
Equity in $130 million range if I remember correctly. I’d have to look.
Okay. Final question. You expressed a lot of confidence in your movements. You used Wall Street terminology in your estimates scope. I guess you would have to say estimates that you could drive out cash flow. What were the variables between the two estimates on EPS?
You are talking about the $0.60, the $0.40 for a $1.
And it’s really driven by the assumptions we’ve laid out in front, the 2%, the 3.5% comp sales as well as the gross margin from 36% to 36.4%. If you look on one side and say there is headwinds or pressure that pushed back some and we drop towards the lower end of the range, that’s going to drop us down towards the $0.40. If we can drive the higher sales and the gross margin rate will go towards the upper end of the range.
Thank you. Good afternoon. What are your plans for the 10.25% bonds, please?
Our plans for the 10.25% bonds, at this point we have $69 million outstanding. Truthfully, we could pay those off via cash flow and excess borrowing capacity. Today, we have two requirements on facility as to drawing it down and we qualify for both of those requirements very easily and meet the standards that we needed to hit.
So we could do it that way. We also noticed a very strong market out there. We are continuing to investigate that market and we will make a decision, whether we should do something today or if we should just drop on the line. How do we want to do that?
I think. Over here. What’s the demographic of the Kors customers that you hope to bring in? Is it different than your traditional customer? Can you talk about kind of age and style and income?
I’m sorry. Did you say Kors or core?
Kors. Michael Kors. What’s the demographic of that? Is it the same as your traditional customer?
She is more excellent than our base customer. I mean, we only had Michael Kors in nine doors when I got here last year. We expanded to about 40 doors, so we now have 270. So, it’s still a top door resource for us and clearly it’s the brand and it brings in a younger, more updated customer for us. Hopefully, she gets introduced in the store and spends elsewhere.
But I think, also it was important for me, online and the stores to have Michael Kors because we needed to have a fair fight with the competition in places like Chicago where we are in a crowded marketplace. And not having Michael Kors, for example, right now will set a huge disadvantage. So back to the website, I think it’s going to be a huge lift to the website to have brands like Kors and Coach, even though they are found elsewhere.
And when you say younger, are you talking about two years or like 10-years younger?
No. The mistake -- what I have said in the past is a mistake Bon-Ton made. It was trying to get too young too fast, was trying to get decades younger in one step. So we are doing that much more gradually, methodically now, embracing our fifty something year old customer who loves our modern and traditional ready-to-wear assortment. But at the same time, almost by definition, the department store used to cast a wide net. And so brand like Michael Kors is a very easy one right now because it is the hottest thing going and I think while it appeals to younger customer, I think it also appeals to younger thinking customer.
So there's really probably no boundaries to the age it appeals to right now and so for us it's just a hot brand right now that we need to be playing in and hopefully it does. Our friend does a little bit younger. But it’s not the start of a, trying a Kors correct to go much younger again.
Obviously, you guys have done a great job and taking steps in order to increase the -- I guess assortment income statement, which has been the bigger problem behind the balance sheet really. And so as you are looking at sort of your capital market strategy and the different markets available to you.
Historically, we’ve seen you in high yield markets. We’ve seen you in the equity market, although you haven’t issued you any equity for a while. We haven’t seen you in some of the other markets that are out there, like for bond markets, for example or the deferred market. Both markets that are actively open right now and very attractively priced.
So, as you are looking you at your capital market strategy on a go-forward basis, you are looking to continued to fund these strategies that you are moving forward, whether it’d be technology investments or new stores, equipment stores, et cetera. How are you looking at that relative to your capital market strategy and the different markets that are open to you?
There is no question. Those are part of our consideration, as we look at the capital markets in general. Whenever you get into an equity side, we certainly want to make sure the markets were recognizing the value in the company, the go-forward value in a company. And we don’t want to something that’s going to be dilutive to everyone.
Right now, I think the debt markets because of the comparable is where the treasuries are or the spreads. So forth they are very attractive market, whether it would be our senior notes on some kind of high yield or be in term loan. Everything we are hearing is there is a lot of opportunity there.
Certainly, as you go forward is what you are saying, there is two big pieces or two big components like capital structure. We just think it’s premature right now in the equity side if you are looking.
Yeah. We kind of do that again. They are going to look at where you are and you look at the upside to where it can go. We think we just have to show a little bit more stabilized and continuing a trend of sequential improvement. We only had two quarters here that we all can say we’ve shown improvement in EBITDA. We need to continue to register that forward and I think it opens up a lot of more markets for us.
Hi. If you are able to successfully execute the localized merchandising strategy and presume, it will take a little while for you to validate that that’s working or not. But let’s say that that’s successfully executed, does that enable you with some point in the future to collapse some of these banners from seven to maybe five or three or maybe even one? Is that even a goal of yours and are there benefits to that? Thanks.
Yeah. I will tell you when I first got here about a year ago, I absolutely thought we are going to collapse all those banners because, Younkers to me was a town next to my home town and Boston store been located. In Milwaukee, I was confusing and I never heard because of burden.
And so I was all right to collapse these things and then I started to travel a lot in the middle of country and realized in Des Moines, Iowa, Younkers is the store. I mean, they Davenport, Moline were also but we are like the home town stores. If I slap another name on that building, it would not increase sales. It would take us -- we would take a step back and we would have to invest to rebrand those stores.
So and that’s towards Minnesota with Herberger's and et cetera. So right now there is no immediate plans to do something like that and I think I’m probably more reluctant as we do think about the localization efforts and appreciate that the branding is part of that. So, no, I mean in the short-term that’s not the presumed outcome of localization strategy.
What I would say would be the presumed outcome beyond this store-for-store growth would be, if this can become a core competency of ours, the opportunities are opening up new stores in new regions. And normally the department stores are really doing that right now. So if we can figure out -- figure this out, we’ll then we can go back into Idaho and Wyoming and places where 60 miles to get as they water in and become that local store of choice under whatever banner name.
Yeah. How many of your stores overlap with J. C. Penney in the same mall, and how much of your improvement in the second half of the year couldn’t even do due to their stumbling?
The past three quarters of our stores are in the same mall with J. C. Penney’s and probably closer to 90% of our stores were in the same market. So they are our most, our nearest competitor. Truthfully, it was very inconsistent. The gains we got by store and I think you’ll have to remember that through most of this year, we were going through our own identity crisis.
We had made our own missteps and that we were quickly trying to change. So, I think if there was a different franchised J.C. Penney’s customer and she came into the Bon-Ton in March or April, she wasn’t necessarily falling in love with us. So, I don’t think we did a great job of that as we stabilized the company.
I do think a lot of that volume is still up for grabs because not sure if anyone knows quite where it went. And to your point, taking about $2.5 billion in your market, so if they’ve lost about $500 million of market share I mean that’s a number that we are actively talking about and thinking about now as we feel we’ve, Kors corrected many of our issues and can now focus a little bit more on servicing that customer.
What percentage of your stores that are not flowing, all this that are positive?
It would be about 10 to 15 stores out of total store growth. We’ll need to update that more for 2012 data, which we are not completely through with yet. And I do expect there is a couple that will move off that list to move down but there could be some other price. Ones that were in that group, we definitely have a focus on trying to grow the volume there, looking for opportunities, ways to improve those locations. But certainly, here we have to take a look now at the end of 2012 to see where that ends up.
Just to follow-up on the J. C. Penney question. Have you seen any changes in mall traffic? If anything, have you actually seen maybe you’ve not seen any extra terrific process making to J. C. Penney not referring to sales back?
I mean, we don’t have traffic cameras. So I can’t -- I can only tell you that gaudily but that was something I said in earlier conference call that I think there is -- there is a point of view that you could make which is just that, that many of these malls that we’re in are really low occupancy malls at this point.
Count number two anchors to bring in traffic. So one of the anchors loses all that market share. Yeah, I think that there is some of that. And I think that’s why back to the earlier question, there was an inconsistency in what we saw in terms of taking advantage of that volume.
Historically, you mentioned that you’re underperforming. I think concentrated in any particular region or is it scattered throughout the country?
They are pretty much scattered, they were nothing like lost dollar or any kind of issues there. It’s more in certain cases or stores that weren’t performing well before. I think within that 15, there is a probably a core group of somewhere between 5 and 10 stores that are going to be difficult to turn around, have longer team leases.
We continue to try and make strides with him but I think that basis is going to hang there for a couple of more years. But the other ones we believe that through our organic growth and improvements will be able to double them up out of that group.
The question was how much negative EBITDA for the stores. It’s not something we’ve disclosed. I will say you have some that was low as being maybe $100,000, $50,000 negative. We also have the other end where a number might be closer to the seven figures as to the negative cash flow of that location.
Yeah. I was just curious. You guys have, of course, cracked it. How is your head count track as you comment to Q1?
Internal head count.
Yeah. You cross all the stores. I mean, you guys -- I was curious like how much you’ve taken out of employees or added as you’ve done all this?
No. Back in late Q1, Q2 last year, when we did the substantial reductions, yeah, we took out some head count but it was also in the stores the way we structure the stores. So they -- to summarize, each of the stores used to have a number of department managers that were exempt executives and they were more management than selling.
And so what we’ve done is we’ve transitioned them in most of our stores to selling supervisors where they’re actually now on the floor more selling as well as supervising. So in some ways, we’ve actually added head count but reduced the overhead. And if something was still evolving into, linear than I would like on the sales floor and certainly as we gave some traction, we hope to be able to invest back in.
So I think that’s a place we can been competitively advantaged as others have really pulled back at some of the store personnel. But overall for now, I think we’re very comfortable with the level of expense and head count for the size of our business.
I’ll hop in with one. In terms of reallocation square footage, I know that shoes was big in 2012. I guess I’m curious how much maybe that would have contributed to your comps in some way. If you have any sense of that and then other changes being made at the store manager level or they coming from a higher level. It’s kind of more broad based strategy. If you can talk little bit about that and then how do you think about ‘13?
Well, just about every store, there’s some expansion of shoes whether it was capital -- capital involved that they do just what we call muscle moves which I just went ahead and did it. And we were very pleased with our shoe business last year and the increase of growth. I was disappointed though in many of the stores that we didn’t get the handle effect in other areas.
And I think that speaks to the culture we had at the Bon-Ton which was really one of the executors of the store level. So they were told to expand shoes and they expanded shoes. But then they weren’t being proactive about saying okay, in order to expand shoes, we move luggage and now luggage have borne 20%.
So let me see if I can move luggage to the different part of the store, constantly being playing around kind of within their sand box. And we’ve been very clear within now that they have that empowerment to do so. And we expect them to do so. And not just back and wait for the next directive from corporate.
So I think taking those separate issues, we continue to be very bullish on and expect that to be of outsize growth in 2013. It will also be advantage because the inventory will catch up with the increased square footage we made.
A lot of the -- we did this increase. We’re able to increase this square footage earlier than we’re able to get the receipt to fund those areas. But probably more important is having the stores continually be proactive about changing around their presentation to maximize sales. And it goes back to the start-up localization.
It is taking more inputs from the grass roots of the store level to understand that if we say we want on this tower a green sweater than happens to be 70 degrees in their markets that they should put a short sleeve pillow on there and see how that sells. So I think it’s a constant evolving and learning process at Bon-Ton.
My question was actually very much along this line. When you first started you were talking about easy kind of inexpensive conversion strategy that you could implement in order to increase sales in the stores whether it be a drop a clock or expand shoes or expand cosmetics or whatever the case maybe. And you certainly have a larger survey.
So I guess the question really is how many of these stores have got securities in extent to conversion strategies. Are you finished at this point in time and how much more do you have to go?
We’re just getting started. I mean, with the shoe moves, in particular, we’ve touched most of the stores at this point. Your example of a curtain, the strength of stores is something that we’re aggressively taking action on now.
When I look back on 2012 and I look back in the past at Bon-Ton, we have two much inventory right now. We have too much inventory in the small stores, that’s something that’s crept up over the years. As we have brought the fix to fill, to fill store rather than buying to what stores actually need to sell.
So if you look back, high water mark of $240 million in EBITDA back in ‘10 $170 million were basically been now. Sales are about the same. It’s the gross margin and to me it’s the turning of smaller stores and robbing the big stores of the inventory to sell those smaller stores.
So we are really aggressively stepping up with those suggestions of artificially shrinking the store, also looking at fixtures and figuring out other ways to merchandise them without having to fill up the fixtures that we have whole capacity. For example, I was in one of the denim markets last week when they designed the denim brand. And they were bragging about this new fixture they were going to give us, new eye capacity fixture helped 250 pairs of jeans.
Well, that’s terrific in 20 or 30 of our big stores. In most of our stores, I want a low-capacity fixture. I want something about 100 jeans because that’s probably all we need. And yeah, I don’t want to have a big fix as it looks empty because then it looks like we don’t believe in the business.
So working with vendors, we’re also working with our visual team to say okay, this is now your responsibility to make these stores and fixtures look for, not the merchant’s responsibility to buy units to fix their form. I think we can make great progress there.
By the way, we stylized some of these fixtures, not triple hanging kits, double hanging kits, I mean we just raised the dividend. I think that’s the quickest win we can get in terms of gross margin is -- merchandising these small stores. While we figure out how to localize them, the level of inventory that the sales would dictate.
Just that two quick follow-ups on your J. C. Penney comments. First, do you need them to succeed to drive traffic for you given your comment about…
We didn’t go that far.
Not for sale, maybe they are not going to sell -- so we can comment on -- I'm just taking your last comments a bit further about total occupancy mall. And secondly, how much of the 75% overlaps our J. C. Penney stores where they are not doing store-in-store concept?
Well, so I tell you in a reverse order. My guess is 95% of this. Outside of Chicago, I don’ think these are any of the stores, they are doing those shop-in-shop centers. These are really middle of the country where much smaller and row markets. So that’s my guess. I haven’t really -- as I visit them, I haven’t really seen them topping up.
I think to the first part of the question, I was kidding aside, well, we don’t wish anyone ill. We will -- we just need to better job of taking advantage of the opportunity this is presenting and again, 2012 was not the best year for the Bon-Ton. We were finding our way. And so weren’t prepared for this customer to come seek us out.
I think 2013 we’re better prepared. So if that -- if they don’t gain back the volume themselves, I think we are in better position to take some of that volume. I think it will be even better in 2014, if we can get this localization press opportunity figured out. I mean I was in Colorado last week, last month in Grand Junction, Colorado which is four hour rest of Denver, terrific store for us relative to our productivity.
We are the only mall -- we are the only store in the mall, the only anchor and yet if you walk into that store, it could have been our Allentown, Pennsylvania store. It could have been our Woodfield Illinois store. It had no -- it was not merchandised at all. Market is all for the fact that it’s in street town, it’s mounted outdoor, it should be more casual. That’s where I think the opportunity is and understanding the J. C. Penney’s competitors in the market, they should be proud of that. I guess, that means we’re done.
Bill Reuter - Bank of America Merrill Lynch
Thank you very. I appreciate, Brendan and Keith.
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