Charlotte Russe Holdings, Inc. Q2 2009 Earnings Call Transcript

Apr.17.09 | About: Charlotte Russe (CHIC)

Charlotte Russe Holdings, Inc. (CHIC) Q2 2009 Earnings Call April 16, 2009 4:30 PM ET


John Goodman – Chief Executive Officer

Frederick Silny – Chief Financial Officer

Emila Fabricant – President, Chief Merchandizing Officer


Janet Kloppenberg – JJK Research

Adrienne Tennant – Fbr Capital Markets

Betty Chen – Wedbush Morgan

[Alex Furman – Raymond James]


Welcome to the Charlotte Russe second quarter 2009 conference call. With us today on today's call are John Goodman, Chief Executive Officer, Emilia Fabricant, President and Chief Merchandizing Officer and Fred Silny, Chief Financial Officer.

Certain statements made on this conference including without limitation statements addressing the beliefs, plans, objectives, estimates or expectations of Charlotte Russe Holdings or future results or events constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of1995 as amended.

Such forward-looking statement involve known and unknown risks including but not limited to general economic and business conditions and conditions in the specialty retail industry. There can be no assurance that the actual future results performance of achievements expressed or implied by such forward-looking statement will occur.

Users of forward-looking statements are encouraged to review the company's latest annual report on Form 10-K, it's filings on Form 10-Q, managements discussion and analysis and the company's latest report to stockholders, the companies filings on Form 8-K and other federal securities law filings for a description of other important factors that may affect the company's business, results of operations and financial condition.

The company may also disclose non-GAAP financial measures on this conference call. Pursuant to the requirements of Regulation G, the company has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings press release issued earlier today. The earnings press release is available on the investor relations section of the company's web site at

The company has filed a definitive proxy statement with the Securities and Exchange Commission relating to its solicitation of proxies with respect to the company's 2009 annual meeting of stockholders. You are encouraged to read the proxy statement and any other materials filed by the company with the Securities and Exchange Commission because they contain important information related to the annual meeting.

And now, I will turn the call over to Mr. John Goodman.

John Goodman

Good afternoon everyone and thank you for joining us today. Since we talked to you last quarter, our team has made progress against our plans to transform Charlotte Russe. We're pleased that all levels of the organization from our corporate staff to the field have embraced the new strategies faster than we anticipated and we feel positive about the changes that are underway.

In the second quarter we posted comp store sales in line with our guidance range and delivered better than expected earnings per share despite the difficult selling environment and a shift of Easter into our third quarter.

By geographic region, the Midwest had the strongest showing and we saw some improvement in the Northeast in recent quarters. Conditions remain particularly challenging in the Southeast and west including Texas.

Among our top priorities since we arrived in November was to attack inventories and expenses. Over the past several months, we've taken decisive actions to lower inventories, cut receipts, manage mark down levels and generate strong full price sell through.

Additionally, we implemented strict cost controls and reined in SG&A levels. These efforts drove our earnings per share up $0.04 in the second quarter.

During the period we made progress in both in operational and strategic perspectives, executing on each of the initiatives we described to you on our last conference call. Our five prong strategy includes the following; one, refining our brand positioning to better serve our current customers and capture an expanded base to enhance design quality and style.

Two, enhancing our merchandise assortments through improved planning, production, design and execution. Three, refining our buying process and bringing a greater level of discipline to inventory planning and allocation.

Four, assuming a more proactive approach to managing our real estate and maximizing productivity, and five, employing a discipline return oriented approach to capital utilization.

In a short amount of time, we've begun to refine what the Charlotte Russe brand represents. Our product offerings are improved. We're now providing the customer with trend right, well styled merchandise, and our stores communicate a fashionable well defined point of view that was missing in the past.

For those of you who have not visited our stores recently, I would encourage you do to so. Although our work is just beginning, I believe you will notice an improvement in product, merchandising and store presentation.

We rationalized our style and color choices which were down approximately 30% at the end of March versus a year ago. We're giving the customer fewer choices or we're making commitment to specific trends, interpreting those trends for her and making the appropriate investments.

One of the most elements of our brand positioning strategy is to better serve our current customer while capturing a broader base through a more appealing design quality and style. We're continuing to concentrate on growing our business with our loyal 16 to 22 year old core Charlotte Russe customer while also offering enhanced product assortments, fashion and contemporary fit that appeal to the older end of our target range, the 23 to 29 year old.

We're supporting our brand and product development initiatives with windows and in store visual that deliver a consistent message and convey a clear lifestyle positioning. This includes ensuring full alignment of all customer facing elements with our brand positioning from store design, signage and staff to the Charlotte Russe web site.

Turning to inventory optimization, we have refined our buying process and have brought a greater level of discipline to inventory planning and allocation which is evident in our second quarter results. We ended the second quarter with comp store inventories down 18.4% and the comp position of goods is dramatically improved.

We moved aggressively during the first half of the year to get Legacy issues under control and we're not able to operate much more effectively and efficiently. We've also adopted a more strategic and profitable mark down strategy that will enable us to move through goods more quickly. Emilia will discuss this in greater detail shortly.

Another source of margin opportunity can be realized by involving our sourcing strategy. We've recently begun working with some new domestic vendors, doing some buys on an exclusive basis and working with our trend team and vendors to create proprietary looks. We also plan to increase our direct import penetration from about 15% up to 30% in the future.

Overall, we're buying tighter, operating leaner and enjoying healthier sell throughs. The combination of our strategies to operate with lower inventory levels, improve our mark down strategy and evolve our sourcing strategy should result in enhance gross margin performance in the months and quarters ahead.

We know that cash will be challenging in the current environment but we are committed to driving improvement over the long term.

Turing to our real estate strategy, we're taking a proactive approach to maximizing unit level contribution and return on invested capital. One of the most common observations about our stores is that the box is too big to achieve desired productivity levels. We believe approximately 5,500 square feet represents a more appropriate footprint for our concept and there was a clear opportunity to make the economic model more productive.

First, we're working on the structure of our existing leases. We're having constructive conversations with our landlords surrounding both new and existing store lease negotiations. The good news is that we're a favorable tenant given our size and strong financial position. Thus far we realized $2.3 million in annual rent reductions and we're encouraged by the continuing dialogue and opportunities we're seeing for rent concessions, location and size.

In addition to refining the structure of our leases and right sizing our stores, continued improvements in product assortment, merchandizing and sell through will also drive enhanced productivity over the long term.

Currently our sales per square foot are tracking at $253.00 which is well below our specialty retail peers. We are focused on increasing that into the $300's as quickly as possible. As we look at new locations, we plan to selectively add A malls which Charlotte Russe had underpenetrated and the economics would be more favorable, particularly with a smaller footprint. We're seeing opportunities and working with landlords at malls where Charlotte Russe would have not otherwise been because of our historical size and depressed productivity levels.

We are also on track with the development of our outlet strategy. We believe there's an opportunity for up to an additional 60 locations from our current 47 stores. We are currently developing specific strategies for product, pricing and promotion that cater to the demographics of the outlet customers.

Today our outlet store productivity is well below what landlords expect in these locations. We plan to roll out our new strategy in the first quarter of fiscal 2010 and believe there is a substantial opportunity to achieve both store level productivity increases and unit growth.

We're operating the business with discipline, conserving costs where possible and investing for the future only when there's an appropriate return on investment. The company continues to be a strong cash flow generator providing us with the financial flexibility to strengthen our competitive position in today's difficult retail climate.

At quarter end, with $51 million of cash with no debt. In the first half of the year, we generated approximately $18 million in cash from operations.

In the current environment, we hear a lot of companies talking about cutting costs and lowering inventories. Clearly that is prudent and those are indeed among our top priorities. We think it's also critical to take steps to connect with our customer. We're utilizing highly cost effective and return oriented marketing and public relations initiatives to generate traffic to both our stores and our web site. Our total spend will be less than 1% of net sales this year. Later in the call, you'll hear from Emilia about the specifics of our strategies and the results we're seeing thus far.

Additional, I've been working closely with Sandra Tillet, our Executive Vice President of Store Operating to create an in store service proposition that is much more engaging, trend focused and distinctive. Our sales staff must be knowledgeable about the product assortment, engage the customer and represent our aspirational brand positioning. Sandra has terrific experience and is moving quickly to improve upon the overall culture of execution and accountability in the field.

While we have made good progress in a short amount of time, there is still a great deal of work to be done, but also a great deal of opportunity ahead. As we approach the fall season, we expect to build additional momentum as we continue to execute on our initiatives from product, merchandizing and marketing, the supply chain and store level execution.

We believe our five prong strategy provides a compelling road map for our team to transform Charlotte Russe into a top tier specialty retailer and capture our fair share of the market. We're repositioning our products in stores. We're improving our processes. We're focused on store level profitability. We're making investments only when there is an appropriate return and we're holding all of our team members accountable for results.

We believe that Charlotte Russe now has a strategic plan and operating model that can drive sustainable results and create long term shareholder value. We're at the beginning of an exciting transformation. We're encouraged the initial results of our efforts during the past five months and we look forward to keeping you updated on our progress.

Before turning things over to Fred Silny, our Chief Financial Officer, I'd like to briefly comment on some recent developments. As you know, for the past several weeks we've been engaged in a proxy contest with Karp Reilly.

For those of you following the contest, we recently earned the support of two leading independent proxy advisory firms, RiskMetrics and Glass Lewis who have both commended the company's progress and recommend that shareholders re-elect all seven Charlotte Russe Directors.

Subsequently, KarpRiley decided to withdraw its slate of nominees for elections to Charlotte Russe's Board at our upcoming annual meeting. We're extremely pleased with this decision and this will allow the Board and management team to fully concentrate our efforts into transforming the company while carrying out a competitive sale process.

With respect to the sale process, I'd like to reiterate what we've said recently. The sale process is progressing well and we are encouraged by the level of interest from potential buyers. Given that we would really like to focus on the progress the company made in the second quarter. We won't be making any additional comments on the proxy contest or the sale process today.

With that, I'd like to turn things over to Fred to review the financials.

Frederick Silny

Hello everyone. Total revenues in the second quarter increased 3.3% to $191.2 million. Comp sales of negative 8% were in line with our anticipated range and primarily reflect the difficult environment. Approximately two to three points of the comp decline can be traced to the shift of Easter into our fiscal third quarter.

Non-GAAP diluted earnings per share came in at $0.04 substantially above our guidance range. This is a result of our initiatives to reduce inventory levels and limit promotions which led to fewer than expected mark downs and strong full price selling.

In the second quarter, we incurred cash charges of $1.5 million for expenses related to proxy solicitation, the recent management transition, severance costs and the review of strategic alternatives and subsequent sales process. We also incurred a non cash charge of $1.6 million for the impairment of two stores.

In my discussion today, I'll be referring to non-GAAP financials which exclude these costs. A reconciliation of these non-GAAP financial to GAAP numbers is detailed in our earnings release.

Turning to comp store transaction metrics for the quarter, average unit retail was down 1.3% to $10.68. Comp store transactions were down 3.7% and units per transactions were down 3.1% to 2.64.

Non-GAAP gross profit in the second quarter was down 2% to $45.4 million while gross margin declined 134 basis points to 23.7%. The decline primarily reflects approximately 210 basis points of rent and occupancy deleverage. This was partially offset by 15 basis points of improvement in product gross margin primarily due to fewer than expected mark downs as well as 60 basis points of improvement in distribution center expense.

In addition to our improving mark down strategy as John mentioned, we believe there will be an opportunity to increase our IMU to enhance sourcing initiatives. Non-GAAP SG&A expenses came in at $43.9 million or 22.9% of sales compared to $41.1 million or 22.2% of sales last year. The increase of 70 basis points includes 110 basis points of store payroll deleverage partially offset by lower corporate overhead.

Going forward, we are committed to operating in a disciplined manner and expect to achieve further improvement on the SG&A line. We will continue to concentrate on making reductions in areas such as store payroll, supplies, travel and consulting fees.

Second quarter non-GAAP operating income came in at $1.5 million which compares to $5.3 million in the year ago period. Interest income declined substantially to $82,000 versus $1.1 million a year ago. This is primarily due to lower interest rates and lower cash balances resulting from cash expenditures related to the Dutch tender offer in April 2008.

Non-GAAP net income for the period was $0.8 million or $0.04 per diluted share compared to non-GAAP income of $4.9 million or $0.19 per diluted share in the second quarter of 2009. You should note that the effective tax rate for the second quarter of 2009 is 47%. Additionally, we expect the effective rate to be 44.4% in the third quarter and 46.4% for the full year.

Turning to the balance sheet, the company remains in strong financial condition. As of March 28, 2009 we have $51 million of cash and no debt. The business continues to generate strong cash flow which will readily fund our working capital needs and planned capital expenditures this year.

During the first six months of the year we generated cash flow from operations of $17.7 million. In addition, we have a $30 million revolver which is expandable to $40 million. At the end of the period we had $5.5 million in outstanding letters of credit and no borrowings. Importantly, we don't anticipate any borrowings for the remainder of the fiscal year.

Second quarter depreciation was $11.5 million. Capital expenditures for the period totaled $7.6 million. Of that amount, $2.8 million was deployed to new store openings and approximately $4.8 million to corporate IT and other. Our anticipated capital expenditures for the year remain unchanged at $30 million.

We remain on track to complete 20 new store openings in fiscal 2009 with the remaining 11 to be opened in the second half of the year. Total square footage as of March 28, 2009 was 3,512,708.

We're pleased to see that the execution of our strategies is generating positive results and we expect to gain further momentum throughout the balance of the year. For the third quarter, we anticipate comp store sales will be in the negative low single digit to positive low single digit range and expect to report non-GAAP diluted earnings per share in the range of $0.17 to $0.27.

We also expect in the third quarter comp store inventories down in the low to mid teens.

Going forward, we will continue to operate with financial discipline. We are committed to carefully managing expenses, investing only when there is an appropriate return and preserving our strong cash position.

Now I'll turn things over to Emila Fabricant, President and Chief Merchandizing Officer.

Emila Fabricant

Good afternoon everyone. When we spoke to you last quarter, I outlined four major objectives that our merchandizing organization was working on. One, evolving and refining the Charlotte Russe brand. Two, improving our merchandise assortment through quality, style, fit and point of view. Three, developing compelling marketing that emphases our fashion perspective and four, creating a boutique store environment that is easy to shop and provides an engaging customer experience.

I am excited to report that we have been making good progress on all fronts. In our merchandizing and marketing and visual teams have been enthusiastically embraced the new processes and tasks ahead of us.

From a product perspective, we have enhanced our assortment through improved planning, production, design and execution. The level of quality and style has been significantly elevated and communicates the distinct fashion point of view that is understandable to customers while also maintaining the value Charlotte Russe is known for. The feed back from our store employees and customer alike have been very positive.

In the second quarter, we saw strong performance in footwear, lingerie, the Refuge Jean brand and especially day time dresses in a variety of silhouettes and lengths. Casual women's skirts also performed well driven by the resurgence of the maxi skirt. Mid tops remained challenging for us but we started to see promising improvement during the final months of the quarter.

I'm pleased to note that our casual and dressy categories are both performing equally well. We're finding that our customer appreciates the versatility of our day to evening wardrobe options that provide her with great pieces that she can mix and match. This versatility and the ability to transition from day to night is key in today's economic times.

This month, we're implementing assortment planning processes and tools that will allow us to manage and flow through product much more efficiently and profitably. Ed Wong, our COO has been working closely with our IT, planning and allocation teams in partnership with our merchandising and field teams to bring this online.

We will have the ability to execute more accurate strategies by category attributes and tailor our product offering across store cluster based on customer differences and historical store performance. Additionally, our new hand held technology will also be operational this month enabling us to improve our mark down strategy and cadence. This will allow us to target the more profitable price per item, therefore maximizing our gross margin capability.

First, we're minimizing the depth of our initial mark downs. Historically, the company took 50% to 60% off at first mark. Our new target is 30%. Second, as we discussed on our last conference call, we have shortened our delivery flows from eight to six weeks and we are now delivering by floor set.

Importantly, each trend has a predetermined life cycle on the selling floor. Historically mark downed goods went straight to clearance rounders at the back of the store and up to 25% to 30% of the store was allocated to clearance racks. The new hand held will enable us to keep the collections together on the floor and mark them down more profitably until they cycle out. While the stores will still have a dedicated clearance area, it will be much smaller.

Overall the new processes and strategies are beginning to foster tighter buys, faster turns and higher out the door prices. In fact, full price non clearance sell through for March improved by 180 basis points versus a year despite the difficult environment and the Easter shift.

We are just starting to see improvement and expect to make additional progress in the fall season and beyond, and part of our focus on broadening visibility for the brand and improving our competitive position. We have put new marketing and public relations into place in the recent months.

Our marketing campaigns are fashionable, stylish and convey a distinct lifestyle message. We have elevated the look and feel of our fashion imagery and increased the amount of visuals we use to support in store and online trends presentations.

We also updated our promotional signage package which now features a hipper on brand esthetic. Eric Damon was hired in November of 2008 as our creative consultant and stylist. We love the creativity he brings to our efforts. Eric knows how to elevate a look from simple to fabulous and is helping us show our customers how to develop a hip fashion sensibility of their own.

We recently launched weekly text messaging campaigns, giving us another channel to reach out to customer's real time and get them excited about the brand. We also enabled email capture at point of sale, which will help us increase the size of our data base and make email an even more effective sales and customer engagement tool for us.

In January we hired a public relations firm, Harrison and [Shrefman] which is greatly increasing our exposure in the fashion and lifestyle press. During the spring season, Charlotte Russe has received unprecedented coverage. Our products have been featured in publications such as Lucky, Seventeen, Allure, People and Cosmopolitan to name a few.

We have also received extensive television coverage such as Good Morning America, the Insider and Live with Regis and Kelly. This level of exposure is invaluable and is helping us communicate Charlotte Russe's fashion perspective while also broadening awareness of the brand. For the fall season we are planning a number of in store gatherings and interactive events that will get the customer directly involved with the fashion.

All of these initiatives are designed to help us drive customers into the stores and increase conversion. Our goal is to make Charlotte Russe a destination. We can do this by delivering a compelling presentation in our stores, making them easier to shop and creating a boutique environment that is comfortable and fun.

We have already started to accomplish this and we have been pleased to hear positive feedback from many of you who have been in the stores. Specifically we have been improving the store environment to four key initiatives.

First, products, merchandise, office and collections, incorporating an elevated level of styling. Second, we created distinctive in store shops that allow us to separate trends and simulate a boutique setting. Third, with each new trend group we create inspirational windows and compelling in store visuals, and fourth, we are reconfiguring fixtures using more face outs and mannequins.

Looking ahead to the fall season we expect to hit our stride when our back to school forces arrive in mid July. While we have begun to make progress, we expect to see a more complete transformation in terms of processes, product and marketing, store presentation and the Charlotte Russe point of view over the months and quarters ahead.

Thanks for you attention today. Now we'll open the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Janet Kloppenberg – JJK Research.

Janet Kloppenberg – JJK Research

I was wondering if Emilia could talk a little bit about how effective and timely the new sourcing efforts will be in terms of helping the IMU and if she could talk a little bit about what country she'll be sourcing from and if she has existing relationships that could help leverage the sourcing effort.

And Fred I was wondering if you could talk a little bit about the spend on marketing and PR. It sounds like it might be higher than it's been historically and if the overall SG&A costs can be contained given the increase in the marketing and PR spend.

Emilia Fabricant

To your first question about margin, first and foremost better product will help drive improved gross margin, but our strategy to increase direct import penetration from 15% to 30% combined with our domestic vendors negotiations will help improve our initial mark up.

As far as what counties or where we're sourcing from, it will continue to be Asia as well as we're looking at other, we do work with India, and again leveraging our domestic vendors and negotiating a higher IMU at the beginning of the season.

Janet Kloppenberg – JJK Research

Will that increase the lead time as well? How would that work out?

Emilia Fabricant

It won't increase the lead times. Within the 15% to 30% penetration of imports, the lead times will remain the same.

Janet Kloppenberg – JJK Research

But you expect that to help the IMU at what point? In the fourth quarter? In the first quarter?

Emilia Fabricant

We're actually staring to affect that today and we're increasing it gradually as we move forward season to season.

Frederick Silny

On your question regarding marketing and also containing SG&A expenses....

Janet Kloppenberg – JJK Research

It seems like the marketing is going up but it sounds like you still have an opportunity to bring the overall cost down. I was just wondering if you could elaborate on that please

Frederick Silny

First of all we look at any SG&A spend as a form of investment and for our spend on marketing; we definitely feel that we're going to have a return on that investment. As a percentage of sales, marketing will probably run about .7% of sales as we look out to the year and with respect to containing it, I would say in the near term if you look at our SG&A as a percentage of sales, next quarter it should be about the same percentage as it is this quarter.

And our goal is to aggressively contain SG&A expenses as we move forward.

Janet Kloppenberg – JJK Research

Why is the tax rate so high?

Frederick Silny

We have certain permanent differences that are non deductible. These are expenses that are non deductible for tax purposes and what that does is, it has the effect of raising our book tax rate.

Janet Kloppenberg – JJK Research

It's just higher than it's ever been historically as I look back on many years on my model.

Frederick Silny

The other piece of the puzzle is that at these lower levels of income the amount of these non deductible expenses are relatively large.

Janet Kloppenberg – JJK Research

Comp inventory is down so much which I appreciate but I'm wondering won't it be hard to get comps to move into the positive area?

John Goodman

We really believe that we were carrying way too much inventory previously and what we're focused on right now as we said we really wanted to get our inventories in line, get the right product in there, be able to turn it effectively, having higher regular price sell throughs. We do believe we can do this and provide the comps that we need to drive this business for the next quarter and into the balance of the year.

It's really, as you look at it, it's the composition of goods. It's going after the right product and we're very comfortable with our inventory levels as well as our ability to drive the comp performance going forward.


Your next question comes from Adrienne Tennant – Fbr Capital Markets.

Adrienne Tennant – Fbr Capital Markets

My question is on the new version of the prototype. What's the size of it? What should we be looking at first year sales productivity? And then historically I think the max sales productivity the company had done was close to $290 million or something like that, so given that the majority of your stores will still be in this larger size format, how do you propose to enhance the productivity of that box beyond what we've seen it do historically?

John Goodman

As we've talked about, if you look at our two biggest drivers of productivity and always outperform the base of the stores is A malls and outlet malls. And so as we look at this 5,500 square foot blueprint which is approximate, but that's what we're looking to do, we believe and any deal we're going to sign, the minimum price eventually for us is going to be $300 plus for any store we sign going forward.

So for us, we're looking at especially A centers, the outlet malls and saying that based upon the square footage and the velocity that we've done previously with our existing fleet, we feel comfortable and have no problem seeing that we can get into the $300 range with these stores.

Adrienne Tennant – Fbr Capital Markets

So is the prototype size is how big now?

John Goodman

Today, it's 7,200 square feet. The existing fleet today averages 7,182 feet to be exact. Going forward, the fleet that we're looking at as we go forward to new stores is roughly around 5,500 square feet.

Adrienne Tennant – Fbr Capital Markets

What do you do with those stores, the big stores? Clearly if you're reducing styles and inventory, the larger stores are just, you just don't need them to be that large and it sounds like you're actually turning inventory much more efficiently to drive productivity so maybe you probably don't need as much inventory as you historically have run.

John Goodman

That is 100% correct. Our feeling is, one of the things that we wanted to do is we had to clean up the inventory to make sure the presentation in the stores was appropriate. We carried way too much product and had too much inventory that was in the clearance rounders. For us right now it's about making sure that we have the appropriate amount of clearance in the stores, selling higher regular price and really spreading out the stores.

I'm sure if you walked through the stores in the past, it was very hard to go around the fixtures and the walls and the product into the racks. So what we tried to do and what our team is working on is creating that boutique environment, still having the right amount of product. And we talked about having 30% less in SKU's but we feel like we can make the bigger boxes more productive from where they are today just by doing the things that we talked about on this call.

Adrienne Tennant – Fbr Capital Markets

Are there other categories that you might distort or grow actually?

John Goodman

We're really comfortable with the categories we have today. We obviously are looking at different categories but whether it be footwear or denim or accessories, they're very strong for us today.

Adrienne Tennant – Fbr Capital Markets

Can you give a percentage of A, B outlets, how that stacks up for the fleet?

John Goodman

A percentage in what respect?

Adrienne Tennant – Fbr Capital Markets

What percentage are in A malls, the total fleet are in A malls, B malls and then outlets?

John Goodman

We have 47 outlet stores today and as we said, we have an opportunity to grow an additional 60 stores. A locations, it's still a relatively small part of our fleet today. We'll get back to you on the exact number.

Adrienne Tennant – Fbr Capital Markets

How many stores do you have with GGP and are there any implications with their press release today?

John Goodman

We do have stores with GGP. We've been talking with them. We obviously wish them well and they've been good parties with us and we hope they get through this period. We can give you the exact number of stores we have with GGP. I don't have it off hand, but we are aware of that and have had dialogue with them.

Adrienne Tennant – Fbr Capital Markets

When you had put the company up for sale, I think we were in a different situation with regard to the turn around so if you look at the business and you look at the potential that's ahead of you in the turn around, philosophically does there come a point when you kind of make a decision do you really want to sell the business or is there more value in effecting the turn around and letting it kind of go that way?

John Goodman

We're really not going to comment today on the whole sale process. But what I would say is that this management team and everyone at headquarters and the field is focused on driving results. That has been consistent. That has been our message to our employees to really continue on the business and drive appropriate results.


Your next question comes from Betty Chen – Wedbush Morgan.

Betty Chen – Wedbush Morgan

I was wondering if you can remind us on the number of leases that will be up for renewal in the upcoming year and perhaps give us a sense of some opportunities that could come up in the form of store rent reduction and then I think along with that, are we also seeing some better rent agreements from the new store openings this year?

John Goodman

We have 15 leases expiring this year and approximately 25 to 30 annually over the next couple of years so that gives you an idea of what is coming up. With regards to working with our landlords, we are having conversations and dialogues with them. We're really looking at several ways of doing it.

One is refining the structure of our leases. Two, transitioning our fleet to smaller boxes and then really seeing if we can do that in a profitable way. We want to make sure it's a win win for both us and the landlords. We want to make sure that if we are going to move that the store is probable. We don't want to spend extra money if the store hasn't achieved the results.

So we're really looking at working with our landlords, working on the rent concessions. We've stated we've got $2.3 million so far. We're constantly talking with them and working with them as our rents are coming due or our leases are coming due and then looking at opportunities to either shrink the box or find a way to make it more profitable.

Betty Chen – Wedbush Morgan

The cost controls during the quarter was very impressive. Going forward, how should we think about SG&A developing for either Q3 or longer term? Should we anticipate that as you evaluate some of the buckets like store payroll, corporate, travel and consulting etc. that we could continue to see additional savings and SG&A leverage coming through?

Frederick Silny

We're committed to controlling costs and looking at SG&A reductions in the future. If you look specifically to next quarter which is our third quarter, we anticipate that SG&A as a percentage of sales, that should be running at about the same percentage that it ran in the second quarter of this year.

Betty Chen – Wedbush Morgan

I was wondering if you could talk a little bit about the marketing campaign. It sounds like we're definitely using some of the campaigns that are quite effective with the demographic of your customer base. Could you give us a sense of the number of names either on your email data base of the text, those part of your text campaign?

Emilia Fabricant

At this point we don't disclose the specific number or time frame but I can honestly tell you that our efforts are geared toward increasing that tremendously over the next year or so.

Betty Chen – Wedbush Morgan

I know we're still very early on as you said in the turn around process. I was wondering if you'd be willing today or at a future time to set up some long term targets for the company whether in terms of sales growth or in operating margin target?

John Goodman

We can't give you a specific number today or a time frame. There's obviously a macro economic condition that's out there. We certainly as you said are at the beginning of our turn around. One of the things that we've guided to is that we need to get to 300 square feet plus for our fleet. 253 is not acceptable and that is really a target.

We also stated that we want to improve our margin whether it be INU or finished out the door margin. That's incredible important for us. And then improving the turns, continuing to improve our turns.

So those things we're going to focus on and it should shed some light in the quarters to come about the direction where we're headed.

I just wanted to answer the question about A malls. We're at 15% of our fleet is in A malls today approximately.


Your next question comes from [Alex Furman – Raymond James]

[Alex Furman – Raymond James]

When should we expect to see People's Liberation in Denim flowing into the stores?

Emilia Fabricant

People's Liberation will be in the 7/12 floor set on the floor.

[Alex Furman – Raymond James]

Are there going to be any SKU's taken out in your existing denim assortment to make room for that?

Emilia Fabricant

No, actually our Refuge brand is our number one brand and is outperforming our expectations at the moment so we will continue to drive that.

[Alex Furman – Raymond James]

Going back to SG&A I know for the third quarter you're expecting as a percentage of sales to be about the same as the second quarter. How much of that is dependent on comps being within your range and what kind of an opportunity is there to be a better than expected comp?

John Goodman

We always hope there's opportunity. Let me say because we are watching the SG&A line very carefully. If comps would exceed our expectation there's likely to be some improvement. But I also want to say that it's a very tough environment out there and we have to be realistic about expectations I think.

[Alex Furman – Raymond James]

I guess on the flip side, are there a lot of down side risks if comps are a little bit worse than the low single digit decline?

John Goodman

I think that's relatively unlikely with the cost control we have in place.

[Alex Furman – Raymond James]

Do you anticipate anymore one time charges related to the proxy fight in the third quarter?

Frederick Silny

We are incurring expenses currently this month and our annual meeting is this month so those expenses will fall into the third quarter.

[Alex Furman – Raymond James]

Is there any kind of a range you can give us to expect there?

Frederick Silny

No, t hat's not something I could quantify at this time.


We have no further questions at this time.

John Goodman

I'd like to thank everyone for their participation today. We appreciate your time and we look forward to keeping you updated on our progress. Thank you very much.

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