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Executives

Brendan L. Hoffman – President and Chief Executive Officer

Keith E. Plowman – Executive Vice President, Chief Financial Officer and Principal Accounting Officer

Mary Kerr – Vice President of Investor and Public Relations

Analysts

Kristin McDuffy – Goldman Sachs

The Bon-Ton Stores, Inc. (BONT) Goldman Sachs Twentieth Annual Global Retailing Conference Call September 10, 2013 2:15 PM ET

Operator

Kristin McDuffy – Goldman Sachs

Good afternoon. My name is Kristin McDuffy and I'm high yields credit analyst covering the retail space here Goldman. We are pleased to have the management team from Bon-Ton with us today to discuss their business. Joining us are Brendan Hoffman, President and CEO; Keith Plowman, Executive Vice President and CFO; and Mary Kerr, Vice President of Investor and Public Relations.

Thank you for being with us here today, I’ll turn the floor over to you for some brief opening comments and then we’ll open up for the fireside chat.

Brendan L. Hoffman

It’s cold enough in here that I think we need the fireside chat. Well, good afternoon I'm Brendan Hoffman, CEO of Bon-Ton. Thank you for being here and showing interest in our company. I’ll keep my remarks very brief, so we can get to the Q&A, clearly this was not the quarter we were expecting from the top line, quiet change from what we had seen in Q1 and so we were clearly disappointed.

Why did it happen certainly weather is something we always like to blame and no more than in this quarter, you know we probably should have been for warned when it snowed in Minneapolis at the end of April and really didn’t get warm in our markets until the end of June? At that time I think our customer had shutdown any willingness to shop for spring or summer.

Higher gas prices, there was a lot of conversation in the National Media about the higher gas prices particularly in the Midwest with some record highs in the states that we have a lot of exposure to and I think particularly in our smaller markets, which is predominantly where our store base is that’s a real tax to our customer and the extra $20 or $25 a week was money she did not have to spend on apparel.

And we saw that with a lot less traffic, we don’t have traffic counters in our mall, but we do subscribe to ShopperTrak and really we are able to see from beginning of the quarter, how off-traffic was in our markets from the year before and how much down it was compared to the rest of the country.

Having said that, I think we made a lot of progress that was unfortunately massed by the top line sales, our gross margin rate increased about 100 basis points, we continue to make great progress on our SG&A management, all that allowed us to spike the sales drop to pickup about $2 million on EBITDA for the quarter and double our EBITDA season a day at about $24 million versus $12 million.

E-Com growth continues to be very strong, we are very pleased with the progress we’ve made there, we’ve talked about it being 5% of our total business by years end, we are well on our way there, launch brands like Michael Kors and COACH earlier in the year and quite thrilled to be able to Lauren Ralph Lauren next month. So I think that will get us competitive with our peer group.

Our clearance strategy, it was a big part of the reason why we were able to show gross margin improvement despite the tough topline business. We opened up our first standalone clearance store to go along with the store with in-stores, we launched last fall. We saw great improvement with the standalone stores so much so that we’re opening up another one next month. And my guess is we’ll open up a third by the end of the year.

We think this has greatly improved our profitability not just with the clearance store itself, but allowing us to reverse engineer the in-store clearance or what we call our Yellow Dot process. We saw strengthen our core customer. Our private label credit card penetration continue to grow, it’s up in the mid-40% rate and really our core customer grew, it was really the third-party charge cards that really dropped off for our mall traffic or natural traffic that just didn’t happen this past quarter.

We continue to be pleased with our IT investments we launched merchant reporting, a new merchant reporting tool last week. I spent all weekend remotely on our new merchant reporting, finding things in the business that I wasn’t able to see before and then I can tell you our merchant team is absolutely thrilled with this new tool we’re giving them and we will continue to rollout.

And most importantly, we worked on our localization initiative during the quarter. This is something I talked about last time when we were going to try to breakdown our stores beyond treating them as one the 270 stores we have, recognizing that Fargo, North Dakota is very different from suburban Chicago which is very different from Grand Junction, Colorado.

And I’m sure we’ll get into this a little bit more, but this will all start to take the shape next week as we launch our goodwill event and will be the first time we are putting into practice. Versioning our catalogs, pricing differently for different merchandise and starting to add new vendors to our bottom and middle store, so we are excited about that and probably is what give us the most confidence that we can stabilize business regardless of the environment. So with that I'm happy to turn back over and answer questions.

Kristin McDuffy – Goldman Sachs

Great thank you. I’ll kick it off with question and there mike in the audience. So feel free to chime in as we go along. You mentioned the difficulties associated with the current retail landscape. Can you elaborate on the environment you are currently seeing and give us a sense whether we are seeing any improvements or if things generally remind what they were in the second quarter?

Brendan L. Hoffman

Well, we cant give too much guidance into what we are seeing now, I did mentioned on the conference call last month that we were encouraged by some of the early signs we are seeing with fall merchandise and so that continues to be true. I think we will really get a read over the next two weeks, once we get past this 90 degree weather we are having Chicago today and having here tomorrow. The weather is supposed to get seasonal, suppose to be in the low 70s, suppose to be 50 in the morning.

And next week we launch our big Goodwill events, so it’s specific to the Bon-Ton, I think we’ll have a much better read in the next weeks, we might not be able to share it with you quite so soon, but a much better read internally and on much weather played a factor with what we saw in Q2. And really hoping especially for our stores in the north, the fall such a much longer selling period for us and much longer where above merchandise for them, so if we get this seasonable weather next week. I really they will start to open up there wallets like they won’t willing to do in the spring.

Kristin McDuffy – Goldman Sachs

Can you give us any insights and what you saw in Back to School and what some of the trends are for Back to School?

Brendan L. Hoffman

Back to School for us isn’t as important as is for others and I think it’s probably an opportunity for us next year, because one of the things we are learning as we talk about localizing our merchandise mix and our assortment and our marketing cadences, Back to School happens at all different times in our different store base. So we had stores – regions that literally went back to school today and we had regions that went back to school the first week in August and so it makes it difficult to pinpoint exactly when Back to School is.

So we were pleased with some of the things we saw in kids, its I don’t think it was anything that jumped off the charts in terms of new trends, but I think it was – it gave us some optimism as I said earlier about some of the things that are checking in fall and especially in categories like outer wear, but for us specifically I think we now have better handle going forward on how we need to stager in cadence Back to School in the future.

Kristine McDuffy – Goldman Sachs

With Back to School behind us, it looks like we are starting to think about the holiday season, how are you expecting to position yourselves promotionally for the upcoming holiday season and how are you planning inventories?

Brendan L. Hoffman

Well we’ve been talking about planning inventories down since last December, I mean that was really one of the things that as I’ve learned the business last year was that the inventories that Bon-Ton had become bloated over the last four or five years without the sales to go with it and so we made the decision to dramatically reduce our recite e level.

Now it didn’t really manifest itself with our ending inventory at the end of the quarter for a couple of reasons, one we had such a large sales drop and two because of the 53rd week the timing and some of the fall recites change, but we were really pleased with the ability to pair down our recites, we are no longer going to just fill the smaller stores with merchandise, we’ve gone so far as to shrink the smaller stores whether it was the clearance stores I mentioned earlier, with stores within stores or actually just dropping a curtain in some of stores to artificially shrink the stores.

But in doing so, it’s going to allow us to continue to drive our inventory levels down; we’re doing that for the fall season as well. And I’m pleased to say that the vendors are very receptive to that, because while they recognize, they might take a short-term hit in terms of the out the door recedes. They realize it’s going to make us our natural margin healthier as we go forward and that really helps them.

So I think from an inventory standpoint, we’ll be a bit leaner and that’s going to mean good things by year’s end. I think in terms of promotional activity, it’s going to be very promotional, we know that we’ve seen that already over the last four weeks or five weeks how the competition has turned up the competitive meter.

For us I think we are always very competitive, but we are always very promotional. One of the things we’ve tried to do during spring was get smarter about our promotions. One of the things we’ll be doing with next week’s goodwill event and start of our, launch of our local localization initiatives, is to start to price differently in different regions and I think that’s going to allow us to optimize our markdown dollars and ultimately our gross margin.

But we’re prepared to get more aggressive if need to be we think we have a well thought our calendar as it leads into holiday, certainly Black Day after Thanksgiving, Black Friday is an enormous event for The Bon-Ton, something we’ve always over indexed in and feel like we’re stronger than ever. But I think we’ve always been well prepared for a very promotional environment.

Kristin McDuffy – Goldman Sachs

Speaking of Black Friday, each year seems to start earlier-and-earlier, what are your plans for this event and in more generally any thoughts about expanding your store average for the holiday?

Brendan L. Hoffman

While we opened at midnight last year, that’s what we are talking to right now. We’ll continue to look at that and see if it makes sense to open up any earlier. Both balancing the ability to get our associates to commit to being there and giving up that much more of their the holiday with what we think the incremental business will be from the competition, I think last year mid-night was very appropriate for the malls we are in, I know lot of off mall retailers opened up earlier and seem to have success with that, but we think we are loaded for Black Friday, we think we have a much better handle on the cadence of the day, in terms of the midnight 3 am and then it kind of dies of till 7 am and then picks up again with the early bird specials to about 1 o’clock or 2 o’clock.

And how the Friday and Saturday and Sunday in online become much more important as far the whole Black Friday weekend. So while it’s a scary number for us because it’s a big number and we keep our figure cross they don’t get any early snow storms, I think assuming that there is nothing like that to impede shopping, I think we’ll nice lift out of our Black Friday efforts.

Kristin McDuffie – Goldman Sachs

You had mentioned a promotional environment, I know you’re frequently asked about J.C. Penney, but it is an issue that is on I think at the top of everyone’s minds. As J.C. Penney enters a new phase of reinvention with an increased focus on promotions. Is it likely to be a more consistent headwind for your stores and ae you doing anything differently now, that the competitive landscape has shifted with respect to J.C. Penney?

Brendan L. Hoffman

You are right, we’ve gotten that question over and over again and I think the consistent answer I’ve given is that it’s been very inconsistent what has been happening there has meant to the Bon-Ton and I would say other department stores as well. Certainly at a high level, you would think that it would have been easily pick-ins for store is like the Bon-Ton, but in reality we miss a lot of the traffic that they failed to provide, especially in these regional malls that we’re in where its just us and J.C. Penney and maybe Sears and 50% occupancy with inline tenants, we count on them to bring traffic into the malls.

And I feel really – I feel quite certain that if we get traffic into the malls with the changes we’ve made and we’ll continue to make that will convert the customer. Problem is as I said in my brief remarks we just haven’t been seeing that natural traffic happen. So in many ways I’m root in for healthy pennies because I think you could have a halo effect on us, that we’ll be able to take advantage of. And I think the inconsistency there has probably hurt us more than it has helped us.

Kristin McDuffy – Goldman Sachs

It in terms of industrial structure, just a couple more questions, from an M&A perspective, we’ve seen a lot of activity in the retail space. Do you think there’s a bias for further consolidation in the space?

Brendan L. Hoffman

As you said lots already happened recently, so I guess we’ll see with that said settles, I mean, for us we are a public company, who are family controlled public companies, so that means any decisions like that are over my pay grade. So I’ll leave it to somebody else to the side what’s right for The Bon-Ton. Well I just try to get us healthy and growing again.

Kristin McDuffy – Goldman Sachs

Sure. There have been market share gains from some big disruptors in the retail space whether would be fast-fashion, discount stores, or online-only retailers making a bigger play in the apparel space. How do you see the industry evolving over the next several years and where do you expect Bon-Ton’s place to be?

Brendan L. Hoffman

I think that’s where we got to get better about what we do I mean, I think, that’s why it’s important for us to figure out how we can localize and be better in touch with our customers, because as you said, they’re going to be a lot of disruptors out there. And we can’t just count on if we stay the same being able to protect our turf.

And so I think that’s why we have taken this so seriously and invested, invested quite a lot of expense dollars, while we’ve being frugal, this was a place we saw as needing some outside help, to help us figure out the right methodology to be able to decentralize our organization in a virtual way without actually decentralizing in a physical or a real expense structure way. And I just think it’s crucial for us to be able to withstand the challenges that you rightfully say are going to come from all different angles.

Kristin McDuffy – Goldman Sachs

And just as follow on to that as you look those three different angles, the Fast Fashion, The Discount Stores, The Online Only. Is there one or the other that stands out to you as being the most daunting from a competitive perspective?

Brendan L. Hoffman

Well, I think Fast Fashion we’ve kind of seen and we’ve already seen what that’s done to businesses likely juniors and that’s kind of already backed into our numbers at this point. I think E-Commerce and the disruption that they can cause with different profit expectation, you don’t know where that’s going to continue, but at the same time when it comes to E-Commerce that our fastest growing engine too.

So while we are little bit fearful and what some of these peer play can do on a net side, we think its going to be a huge benefit to us growing its our single biggest growth engine, its also a way we can attract younger customers, we just need to diligent about doing it. So hopefully that can be turned into a net positive for us.

Question-and-Answer Session

Kristin McDuffy – Goldman Sachs

I’ll pause here and see if there are any questions from the audience. Right over here.

Unidentified Analyst

As you look ahead on your opportunities what is Bon-Ton’s strategy to take advantage of your great growth markets where you’ve got population growth, job growth, income growth and areas that are booming energy exploration, colleges and universities that are expanding that’s question number one.

Question number two is a follow-up what you impressionally pointed out before. What opportunities do you have to reduce rents, occupancy cost and cam charges as you co-anchor mid-tier tenants whether it would be Penney or Sears or Buzz Caf [ph] or whomever are having declining customer counts and so we are not consistent with your leasehold covenants in terms of what the shopping center owners and landlords and REITS had promised the company.

Brendan L. Hoffman

Okay, I’ll answer your second one first and hope I remember the first one. So keep the microphone close by in case I need help from on, but now I think we have great – we do recognize that we have great leverage in the markets we serve with the landlords there and so as leases expire you know we’ve made some decisions to close the stores, but more often to not, we’ve gotten great concessions out of the landlord to make the store profitable for us and worthwhile to stay and try and grow and so, I think we’ve done a great job leveraging what their weakness and their necessity to keep us in the mall, because of how much vacancy there are in those malls.

I think to your first question, if I got it right, in terms of taking advantage of some of the regions where there are some opportunities, its goes back to this localization and just to clarify what I mean by that, starting next week we have our Goodwill event, its our signature event that’s on holiday and we have a 68 page catalog that goes out with that. Traditionally the 68 page catalog that went out to all 270 stores and it would be – they would all get the exact same thing.

For the first time as part of this localization effort initiative, we started talking about and developing in Q2, which really wasn’t suppose to rollout until 2014, but it just became so obviously to us that this was the right thing to do and with business being the way it was we didn’t want to hold back on anything that we think we could learn from and obviously from.

This will be the first manifestation of that and so I think it goes to your question of how are we going to take advantage of different markets both good and band and so for the first time we have now versioned out the 68 page catalog. So of the 68 pages 35 pages have been versioned in some manner and what that can mean is a few different ways to do that, one it can be if we show a $299 coffee maker, top of the line coffee maker we recognize now than in our bottom 150 doors that’s too expensive, so instead of showing that to all 270 stores as we’ve historically done, we swapped out that depiction and we might be showing a $149 coffee maker for the bottom 150 stores. So lost of examples of things like that.

Another example is, we’ve always looked at the balance between casual and career in our stores in our Ready to Wear business and we’ve kind of looked at in total and represent the book to be reflective of our total distortion. Well we know in our smaller stores that are typically out west in the more rural markets or in our college towns, wear to work means something very different, and career wear means something very different.

So what we’ve been able to do is swap out many of the depictions where perhaps we show a Calvin Klein suite in our A doors are more career oriented doors, but we will show Calvin Klein performance you know the sport in our more rural doors on our more B doors, something we never were able to do before.

Lastly we might show the very same depiction, but we might price it differently in the A and B doors, so it might be a category and we say 30% off outer wear where in the B door the same depictions will be 40% off outer wear. So when I looked at these two different versions of the book last month, I mean I got giddy, because it really looked like two different books and it just has to be more relevant to the customers we are trying to serve, then trying to do with one book.

Now, if two books in the answer absolutely not, I mean, we ultimately need to go a lot deeper than that. But I think two books is a great start and I am really just waiting to see what this does next week for our goodwill sale, hopefully combined with some, with the seasonable weather we talked about before. Because I think both directionally and also incrementally, it will give us a real lift. And then some of the other pieces of this that go along with the localization just a finish up the topic include adding different vendors than we would have done before.

So in the past we always like most – the part retailers we look from the top down and figure how far can we squeeze these brands down. And because we only had one book we advertised in, we tried to get the brands and as many stores as we possibly could so that the advertising matched.

Well, giving an example in mens underwear, we had Calvin Klein mens underwear in our 270 plus stores. The bottom 150 doors we weren’t selling it, Calvin Klein knew it, we knew it, we just never thought of any other way to satisfy the customer. Well part of this, the initiative was to survey and to solicit customer opinions.

And they were loud and clear in our more remote markets they wanted Hanes underwear. It was a more accessible price point for them, it was a great quality, Michael Jordan wears it what else do they need. And so we are in the process now of taking out Calvin Klein those bottom 150 doors and putting Hanes’ underwear in there.

Similar story in Lee, we thought we had Denim coming out of our years we didn’t need another Denim resource. Our customers said in those smaller doors, we want Lee. So we are now in the process of adding Lee Jeans in men’s, women’s and kids, not for the top doors, but to the middle and bottom tier doors.

So in addition, we’ll also add some people in the field to help marry some art and science with this along with some new reporting tools we’ve added in. So I think all of this, this whole localization micro merchandising initiative which also includes marketing and store presentation, we are really excited about and we really are counting on to pay dividends.

Unidentified Analyst

Brendan in the past you guys have talked about your stores overlap where JC Penny and Sears, I was curious to hear your overlap with half price retailers like Ross and T.J. Maxx and how you guys have responded in markets where those guys have moved into those markets.

Brendan L. Hoffman

Yeah you know, I don’t have that number, I mean we just – that’s not one that we’ve ever counted up, perhaps we should based on their strength right now. Obviously there are all off malls so they are not specifically in the malls, but neither is Cols and we certainly track Cols quite a bit.

So that might be another one we will go back and go tally up, but clearly they are the ones that seem to be benefiting more from what’s going on with J.C. Penney as customer is feeling pinched in our regions and they are great place for them return. So that’s something that we are cognizant of.

we think in these markets over half of our markets don’t have a Macy’s in them so we think we bring some thing different to the table that’s T.J. Maxx and Ross and J.C. Penney and Cols can’t bring, whether that’s the cosmetic brands they don’t have access to, whether that’s Calvin Klein, whether that’s Ralph Lauren, and the list goes on and on that’s what we need to distort and that’s part of the process of this localization is looking at who the competition is.

I mean the first thing I ask when I go into a store is how far do I have to drive to get to a Macy's and by Macy's I mean Belk’s or Dillard's but we don’t really compete with that many of them Lord & Taylor. And that changes the way I walk the store, if I know there is a Macy's in the mall, which obviously I could see if there is one 10 minutes away versus they have to drive 60 miles to get one and yet we weren’t using that same thought process when we were assorting the goods, when we were distributing the goods, when we were allocating real estate within the stores, I mean if we know that you have to 60 miles to go to the closest Macy’s, we probably should be increasing our cosmetic presence by 50%, because that’s a place we can distort.

So while we really haven’t gone – candidly haven’t thought about it yet with TJ Maxx and Ross and what hey are doing and bring to the table, we are spending a lot of time as part of this looking at the ones that we do track like Macy’s calls J.C. Penney to figure out how we can bring relevancy and that to me always it was the key question for me when I was at Lord & Taylor, it’s a key question here, how do you become relevant in the markets you serve.

Unidentified Analyst

So you mentioned that E-Commerce has been one of the strongest areas of growth, how much of that is actually incremental, how much do you think is coming from the stores and also how are you tying in the localization strategy online? Thank you.

Brendan L. Hoffman

Yeah, I mean I think just my experience between in even markets in Lord & Taylor, I mean I think most of its incremental, I mean I think we’ve always seen that a healthy E-commerce business actually grows your store business, because you have a more robust digital strategy at people browsing online, you go into store to shop. So I feel pretty confident that we are not seeing any cannibalization any meaningful cannibalization, and if we are a little bit it’s certainly worth it in terms of the overall scheme of things. What was the second part of your question? I'm sorry.

All right. Oh localization, yeah there will be a real clunkyness with that, you are absolutely right, because the pricing specifically that I mentioned before where we are going to be 30% off in some regions 40% off in other regions, we will be 30% off online, so the customers are getting that 40% book and go online making up the example and see outer wear at 40% off, there will be a disconnect and certainly if they call up, our customer service area will honor the price, but and its not to say that there can’t be a customer who we had – there might be stores within 60 miles of each other that the pricing might conflict and so there could be some crossover there, but we couldn’t let, there is no perfect solution. So we wanted to let what we thought was a much better solution carry today and just be prepared to handle any of these one-offs but I'm sure we’ll get.

Unidentified Analyst

Interest expense was down fairly nicely in the first half, are their opportunities for further improvement, they are either through refinancing or free cash generation.

Keith E. Plowman

Yes, you did not see the full benefit on the interest expense line in the first half of the year, because as you know we just put the new notes the 2021s out there and the difference in the interest rate to the old notes of 2014 is two and a quarter, to the 2017 its two and 58 so you will see some additional drop, next year as we go forward as well as there were some cost for doing both refinancing this year and next year. So we would expect that number to go down substantially from where it is this year low 70s, high 60s next year.

Kristin McDuffy – Goldman Sachs

And just as a quick follow on to that question. How do you think about using the revolver to address the remaining 10 and 58 notes and what kind of – what level of liquidity, minimum level of liquidity do you like to maintain in this environment?

Keith E. Plowman

Well we certainly have availability in our line, our revolving credit facility to draw down and to pay off the 2017 notes. Right now it’s more from a standpoint of optics, we think it’s not appropriate to do that we are going into the busy seasons, it’s where our vendor’s factors so forth watch what happens with the business and we think its appropriate to leave all that excess capacity there. Not needed, but leave it sit there.

As we look forward certainly we can draw down that line we can use additional cash flows we generated in the business and quite frankly as we look forward, we think we’ll generate cash flow that we can start looking at the 2021 notes in the open markets they are accessible things like that to try and bring down our interest expense. So we feel pretty good about our position. The only significant maturities we have coming up on our debt is the 2017 the $57 million in the senior notes. And then we have our CMBS facility which matures in 2016. Just to remind everyone that’s a facility we set up in 2006 it was a 10-year maturity.

Essentially there is 24 properties that underline that facility and those properties underlie it, essentially were appraised about $325 million. So with the loan-to-value ratio of about 80%, we had a return $16 million line that will essentially be down to about $200 million in long-terms 2016 one is still. That’s about 60% on a loan-to-value ratio. So we feel pretty good about the positioning there and think that we have a pretty strong capital structure now with all we’ve done over the last year.

Unidentified Analyst

Just about the Yellow Dot clearance, can you explain what’s you did this year and then compared to what was done last year? And also how much of your inventory is say pack away for that you did not clear this year that you packed away for to be cleared later.

Brendan L. Hoffman

I mean our Yellow Dot process which is essentially our in-season liquidation process we’ve had for a long time. Basically the great innovation we did there was we added a Black Dot. And so we gave ourselves a lot more flexibility believe me or not by simply having that second Dot there. And the reason was the way the Yellow Dot historically worked was, I’ll use the example of fall, since we’re in close to it. We would setup Yellow Dot let’s say November 1st and we would Yellow Dot the early fall recedes that will perhaps came in June, July and it might start at 50% off.

So Yellow Dot was 50% off the original price. Then over the course of the next few months, we would flow new – later merchandise would also get the Yellow Dot sticker, and the Yellow Dot percentage would increase every month, so we are going to 60% off, 70% off I think we went to 80% off. The problem was two fold, one it assumed every merchandise category needed to be liquidated at the percentage off, which is clearly not true, ladies Ready to Wear needs to be liquidated far more aggressively than ladies shoes do, yet we didn’t have that flexibility with the one dot.

Similarly, as I mentioned it started with June, July recites but when you put in October, November recites Yellow Dot might have been 70% off already, so it never had a chance to sell at the 50% or 60% off that the original Yellow Dot merchandise did. So as I said, all we did was we added a Black Dot, it is by no means a perfect situation, but much like the localization, two is there than one in this case. And I think it’s the same thing that Yellow Dot and I do think that’s a big part of some of the gross margin improvement we’ve seen coupled with the clearance centers.

So now we have an end of season way to dispose of the inventory that doesn’t have any exploration date like it used to, where we literally would have to mark this stuff down to like $0.99 and just get rid of it all at once and we would sell hundreds of thousands of units and give them away. So really one wouldn’t work without the other and I actually say we started with the clearance center and that allowed us to reverse engineer what we need with our Yellow Dot process and ultimately we will have more than just Yellow Do, so we will have to figure out a more clever a name.

How much do we have in terms of carryover, at a cost basis it’s probably…

Keith E. Plowman

12.

Mary Kerr

10 to 15.

Brendan L. Hoffman

Yeah about 12 – $10 million to $15 million at a cost basis of inventory that we pack away, so it’s a relatively minuscule number, but just having that ability to do it does make a big difference on the whole process but as I said starts four or five months earlier.

Unidentified Analyst

Great, question on the own real estate, for the six properties that there unencumbered is there an intention or any willingness to monetized those assets and if you guys received any bids on any of the own properties encumbered or unencumbered?

Keith E. Plowman

I heard your first part of the question; I didn’t hear your second part.

Unidentified Analyst

Oh yes, the second part was has any one expressed any interest, any bids on any of the owned properties?

Keith E. Plowman

Well I’ll take the second part and I’ll move back to first part. We have not received any bids, we really aren’t actively selecting any, mainly because to answer your first question, we really do have all the properties monetized, the properties that are not in the CMBS I talked about the 24 properties, the other that’s you named of with excess of properties and are some other with ground leases those properties are part of the assets base in our revolving credit facility.

Unidentified Analyst

Got it.

Keith E. Plowman

So we do monetized against all the assets, but at this time, we are not really pursuing anything, a lot of times when you look at that from the standpoint, if you look at doing a sale lease back or something its very restrictive as what you can do, we don’t feel we need to do that and from a standpoint of just not right sale, we are not really pursuing anything in that direction other than in-stores that we are not performing well as you know we announced that we had sold Rochester locations closed on two of those just recently and then we have Novel and that will close on next year.

Unidentified Analyst

Thank you.

Kristin McDuffy – Goldman Sachs

You’ve mentioned your brand quite a lot or branded product quite a lot, I just wondered if there was any emphasis still on private label or where private label fits in your plans?

Brendan L. Hoffman

Sure private brands are big part of our go forward strategy; they will continue to about 20% of our merchandise mix, in fact that was one of the things that helped our Q2 margin was getting private brand margin rates back towards historical highs, it was a combination of costs coming inline, because we know we had those cotton inflated prices for a few years and labor cost that have moderated quite a bit and then just being more efficient with the inventory and not having the glut of inventory at the end of the season despite the miss in sales we were just lean enough that we could – we were able to liquidate it much more cleanly.

So going forward, it continues to be opportunistic and whether its you know as I have said before whether it ends up being 21% or 22% or 18% or 19% I don’t think that’s material, we wont use it to test new product categories or new brands, I think that was something that got us in trouble before, instead we will use it to go after proven commodities or proven categories and I think a good example now is the sport lifestyle that’s going on.

And so we have a brand called Exertec which is our in-house sport label, the yoga pants and the weekend wear and its doing terrific and so that’s something that complements the branded merchandise we do very well, but its not something we went out on a lim originally and tested and tried to validate, we saw it happen lots of other places and now its become a great area of emphasis for us especially as going back to what we talked about in some of these smaller more remote stores where that’s really a big lifestyle or have live in them.

Kristine McDuffy – Goldman Sachs

And just as a follow on to that, it feels like you have been covering around 20% private label, is that been an area where you are comfortable, or you want to into that up a little bit?

Brendan L. Hoffman

Again, think its will seek its own level, goes up a couple of points, get down a couple of points, I think its immaterial and its as we find opportunities like Exertec we will try to exploit those, but on the other hand we pulled back on relativity is a brand of ours that just in career made no sense. So we will eliminate those as needed to keep it healthy, I mean I just – I don’t want private brand to be something that hurts as. And I think we were getting a little bit risky with some of the places we were taking our shorts and it was compromising, while we could do elsewhere. We can be a lot of riskier with our domestic brands, because they are great partners who provide great support when things don’t work out.

Unidentified Analyst

As you look to calendar year 2014 and what you just referenced. Do you see brand resources providing more margin support and more merchandising support as you’ve continued to strengthen your business while a couple of key competitors have destabilized their business. So that the fashion resources and the other resources look to you to get some of their growth as you referenced earlier with Kors, Coach and Ralph Lauren coming next year. Do you see with that happening, do you see some of your existing resources providing more margin and merchandise support going into the next calendar year?

Brendan L. Hoffman

Well we will take all the merchandise support and margin support they want to give. And I will say they’ve been great partners, I mean even when times are tough as we’re experimenting, they are – there for us. And we are very grateful about that. We aspire to have higher natural gross margins, so that we can have more of a win-win relationship.

So we will need a little bit less and they can provide a little bit less. But we still get a tremendous amount of support I think every department store does that’s not going away, it’s a part of the ultimate end gross margin that we get. But I think that’s one of the reasons why they’ve kept their support despite the fact that we’ve cutback recedes, because they recognize well there might be a short-term blip in terms of not pushing out as many recedes to us.

Over the long-term it’s going to make us much healthier. And so I can’t speak highly enough about these partners, the existing partners, new partners like we just launched free people on 30 doors, that was very important to us and those top doors, as I said introducing Lee or Hanes which we have relationships with their parent resources, but certainly new from the brand. So the vendors are routing for us for a lot of reasons and they just are terrific partners.

Unidentified Analyst

We are just wondering if you could comment at all on any promotional activities you have seen specifically online in the past quarter and whether incentives such as free shipping will continue to force that business to be a little bit of a drag on overall gross margin.

Brendan L. Hoffman

No, I'm I think pretty much anytime you buy something online you are getting free shipping, if you are not you probably didn’t see the promo code and didn’t enter in properly, because its always there, I think its just a way of doing business, but to that point we added – we now force you to put a promo code in so we give free shipping pretty much all the time, but we force you to put a promo code in. and I would tell you about 30% of the time the customer doesn’t and so that’s actually helped mitigate some of the charges there.

Now we are not trying to trick the customer, I mean it is there, it is – but sometimes they just don’t, they are lazy or don’t do it, but I think free shipping is here to stay, its worked into our overall model as is for everybody else, as the business grows the bottom line profitability of dot com becomes greater and greater even though the way it shows up in the gross margins a little bit funky, because of some of the as you said shipping charges.

But we are very comfortable right now with our online growth, we are very pleased with the profitability, its throwing off not just in Q4, but all year around and recognize that free shipping is part of it and I'm sure the next thing that will start to come up is free returns, because that seems to be the next 20 people are going, but we are very happy with the balance right now.

Kristine McDuffy – Goldman Sachs

And I think was wrap it one big picture question. Last year you showed some early success in executing Bon-Ton’s turnaround. How have things gone, versus your expectations? Are there any anecdotes you could share with us as you’ve gone through this turnaround process and how far are we through the process in your opinion, what inning are we in?

Brendan L. Hoffman

Well I think Q2, made it a little bit rockier than I would have liked, certainly from the top line. But having said that as I started my remarks with, very pleased with the progress we made on the gross margin and the SG&A which are the two of the important components to get us to ultimately do a 10% EBITDA margin we’ve talked about.

I think that the anecdotally it is a much more complex customer base than I anticipated from my previous experiences. 270 stores spread out in those many different parts of the country as we have. You have to remember 10-years ago this organization had five different buying offices that was owned by different parent companies, but Herberger’s had it’s own buying office in St. Cloud, Minnesota, Younkers in Iowa, so on and so forth. And we over the – through these consolidations have merged into one that doesn’t really work well for any of the stores we service.

So I think I didn’t appreciate that one I got here, that’s what the localization is all about, is trying to undo that without actually undoing the buying offices. And it’s what gives me great optimism over the long-term, regardless of any rocky periods we have with customer right now, that this has to be better than what we’ve been doing over the last five years and allow us to evolve to get back some of the business we lost when we consolidated all these stores together.

So I don’t know who what inning we’re in, I do think we made some great progress that was matched by the top line results, it wasn’t a fun quarter, we are hoping that as we said over the next few weeks we start to see some real signs of improvement both because of the changes we made at the Bon-Ton and just because the macro environment becomes a little bit less harsh that it’s been for the last few months.

Kristin McDuffy – Goldman Sachs

Great, and that’s all the time we have today. I want to thank you all for joining us and that’s our last session.

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