Tween Brands F1Q09 (Qtr End 05/02/09) Earnings Call Transcript

Tween Brands (TWB)

F1Q09 Earnings Call

May 20, 2009 9:00 am ET

Executives

Rolando de Aguiar - Executive Vice President and Chief Financial Officer

Michael W. Rayden - Chairman and Chief Executive Officer

Julie Sloat - Vice President, Corporate Finance and Investor Relations

Analysts

Rick Patel - BAS-ML

Linda Tsai - MKM Partners

John Morris – BMO Capital Markets

Thomas A. Filandro - Susquehanna Financial Group

Margaret Whitfield – Sterne Agee

Howard Tubin – RBC Capital Markets

Analyst for Brian Tunick – JP Morgan

Adrienne Tennant - FBR Capital Markets

Dana Telsey - Telsey Advisory Group

Marni Shapiro - The Retail Tracker

Tracy Kogan - Credit Suisse North America

Operator

Welcome to the Tween Brands first quarter earnings and web cast. (Operator Instructions) It is now my pleasure to introduce your host Ms. Julie Sloat, Vice President of Corporate Finance and Investor Relations. Thank you, Ms. Sloat. You may begin.

Julie Sloat

Good morning everyone and thank you for joining us today to discuss Tween Brands' first quarter performance. With me here today are Mike Rayden, Chairman and CEO and Rolando de Aguiar, Executive Vice President and Chief Financial Officer.

Before we begin this morning I want to remind you that our discussion today will include statements about Tween Brands' future expectations, plans and prospects for the company which constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those listed in today's press release and in our SEC Form 10K.

I'll now turn the call over to Rolando for commentary on the first quarter performance and then Mike will make a few comments on the state of our business and the transition to Justice Store brand. Rolando?

Rolando de Aguiar

Thanks, Julie. Good morning everyone and thanks for joining us today. This morning we reported a first quarter loss of $0.06 per share versus the $0.17 we earned last year. While we hate to be in negative territory we had anticipated an incredibly difficult sales environment driven by the continued macro economic pressures in 2009, our reduced marketing activity and tough comparisons since Webkinz sales were such a significant contributor in the first half of 2008.

On a positive note, our performance exceeded our internal forecast as sales for the period were in line with our expectations and our cost savings exceeded our plan which resulted in positive operating income of $2 million. Our tight inventory management allowed us to preserve margins and preserve cash. Despite the reported net loss we remain confident in our ability to continue to realize the cost savings we have previously discussed with you and that our discipline around inventory and general working capital activities is in fact working to preserve margins and enhance liquidity.

So on to the particulars of the quarter. Net sales for the quarter were down 18% driven by a 23% decrease in comp store sales compared to last year; again in line with our internal forecast for the first quarter. Gross income was $65 million for the quarter and gross margin was 31.7%, down from the $86.3 million and 34.3% in the 2008 period. The year-over-year decline as a percentage of net sales is a result of the inability to leverage the $4.1 million decline in buying and occupancy costs against the 18% drop in sales during the period.

However, mark downs were reduced over last year which mitigated the pressure the IMU decline would have otherwise had on merchandise margin. You may recall we had anticipated the decline in IMU as we moved to the Justice brand which had historically carried a lower IMU relative to that of Limited Too.

SG&A expenses were down $14.9 million year-over-year largely due to a decline in store payroll, home office payroll driven by headcount reductions and marketing expense. Although sales dropped 18%, SG&A as a percentage of sales still declined 20 basis points due to our cost saving initiatives.

Interest expense was up $2.1 million primarily due to higher interest rates associated with our credit facility amendments. While our cost structure was reduced significantly, the decline in sales overshadowed the fruits of those efforts as evidenced by the $1.4 million net loss posted by the company for the first quarter of 2009. This compares to the net income of $4.3 million posted in 2008.

On an earnings per share basis the company posted a loss of $0.06 in 2009 as compared to income of $0.17 in 2008. Weighted average shares outstanding on a diluted basis were 24.8 million for the first quarter of 2009 compared to $25.1 million in 2008.

With a cash balance of $84 million at quarter end and our $50 million revolving line of credit facility our liquidity position stands comfortably at $134 million.

Taking a look at our balance sheet you will see that our current ratio as of the end of the quarter was 2.48 and the debt to equity ratio was 0.94. Cash flow from operations for the three months year-to-date was $10.3 million versus cash flow from operations of $5.2 million last year.

I would like to quickly mention that our total inventory at the end of the quarter was down 22.5% per square footage cost from the end of the first quarter of 2008. In-store inventory was down 23.4% per square foot at cost consistent with our expectations.

Since the end of the first quarter of 2008 our total square footage has increased 5.2% to 3.8 million square feet. During the first quarter of 2009 we closed four stores, remodeled three and we ended with 910 stores versus 867 last year. Because of the continued economic malaise and the consequential likelihood that any forecast would be incorrect we are not providing earnings guidance for 2009 at this time. We believe it is in the best interest of our shareholders for management to focus on the longer-term success of our company with the rapid transition to Justice versus managing to a near-term earnings number.

We continue to be diligent about our expense management, very disciplined in our capital investment levels and are focused on the preservation of cash. As we mentioned during our fourth quarter earnings call in February our CapEx for 2009 is expected to rest at approximately $10 million net of cash tenant allowance received this year.

During the first quarter our capital expenditures net of cash tenant allowances totaled $3.5 million, mainly consisting of new store signage for the Justice transition and remodels.

With that I will hand the call over to Mike for color on the state of our business and the transition to the Justice store brand. Mike?

Michael Rayden

Thanks Rolando and thanks to all of you who are joining us today on the call or listening via the web cast. I would like to make a few quick comments this morning to provide you with an update on our business and then we will get right into your questions.

As Rolando mentioned, while we certainly would prefer to be in the positive earnings territory we are pleased with our performance relative to our internal forecast. We are also pleased we remain comfortably in compliance with the financial covenants in our credit facility. We had expected sales during the quarter to be soft for macro economic reasons and our reduced Webkinz sales which cost us about six points in comps but also as a result of our greatly reduced marketing efforts.

The reduction in marketing efforts in the first quarter was done intentionally as we worked to merge Limited Too and Justice databases and conserve marketing dollars as we explored what types of offers would be relevant in this economic environment and with the former Limited Too customers.

To provide you with an order of magnitude on the marketing under-spend, here are a few statistics: Our direct mail circulation of 13.1 million in the first quarter of 2009 was 8.4 million less than our circulation in 2008. We also reduced our number of contacts with customers in the first quarter by a dramatic 50% going from 12 in 2008 to 6 in 2009. There were also fewer days of promotion in the first quarter of 2009. Specifically, 58 days in 2009 versus 70 in 2008.

While reduced marketing events helped us on the expense and margin side, the cost was on the top line. However, to some degree we believe we needed to be thoughtful in our approach in the early stages of our transition and market database consolidation. In the second quarter you can expect to see us increase the frequency of communication with our customer through a greater number of context than we had originally planned and direct mail efforts extend deeper into our database.

Given that customers do not appear to be willing to shop without a deal in hand, we need to fill the gap so we plan to increase the number of days we are offering some type of promotion versus last year. We are also planning to sweeten our offers at various times such as more 40% off events as compared to the 30% off opportunities.

The marketing cost savings we expected to realize as a result of this shift to one brand remain securely in place despite our efforts to step up the marketing frequency from the first quarter. This is because we have reduced our catazine page count from 52 to 36 but have increased the density of the merchandise on the pages. We are also using post cards in place of catazines and minis since we believe the offer has become more important than the view of the merchandise assortment which they can experience when they visit the store or website.

As an aside, the cost improvement efforts do not stop here as we are also striving to preserve margins through progressively tighter inventories, ramping up our direct sourcing and lowering occupancy costs through rent renegotiations, etc. All of this gives us confidence that we can realize the cost savings we have outlined in the past months as well as protect margins versus our original internal targets.

Just as we had anticipated and discussed with you on several occasions, value and price are at the top of the customer’s list and we will be using all of the tools in our repertoire to be a location she comes to when she wants to shop. After visiting numerous stores in the past weeks and constantly sifting through our performance data as well as general economic statistics, I am even more convinced that a singular strategy with a value bent is the right way to go for us for the long-term.

We believe we do win relative to the competition on the key elements of retail and brand success, those being product, convenience, environment, experience and emotional connection and that we need to shore up our business on our price offering. It is important that we at least maintain market share with the goal of increasing it.

We will do what we need to do to work towards accomplishing this while maintaining the uniqueness of our brand. All of the physical activities for the transformation to the single Justice brand have been largely completed. We expected to be completed by the end of April and that is where we are. The merchandise has been completely converted and our customers are beginning to get used to it.

We are only about four months into our transition and while Justice and the overall market continues to experience price pressure, we are seeing UPT and transactions gaining traction in our malls. At this point, aside from the few malls where we have two stores, locational cannibalization does not seem to be affecting our business. In fact, our stores are performing very similarly when compared to the respective percentage change in sales relative to the base line we established prior to the transition.

This seems to be the case regardless of whether the store is within ½ mile of a sister store, within five miles of a sister store or a store that is outside of a five mile radius of a sister store. I think our primary challenge as we move forward is not whether we have two stores across the street from one another because there appears to be room for both stores to exist as long as the rent structures are correct. Rather, the challenge is to get the price value equation right and determine how we successfully compete while the market remains in a state of turmoil.

Based on our performance relative to our internal forecast we see ourselves moving in an improving direction. The Webkinz phenomenon that caused a six comp point in the first quarter will become less of an issue as we move through 2009. As I mentioned, we are ramping up our marketing efforts for the remainder of the year while preserving the cost savings associated with the shift to one brand.

Margins should be buffered by our continued focus on tight inventories, direct sourcing increases and lower occupancy costs, all in addition to the $25 million in pre-tax savings associated with the brand conversion as well as the incremental $7 million pre-tax savings that we announced during our 2008 year-end conference call.

We are only a few months into the brand transition and expect to continue to face a difficult economy with unemployment on the rise. Given this amount of uncertainty it makes earnings guidance a risky proposition that we do not want to engage in at the moment. We realize that the lack of specific guidance can result in a wide range of sell-side estimates that comprise the consensus against which we will be measured.

However, we believe we must continue to focus our energy on constructing the recipe for the optimal price value equation and will continue to do so using all of our ability and talent. With that, I would like to take your questions. Julie?

Julie Sloat

Thanks Mike. So that everybody has a chance to participate we ask that you limit your number of questions to one with one follow-up on first go around and then you will be placed in a listen-only mode after your follow-up. This way we will have a better chance of getting to each question in the time allotted. You are welcome to get back in the queue the same way you did originally. Operator, please go ahead and open it up for questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Rick Patel - BAS-ML.

Rick Patel - BAS-ML

Can you talk some more about your promotional strategy? Is there any way to quantify the difference in traffic you saw with the 40% off sales versus the 30% off ones in the quarter?

Michael Rayden

In evaluating the first quarter results in the marketing what we really found was that our 30% off point of sale events were not successful. Most of them broke even after we paid for the additional mark down and did not provide net margin contribution. The 40% off event at point of sale was spectacular and both 30 and 40% off on private sale direct mail pieces were successful in the first quarter. The disappointment in the first quarter was that we were not able to drive additional volume and margin with 30% point of sale events versus 40%.

Rick Patel - BAS-ML

Considering Justice had lower IMU how much of a comp recovery would you need to see in order to leverage expenses for the remainder of this year?

Michael Rayden

I think what we are finding is that as we look forward towards the balance of the year, and I am going to speak specifically to back to school, we have clearly placed all of our goods and we will find that our IMU’s are starting to get to the level of a melded business of last year. So we actually believe in the last half of the year our IMU may be very close to what the melded businesses were. So IMU is improving at a much faster rate than we had originally anticipated with supply and demand issues in the market place so I don’t think IMU going forward especially in the second half will be an issue within our business.

Operator

The next question comes from Linda Tsai - MKM Partners.

Linda Tsai - MKM Partners

What was the sales impact of lower marketing costs on your top line in Q1? Conversely, how might the higher marketing spend drive the top line in 2Q?

Michael Rayden

If you look at our business in its most simplistic form, the first quarter would have shown that we were basically down in marketing sales about 60-some odd thousand per store. You will also find that our average store was also down somewhere around $60,000 per average store. In its most simplistic manner, marketing made up most of the decline in the overall business and part of that marketing last year was the big Webkinz promotion in the March period where Webkinz did almost 14% of our business last year.

So you have two phenomenon in the marketing. One was the under marketing, so we can sort things out about offer and melding the databases, but the other aspect of it is we had a major program that appeared in the first quarter of last year called Fun Card/Bonus Card and all of those results basically moved to the second quarter. So of the 60-some odd thousand dollars per store, $16,000 just moves as a timing issue from first quarter to second quarter and in the second quarter instead of being negative 39% in circulation we are actually going to be slightly up versus last year.

So I think that we have made the proper correction in circulation and we have the benefit of the Fun Card/Bonus Card occurring now as a redemption in the second quarter versus the first quarter. So marketing was the largest portion of our decline in the first quarter.

Linda Tsai - MKM Partners

Can you just give us a brief update on lifestyle versus apparel? I know Webkinz…

Michael Rayden

Absolutely. Our hanging business grew 300 basis points in penetration and our non-hanging business which includes lifestyle; accessories, footwear, etc. declined 300 basis points. Five hundred of those basis points decline were in the Webkinz business unto itself. It went from about 11% of the business to about 5-6% of the business with some of the other accessories categories making up the difference. So apparel became a larger percentage of the business at a higher IMU than what the non-hanging business is.

Operator

The next question comes from John Morris – BMO Capital Markets.

John Morris – BMO Capital Markets

Can you give us the components of the comp in terms of transactions, UPT, etc.?

Rolando de Aguiar

Sales increase against last year? Is that what you are looking for? UPT are up 6.9 and AUR’s are down 10.9% for an ADS component of down 4.7. Transactions is driving anywhere down almost 20%.

John Morris – BMO Capital Markets

Trans down 20?

Michael Rayden

I think it is important to understand the statistics a little bit differently. Let me talk about transactions per average store. We were down 20% in the first quarter this year. That was up against the best year in the history of the company last year with the Webkinz phenomenon. Last year our transactions were up 13% with an all-time record. If you look at historical levels, transactions other than the one-year against Webkinz would have been down only 10%. Transactions in the first quarter less than $50 which is where the bulk of the Webkinz transactions resided were down 22% and transactions above $50 were down 15%. So the Webkinz phenomenon had a big issue on the transactions.

On UPT’s in the first quarter we hit the highest UPT number we have ever had in the first quarter in the history of the company and that is because the UPT at Limited Too as is required in this transformation were up on an average store basis almost 10%. Just in the early phases of this transition. So we are very encouraged by our UPT gains.

So the transactions even though they look terrible I don’t think are quite as bad as the numbers actually state. On the other hand, as you can see the AUR was down but that was a 16% negative AUR in Limited Too where we expected to be down in the 20’s and no AUR decline in the Justice foot print stores at all. So with the UPT continuing to increase to offset the reduction in AUR I think you will find the ADS coming into line and as we increase the marketing going forward which will drive our transactions I think you will start to see an improvement in our overall comp performance and especially as the Webkinz phenomenon goes from 11% of our business in the first quarter to somewhere around 7% in the second quarter and less than 5% of our business in the third quarter.

I think if you put it all together that is why we are feeling that we have forward momentum here up against the most difficult quarter we had in 2008. As you remember we had a -1 comp last year in the first quarter and that incorporated a 21% increase in Justice moving to a -8 in the second quarter, a -11 in the third quarter and our spectacular fourth quarter of -22.

I think that gives you the flavor. I hope that lets you understand that a little bit better.

John Morris – BMO Capital Markets

Just a follow-up, I know you don’t want to give guidance at this point but in terms of your inventory planning going forward any kind of color you can give us on your thoughts about how you want to plan the inventory levels for back to school.

Michael Rayden

I think you are going to find the inventory levels remaining relatively constant in relation to last year as we move through back to school. The first quarter of our business was the fastest turning quarter in the history of the company. We turned to cost at 5.6 times in the quarter. It was just lightning and our mark downs being less was because of that lightning turn, the cleanliness of the inventories where we also took the lowest clearance mark down rate we have taken in our history partially offset by the promotional activities of 40% off, etc. We are going to keep the inventories lean and mean and flow our goods as opposed to stocking up in advance.

John Morris – BMO Capital Markets

Just to be clear, when you say you are going to plan at a constant level I would assume we still would expect it to be conservatively down?

Michael Rayden

Yes. As I said, we were down in the 20% range. I think you are going to find that as a pretty consistent number.

Operator

The next question comes from Thomas A. Filandro - Susquehanna Financial Group.

Thomas A. Filandro - Susquehanna Financial Group

I think the question is directed at Rolando. Can you just help us out a little bit more and maybe give us the detail again on the full-year expense savings you highlighted? More importantly should we see similar declines as we did in the first quarter in the second quarter as well as the second half?

Rolando de Aguiar

We spoke about expense savings that totaled roughly between $32-35 million. $25 million is a result of the brand transition last year and another $7.5 million which we announced in February. So far of that amount $14 million we have realized and you have seen it flow through in the statements in line with our expectations. We anticipate seeing the rest of that flow through in the next couple of quarters. Obviously in the first set of expense savings took place in August so once you get to the fourth quarter the amount of expense savings will start to tail off. The bulk of those will happen over the next couple of quarters.

Thomas A. Filandro - Susquehanna Financial Group

Just a separate question in terms of just traffic and transaction performance specifically comparing mall versus off-mall. Are you seeing any variance there? Obviously the convergence is going on, but I mean relative to trends?

Michael Rayden

Are we talking traffic or transactions?

Thomas A. Filandro - Susquehanna Financial Group

I would actually like an answer on both if you wouldn’t mind.

Michael Rayden

Obviously traffic is down in both. I am absolutely seeing a shift to off-mall. I think the reason that I am seeing the shift to off-mall we actually had less transaction decline in our mall stores than we had in our off-mall stores in the first quarter but I think if you are asking me on the trend I think the customer has moved to value. I think you will find in the kids business and the tween business the value players are predominately off-mall meaning Kohl’s, Target, Wal-Mart, Penney’s and Old Navy along with TJX, Ross and all of those players. So I am sensing and seeing a move to off-mall versus mall which I do think is related to the move to value and the location of those retailers.

We still did more transactions in a mall than we do off-mall. I think for the first quarter the transactions in a mall were somewhere about I think something like 14% more than off-mall and ADS is higher off-mall by maybe 13%.

Operator

The next question comes from Margaret Whitfield – Sterne Agee.

Margaret Whitfield – Sterne Agee

Speaking of the trend towards value I wonder if you could give us an update on the tween market overall and your market share and the competitive environment in terms of Kohl’s and JC Penney and their pricing efforts and for Rolando what would be a good tax rate to use for the year?

Rolando de Aguiar

A good tax rate would be around 30% effective tax rate.

Michael Rayden

On share of market, I think it was very interesting Citi put out a very interesting MPD. They didn’t really talk about share in market but talked about the decline. The decline in the 7-14 market for the first quarter January/February and March is about 10%. The people who were picking up share of market were Wal-Mart, Target and Aeropostale to be honest. Kohl’s dropped share market I think. Penney’s dropped share market. I don’t have it in front of me directly at the moment. Even with their pricing they continue to move down even further from Kohl’s and Penney’s. We remain the third largest player at somewhere around 8% of the market in the 7-12 category and tied very closely in the fourth or fifth position around Kohl’s and Penney’s around 6% at that point in time. I hope that answers it.

Margaret Whitfield – Sterne Agee

Any trends in apparel comps during the quarter as well as into May here if you could just isolate the hanging products?

Michael Rayden

Are you looking at overall or are you looking for us?

Margaret Whitfield – Sterne Agee

For your comps during the quarter in terms of the hanging product. Did any month pick up? Did you end on a better note? Did May pick up?

Michael Rayden

Our best month of the season was by far April. We had low single digit comps in April. Very difficult March especially in overall business because of Webkinz being such a large degree and February was pretty decent month relative to what our trend had been. I am finding that towards the last two weeks of April and so far the first two weeks of May the apparel business is gaining traction and gaining more penetration gain than they had in the first quarter which was up 3% for the total.

Operator

The next question comes from Howard Tubin – RBC Capital Markets.

Howard Tubin – RBC Capital Markets

Historically going back a few years you have done some interesting things with marketing. One of the things specifically is the Happy Meal that you did with McDonalds. Would you consider something like that to kind of get the word out on the Justice going forward?

Michael Rayden

I would definitely consider it but those things sort of come along once in a lifetime and are not always repeatable. If it came along where we could find it we would definitely do it. We are going to continue to nail deeper into our file, continue to communicate with our core customer and I do think that the customer is starting to get more familiar with what we have done. Surely the Justice customer is not confused at all and I think the Limited Too customer we just have to be patient. I wish I could find a Happy Meal deal or something like that. Nothing has come across our desk and you will find that most of the media partners where we get our advertising and partner revenue which is down from last year they have all cut back as well so it has been a harder game to get those revenues working.

Operator

The next question comes from Brian Tunick – JP Morgan.

Analyst for Brian Tunick – JP Morgan

Following up on one of the previous questions, compared to Wal-Mart and Target are you finding Justice’s price structure too high? Although you mentioned you are doing the 40% off events and they are very successful, but are the opening price points ultimately lower going forward? How does that impact your gross margin expectations? I think you had mentioned your assortment growing. Any more color there?

Michael Rayden

I don’t have all the statistics in front of me but from memory the average retail price point in the tween apparel business for the first quarter is $7.40. We are somewhere around $13. So we are basically the high guy in the market. Wal-Mart is the low guy and don’t quote me exactly but their average price versus the $7.40 is somewhere in the $5.50 range. As you move up the chain to Kohl’s and Penney’s we get closer. Penney’s I think is in the $10 range and Kohl’s is in the $9 range. Part of that is mix, tops to bottoms, but it basically shows you that. Yes, we are finding that we need to be more promotional, offer greater value and I am not really sure that it is price point as much as it is the customer looking for a better percentage off deal.

So we are going to stay pretty steady on our tip price and offer the customer especially on our direct marketing customer better value through our mailings and try to offset the margins by reducing our rents, going to more direct sourcing and reducing our clearance. A little birdie just handed me my exact numbers. Wal-Mart’s average price is $4.77 in the first quarter. Target $5.55. Kohl’s $8.58. Penney’s $10.22. Aeropostale $10.07. We are higher than those guys, somewhere around $13.

Analyst for Brian Tunick – JP Morgan

Can you also give us a little bit more color on direct sourcing? I guess where are you today? Where do you think direct sourcing is moving by year end?

Michael Rayden

We ended last year in the entire business including accessories at 28% penetration to our business. We will end this year between 55-60%.

Analyst for Brian Tunick – JP Morgan

Quickly, on gross margins could you break down your IMU’s versus mark downs and were your merchandise margins up in the quarter?

Rolando de Aguiar

I didn’t hear the last part. I’m sorry.

Analyst for Brian Tunick – JP Morgan

Were your merchandise margins up in the quarter?

Rolando de Aguiar

Our IMU was down slightly but it was somewhat offset by lower mark downs. Gross margins were down slightly.

Michael Rayden

Internal merchandise margin was up 100 basis points. The difference in our external gross margin was purely occupancy which was up 5.2 percentage points. So basically we had a nice improvement in merchandise margin against the first quarter of last year even with our 40% off events because our mark downs were down even though our IMU was down 180 basis points. So going forward in the second quarter we are not exactly sure where that will come out but it will depend on the mark down level related to promotions and the clearance levels.

Operator

The next question comes from Adrienne Tennant - FBR Capital Markets.

Adrienne Tennant - FBR Capital Markets

My question is on the IMU actually. The IMU was pressured by about 180 in Q1. How should we think about the offset from better sourcing and more direct sourcing? When should we see the IMU pressure alleviated?

Michael Rayden

The IMU pressure will start to go down every quarter from now on. You will find that we are going to do better than 180 basis points down in the second quarter, I would guess somewhere down in the 110-120 and by the time I get to third quarter very close. The entire buy is not completely done but very close. I think you will find the IMU pressure dissipating by the end of the year.

Adrienne Tennant - FBR Capital Markets

Is that a function of your finally getting the cost of the AUC in line with the lower adjusted prices or is that a function of your just going more to the direct sourcing piece?

Michael Rayden

I think you will find it is a combination of all of them. Costs have come down in the Orient because of the supply and demand issue. I guess you are finding depending on the product somewhere between 2-5% on cost basis for light goods. We are finding that the direct sourcing growth of our business is giving us additional IMU and then the third component is mix as apparel becomes a larger percentage of our business. It has 300 some odd basis point higher IMU than the non-hanging goods. So it is cost reduction, direct sourcing and mix.

Operator

The next question comes from Thomas A. Filandro - Susquehanna Financial Group.

Thomas A. Filandro - Susquehanna Financial Group

Can you just directionally help us out thinking how the metrics of comp will look going forward with the increased level of POS mark downs going from 30% to 40%? Can you also tell us how many days during the second quarter last year were you on promo? I know you made the comparison that you were on promo significantly fewer during the first quarter when compared to last year so just a barometer for next year would be helpful.

Michael Rayden

In the first quarter we were basically 58 days versus 70. The second quarter this year to be honest we will be 77 days versus 71. So as you can see we are up six days there. Again as I mentioned we have actually increased circulation in the second quarter from last year’s 15.2 million to 15.5 and the second quarter circulation is actually a higher number than the first quarter which is really what we normally would not have done since we only mailed 13.1 in the first quarter.

So what you find is circulation up, number of days up and slightly higher promotional mark downs. What that will do with margin, it may have a slight negative effect on margin but probably in margin dollars it will be very close to what we originally had planned.

Thomas A. Filandro - Susquehanna Financial Group

Just the impact too on AUR maybe the average tran? How should we think about that in the second quarter when compared to the first quarter trends?

Michael Rayden

We are looking for our comps to improve even though we are not going to give guidance. We would hope that the fourth and first quarter were the worst quarters and we will never see those again. We are looking to improve comps over the next few quarters, each quarter improving sort of relative to where they were going negative last year. On the AUR and UPT, AUR will still be down. It cannot not be because of the conversion of Limited Too but we are looking for UPT’s to greatly offset that having ADS relatively flat and trying to drive transactions with direct marketing.

Operator

The next question comes from Dana Telsey - Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Can you talk a little bit about rent and lease negotiations? I believe 240 stores are coming up for renewal in 2009 and 2010. How do you think about renewals? Is there reduced rental cost you can get?

Rolando de Aguiar

I think those stores you referred to are still coming up for renewal. We are having a lot of success in terms of restructuring our rents to percentage rent. I think we will continue to be very aggressive with our landlords on that basis.

Michael Rayden

We have negotiated something like 65 stores to date that were coming due over the last six months and those stores basically moved to a percentage rent probably 30-some odd percent lower than they were previously.

Operator

The next question comes from Marni Shapiro - The Retail Tracker.

Marni Shapiro - The Retail Tracker

I was curious, I did hop on a little late so I’m sorry if you talked about this at all, but on the fashion side you have had some very clear hits in the store. Some of the items I have seen that sat a little bit longer on the floor are the things that your neighbors down the hall, JC Penney in particular, have done a great job knocking you off. When I think about the fall and when I think about the way you are looking at your business are you keeping a close eye on them? Things like the neon and the splatter where you were a few steps ahead of everybody, how do you keep that going?

Michael Rayden

I think one thing you do is you don’t look to them because they look to us. So I think we continue to look forward and we will always stay a few steps ahead of them at this point. I couldn’t be happier with my organization in design and merchandising and now that the singular focus is on one brand, I have my best people on it and we are only improving. Our fashion radar is at a peak and I think we will start to see those results as we move into back to school and holiday. I think right on. Penney’s has to look at us because they don’t have it.

Marni Shapiro - The Retail Tracker

Is it safe to say the things that I’m seeing that were selling off fast were coming from this new group? The things I was seeing in the store selling out the fastest, this was coming from the new group?

Michael Rayden

Absolutely. It is really my old group reconstituted.

Marni Shapiro - The Retail Tracker

I also have one question about fall, as the customer is buying closer to need and it seemed as weather broke in parts of the country especially in the kids business they bought closer to need. How does that change your thinking about when you set or how you set back to school?

Michael Rayden

There are some changes in back to school and we have got a lot of history in back to school. You have a later Labor Day. Basically the schools are starting to go back the first week of August, will continue to go back every week except there is a later group in our company that comprises about 160 stores out of the 900 that will actually go back to school a week later. I think the fact that you have a swing of that later back to school actually helps in relation to seasonality but I think we pretty much understand that the early portion has to be wear-now goods and back to school is really probably a misnomer in the context of fashion merchandising.

Operator

The next question comes from Tracy Kogan - Credit Suisse North America.

Tracy Kogan - Credit Suisse North America

I was hoping you could talk more whether there are any categories that you are expecting to add to the mix at Justice. Then if you could also talk about the performance of your direct business.

Michael Rayden

The only category that is really a new and growing category for us in the business is going to be the [Oh] Girl Care product which is sort of take on fragrance, body lotion, shower gels, gift sets, etc. So we are moving back into a business that we have now done twice in the past. I am pretty excited about it. It is not the biggest business in the world but there was a time we were doing something like $35,000 a store in that business. So that is probably the newest category of emphasis in the Justice stores as we move forward.

We have moved all of the Party Favors that we were selling in Justice into Limited Too even though they don’t have the parties and that is relatively a growing category for us in a big base of our stores that we didn’t have before. Those are probably the two category differentials beyond assortions.

Direct was down about 15% in the first quarter. A little bit less than our plan and we are expecting actually direct to be positive versus last year in the second quarter. The lack of catazine mailings in the first quarter affected our direct business as you can understand since they drive traffic to direct and since we cut circulation we affected our direct business. We do not think it has anything to do with the brand conversion because those customers seem to switch very freely from the Limited Product to Justice product. I think it was direct relationship to the under marketing driving them to the web.

Operator

There are no further questions at this time. Thank you everyone for joining the call today. This conference will be available for replay by 12 p.m. ET today until June 3^rd by dialing 877-660-6853 using account number 286 and ID number 322170. Again by dialing 877-660-6853 and using account number 286 and ID number 322170. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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