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Executives

Joe Teklits - ICR

Byron L. Bergren – President and Chief Executive Officer

Anthony J. buccina – Vice Chairman, President of Merchandising

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

Analysts

Karru Martinson - Deutsche Bank

Grant Jordan - Wells Fargo

Bill [Royter] – Bank of America Securities

Emily Shanks - Barclays Capital

Tom Roller - Credit Suisse

Leah Hartman - CRT Capital

Christina Boni - RBC Capital Markets

[Colleen Burns] – Oppenheimer & Co.

Michael [Shaygraft] – Longacre

The Bon-Ton Stores, Inc. (BONT) Q3 2009 Earnings Call November 19, 2009 10:00 AM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to today’s Bon-Ton Stores, Incorporated, third quarter 2009 earnings conference call. (Operator Instructions) As a reminder, today’s conference is being recorded and now I would like to turn the conference over to Joe Teklits. Please go ahead sir.

Joe Teklits

Thanks. Good morning everybody. Welcome to Bon-Ton’s third quarter fiscal 2009 conference call. Today Mr. Bud Bergren, President and CEO; Mr. Tony Buccina, Vice Chairman and President of Merchandising; and Mr. Keith Plowman, Executive Vice President, Chief Financial Officer and Principal Accounting Officer will host the call.

You may access a copy of the earnings release on the company’s website at www.bonton.com, and you may also obtain a copy of the earnings release by calling 203-682-8200.

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

And now I would like to turn the call over to Bud Bergren, President and CEO.

Byron L. Bergren

Thank you Joe, and good morning, and thanks for joining us. I’ll begin with the comments on the third quarter, then Keith will provide details on the quarter’s financials and review the financial guidance and assumptions for 2009. Tony will outline the quarter’s merchandise results and discuss our merchandise initiatives as we head into the fourth quarter. After that, we’ll be available to address your questions.

I’m very proud of the way our team executed in the third quarter. In a difficult environment, we were able to report improvement in many financial measurements including comparable store sales, gross margin rate and EBITDA. Our comparable store sales turned positive in the month of October with a 3.1% increase as compared with last year. A good month following consecutive improvements in sales trends in August and September. While it’s too early to tell whether the consumers’ renewed interest in shopping is sustainable, we are certainly encouraged by the improvement in traffic that we saw in the third quarter.

We continue our cost reduction disciplines during the third quarter also, maintaining stringent expense controls and balancing this with the appropriate costs associated with the improved sales performance. We also continued to manage inventory levels, which contributed to the improvement in our gross margin. Our team worked through a challenging environment, and our organization is stronger for it. I want to thank all of our associates for their hard work and continuing focus on execution.

Before discussing our third quarter results, I’d like to comment on the announcement we released yesterday regarding the company’s financing. We announced we have commitments from lenders for an amended and restated revolving credit facility that will replace our existing credit facility. Bank of America is the lead banker for this transaction, and we expect to close the facility in early December of this year. Additionally, we closed on a $75 million second lien term loan. Borrowings under the loan will benefit future excess borrowing capacity under our revolving credit facility.

Additional highlights from our third quarter of 2009 include our gross margin rate improved 200 basis points to 37.6%, reflecting a decreased markdown rate and increased mark up. We reduced our comparable store inventories by approximately 9% at the end of the quarter versus a year ago, and our clearance levels decreased approximately 20% compared with the prior period. We realized a net reduction in our SG&A expenses of $27.1 million in the third quarter, and year-to-date a net reduction of $69.5 million.

We reported operating income of $19.6 million compared with an operating loss of $12 million in the prior year period. And our EBITDA increased $29.8 million to $48.8 million compared with the $19 million in the prior year period. Our excess borrowing capacity at the end of the quarter was approximately $246 million, well above the $75 million minimum availability covenant under our credit facility.

Third quarter regional sales results reflect strength in New York, Iowa, Minnesota, West Virginia, Wisconsin, and Michigan. Best performing markets to the prior year period were Minneapolis, Detroit, Omaha, Buffalo, North Lancaster and Toledo. Worse performing regions were Chicago and eastern Pennsylvania. And our e-commerce business was well above sales from the prior period.

Also, our private brand sales grew to 20.5% of sales, plus our merchandise optimization, which we began implementing in the spring of 2008, is now in all areas except missy’s ready-to-wear which will be rolled out in the spring of 2010. With merchandise optimization, we’ve realigned buyer and planning jobs and processes, and redefined jobs and responsibilities. The big benefit is better allocation of our inventory with the goal being an increase in gross margin and comp sales, which we are already realizing.

And we also assumed control of our fine jewelry department, which had been previously been leased and operated by a third party. We have completed the transition in 86 stores to an owned operation. We are excited about this initiative and believe that the jewelry department can grow and enhance overall profitability of our company. Tony will provide greater detail on merchandise accomplishments and initiatives soon.

Looking ahead, while there have been some encouraging news regarding the macroeconomic environment, we plan to continue to manage our business conservatively. We continue to adjust to what the customer is responding to, which has been more value, as evidenced by the increase in our Incredible Value program to approximately 10% of sales. We are employing our merchandise optimization programs and expect a big benefit to come from improved allocation of inventory to our locations. We know the customer best in our markets.

We continue to grow our e-commerce business through site enhancements and an expanded online offering. And we are capitalizing on our loyalty program, as our membership base of our owned credit card continues to grow. Plus the new marketing initiatives implemented in the third quarter are working.

We also are maintaining our focus on controlling inventory and diligently managing expenses. We have looked at all aspects of our business and changed processes and workloads. We have standardized reports and eliminated tasks that do not benefit the bottom line. And driving gross margin with our private brand, key item initiatives which deliver value to a customer and enhance margins to our sales, and preserving strong vendor relationships.

In summary, we are encouraged by our third quarter results and will continue to implement our current strategies in the fourth quarter.

At this time I’d like to turn the call over to Keith.

Keith E. Plowman

Thank you Bud, and a good morning to everyone. I will review the third quarter financial results and update our fiscal 2009 guidance and the assumptions reflected in this guidance.

First I would like to call out that last evening we announced the company closed on a $75 million second lien term loan with a four year term. This is coupled with the announced over subscribed $675 million revolving credit facility, which will be an amendment and restatement of our existing $800 million facility. This is subject to customary and standard closing [fissions] and we anticipate closing on that in early December. We will provide more details on the term loan in our Form 8-K that will be filed by Tuesday of next week, and more information will be provided on the amended and restated revolving credit facility when it is closed on in December of this year.

During the third quarter, we continued to reduce operating expenses, prudently limiting capital expenditures, and to control inventory levels in order to benefit working capital. We reduced our SG&A expenses by approximately 10.4% or $27.1 million, and are on track to achieve $70 to $75 million in annual SG&A expense reduction, as noted in our updated guidance. These initiatives, coupled with the improved sales and gross margin performance, drove a significant increase in EBITDA and cash flow for the third quarter.

Moving to a discussion of third quarter fiscal 2009 financial results, we reduced our pretax loss in the third quarter of fiscal 2009 to $3.6 million, reflecting a $33.1 million improvement as compared to the third quarter 2008 pretax loss. The net loss in the third quarter of 2009 improved to $4.2 million or $0.24 per diluted share, compared with the net loss of $14.3 million or $0.85 per diluted share in the prior year. This was despite a $500,000 income tax provision in the third quarter of 2009 as compared with a $22.4 million income tax benefit in the prior year period.

For the third quarter, comparable store sales decreased 2.6% compared with the prior year period. Total sales for the 13 weeks decreased 2.9% to $703.9 million compared with $724.9 million for the prior year period. Year-to-date comparable store sales decreased 6.9%. And year-to-date total sales decreased 6.7% to $1.957.7 billion compared with $2.98.6 billion for the same period last year.

Other income in the third quarter decreased to $18.7 million compared with $22.7 million in the third quarter of 2008. Year-to-date other income decreased to $53.1 million compared with $67 million in the prior year period. The third quarter and year-to-date 2009 amounts reflect a reduced sales volume and reduced income from our proprietary credit card.

Gross margin dollars in the third quarter increased by $6.8 million to $264.9 million. The third quarter gross margin rate increased 200 basis points to 37.6% of net sales compared with 35.6% in the prior year period, reflecting a decreased net markdown rate and an increased net mark up. The year-to-date gross margin dollars decreased $22.1 million compared with the prior year period. The year-to-date gross margin rate improved 140 basis points to 36.5% compared with 35.1% in the prior year period.

SG&A expenses in the third quarter of 2009 decreased by $27.1 million or 10.4% to $234.8 million, compared with $261.9 million in the prior year period. The third quarter SG&A expense rate was 33.4% compared with 36.1% in the third quarter of 2008. Year-to-date SG&A expenses decreased $69.5 million compared with the prior year period. The year-to-date SG&A expense rate was 35.5% compared with 36.4% in the prior year period reflecting the 2009 cost saving initiatives.

EBITDA, defined as earnings before interest, taxes, depreciation and amortization, including amortization of lease related interests, and the 2008 goodwill impairment charge, increased $29.8 million in the third quarter to $48.8 million compared with $19 million in the prior year period. Year-to-date EBITDA increased $33.5 million to $73.8 million compared with $40.3 million in the prior year third quarter. EBITDA is a non-GAAP term. For a reconciliation of EBITDA to net loss, please refer to our earnings press release.

Depreciation and amortization expense, including amortization of lease related interests, decreased $1.8 million to $29.2 million, compared with $31 million in the third quarter of 2008. Year-to-date depreciation and amortization expense, including amortization of lease related interests, decreased $3.8 million to $88.5 million, compared with $92.3 million in the prior year period. Interest expense net decreased $1.5 million to $23.2 million, compared with $24.7 million in the third quarter of 2008, reflecting reduced interest rates and borrowing levels in the period. Year-to-date interest expense net decreased $4.1 million to $69.3 million, compared with $73.4 million in the prior year period, largely due to decreased borrowing levels and reduced interest rates.

An income tax provision of $500,000 was recorded in the third quarter of fiscal 2009, compared with the $22.4 million income tax benefit in the third quarter of fiscal 2008. And year-to-date, the income tax provision was $400,000 compared with $61 million income tax benefit in the prior year period. The current year amount principally reflects the company’s continuation throughout 2009 of a valuation allowance position against virtually all net deferred tax assets.

Moving to some key ratios and balance sheet amounts, our working capital decreased to $482.1 million as of October 31, 2009, compared with $555 million as of November 1, 2008, or a reduction of $72.9 million. The decrease primarily reflects the reductions of tax assets and merchandise inventories. Merchandise inventories at cost decreased $78 million or 8% compared with last year, primarily reflecting inventory reductions in response to the macroeconomic environment. Retail inventory for comparable stores decreased 8.7%.

Total debt, including capital leases, was $1.227.5 billion at October 31, 2009, compared with $1.323 billion at November 1, 2008, a reduction of $95.5 million or 7.2%. Our debt to trailing 12 month EBITDA was 6.4 times, an improvement from last quarter’s 7.1 times. Year-to-date capital expenditures, not reduced by labor contributions, were $22.2 million compared with $76.6 million for the prior year period.

Our full year fiscal 2009 guidance is as follows. We are revising our fiscal 2009 guidance to reflect EBITDA in the range of $180 million to $200 million, loss per diluted share in the range of $2.30 to $1.20, and cash flow in the range of $45 million to $65 million. The underlying assumptions reflected in our fiscal 2009 guidance include comparable store sales decrease in the range of 5% to 6.5%, a gross margin rate of 36.5%, SG&A expense decrease of approximately $70 million to $75 million, which reflects the increasing sales and performance that creates additional expense including some incentive comp, effective tax rate of 0% which is exclusive of the favorable potential tax impact in the fourth quarter of the recent Tax Act that was passed, and capital expenditures not to exceed $35 million net of landlord contributions, with estimated 17 million diluted weighted average shares outstanding.

Our third quarter results reflect the benefits of carefully controlled inventory levels as well as cost reduction and capital management initiatives that we began in fiscal 2008. We will continue to manage our business conservatively with cash flow and liquidity remaining a high priority. The cash flow generated from operations, combined with the increased borrowing availability from the financing the company is putting in place, is expected to provide the liquidity to operate and grow for the long term.

Our Form 10-Q for the third quarter fiscal 2009 will be available by December 10, and at this time I would like to turn the call over to Tony.

Anthony J. Buccina

Thank you Keith. We are thrilled with our merchandise performance for the quarter, especially in this challenging economic environment.

Our comparable store sales were negative 2.6% for the quarter, a big improvement from our spring comp store sales results, which were negative 9.2%. We saw our sales performance get better every month since the end of the first half, culminating with a positive comp in October. The recent uptick in our sales trends is encouraging as we enter the critical holiday season.

While the macro environment for the fourth quarter remains unknown, the improved sales trend and improvements in the number of transactions in our stores is encouraging. During the third quarter we had approximately 1% fewer transactions than last year. This compared to 9% fewer transactions in spring, 2009. In October, we had more transactions than last year, which was the first month we have experienced this in well over a year.

Our gross margin dollars increased versus last year, and our gross margin rate for the third quarter was 200 basis points better than the third quarter of last year, beating our plan. Several factors contributed to our rate improvement. We increased the amount of items offered in our Incredible Value program, we had higher penetration of sales in moderate zones which carry higher margin rates, clearance inventory was well below last year for the quarter, down 13% on average for the third quarter, and we achieved significant improvement in private brand performance to prior year period.

Our best sales results for the third quarter were in ladies outerwear, moderate sportswear, accessories, and large size sportswear. The toughest areas were furniture, heart home, and ladies better sportswear. Customers continue to respond to value. The moderate zones were outperforming the better zones to plan and last year, with the moderate areas of missy sportswear, ladies shoes and mens sportswear significantly stronger than the rest of the company. Cold weather merchandise was also a big winner, especially in October.

Our franchise businesses beat sales expectations for the quarter, but were slightly down for last year. Our best franchise businesses were large size sportswear and petite sportswear. Mens’ outdoor apparel, a focus business, exceeded our sales and margin expectations in the third quarter. The best brands were Columbia, Woolrich, Timberline and our own private brand, Ruff Hewn. Sales from mens’ casual outdoor sportswear were substantially better than the total company.

Our storewide key item initiative is still expanding. Key items increased in penetration to total company sales. The highly profitable Incredible Value program grew to almost 10% of the company’s sales in the third quarter, versus 6.5% for the same period last year. This program is exactly what the customer is looking for today, value, and will continue to be an integral part of our merchandise assortment.

Our private brands outperformed the company again, exceeding our expectations and last year’s third quarter results. Penetration of private brand to total sales grew to 20.5% of the company’s sales without furniture, with margin rate improvement. During the third quarter of 2008, private brand sales were 19.1%. The best performing private brands were Kenneth Roberts, Relativity Career, Breckenridge, Studio Works and Living Quarters. Our new brands that were launched last fall, Victor Alfaro, Relativity Career and Kenneth Roberts, all beat sales expectations.

Product differentiation was 33.8% for the quarter. Both private brand and non-private brand unique merchandise increased sales versus prior period last year, with private brand accounting for 60% of our differentiated merchandise.

Our e-commerce sales were more than double last year, as we continue to improve our site and expand the number of items available. Our merchandise optimization strategy is also helping to improve our margin performance. We are increasing our planning allocation organization to support the merchants while providing new analytical tools and processes. Two-thirds of the merchandise area are now on the new process, and the [remainder] will convert in the spring of 2010.

Looking ahead to the fourth quarter, we are well positioned to continue the improved momentum from third quarter. Our comp inventory at the beginning of November was down in the high single digits versus last year, and clearance inventory was down 20%. We have enough inventory in the right places to drive fourth quarter sales. Fresh inventories focused on value, along with an increased assortment of moderate merchandise and lower clearance levels, will help deliver improvements in margin rate versus last year as stated in our guidance.

Our storewide key items will be over 25% of our total sales forecast in the fourth quarter, and the Incredible Value program will be up significantly versus last year. We expect our franchise businesses to grow faster than the total company and we expect sales in private brand to continue to increase and at better margin rates than last year. The penetration of non-private brand unique merchandise should also increase from prior year period.

Our e-commerce is planned for aggressive growth in the fourth quarter with additional vendors and more items on our site.

And finally, the addition of fine jewelry is new for the fourth quarter. The thinly leased department has been transitioned and we have established our own fine jewelry departments in 86 stores just in time for the holidays.

We believe we are exactly where we need to be with our merchandising strategies, and we are executing them with authority. Our success in the third quarter demonstrates we are on the right track with our customers, and we look to continue the success in the fourth quarter.

I’ll now turn the call back over to Bud.

Byron L. Bergren

Thank you Tony. With the all important holiday selling season approaching, we feel good about our results during the difficult economic environment. Our objectives are to continue to operate to a conservative plan and execute our current strategy.

And at this time we’ll open the discussion to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Karru Martinson - Deutsche Bank.

Karru Martinson - Deutsche Bank

I was just wondering if we could start with just the capital markets transaction here, and could you explain a little bit you know why you guys went with the second lien and what the thinking is behind that.

Keith E. Plowman

Karru, this is Keith and essentially where we’re at with it is we looked at our facility, we wanted to have a way to increase liquidity going forward. You know there have been fickle capital markets that have been out there now for the past year and while the company was performing well we thought it was prudent to go out and put some financing in place that would give us additional liquidity, and give us additional strength in the company. This is a good way for us to go in and add a term loan piece to a revolving credit facility that essentially is based upon asset movement. It gives us a good base level that we can borrow against and will give us benefit to our excess borrowing availability to capacity we have as we go forward, and really will strengthen the company in the capital markets.

Karru Martinson - Deutsche Bank

And then we’ll get pricing and all that sort of information in that 8-K on Tuesday, correct?

Keith E. Plowman

That is correct. Everything will be out on Tuesday of next week at the latest and it will give a lot more information. And then for the revolving credit facility, which we expect to close on in early December, we will have that information out again the same way.

Karru Martinson - Deutsche Bank

I’m just wondering what your performance this quarter, I mean going back the last couple of years since the acquisition, I mean this is probably if not the strongest very close to the strongest EBITDA that you guys have generated. And when I look at your guidance, you’re kind of in the mid-point right now already. You know, kind of what’s your thinking here? Are we just kind of being conservative with the consumer or, you know, we’re concerned about the visibility? What’s the thinking on the guidance given the very strong results that you guys had?

Keith E. Plowman

I mean I think, Karru, you answered some of the question there at the end. As you said, you’re exactly right. Right now the visibility is such that as you know this is a very key time to all retailers. I think in general you’ve seen the attitude and the atmosphere out there that everyone is taking a sort of wait and see approach. You hit it correct. We feel very good about what happened in the third quarter. You look at EBITDA improvement. I mean I’ll draw your attention to the beginning of the year, we were talking EBITDA in the range of $140 to $155 million. We’re now saying $180 to $200 million, a substantial increase reflecting the expenses, reflecting the gross margin, reflecting the sales, so we feel we’re very well positioned here, but you’re correct. Right now our trailing 12 month EBITDA is in the range of $190 million in round terms and right now we’re giving you guidance that said, you know, and you can back in these numbers.

If we hit to the low end range of our guidance being that we be down around 6.5% on a comp sales basis, that says we would have about a 5.5% decrease in the fourth quarter. Whereas if you go to the other end and say we’re down about 5% for the year, we’d be down about 1% for the quarter. So we’re giving you a wider range because right now the visibility is such that this will be our first holiday season where supposedly things have gotten better and we’ve moved away from some of these downturn and recession, but I think everyone wants to see how the consumer reacts.

Karru Martinson - Deutsche Bank

And just on the expenses, when we look forward to 2010 do you feel that the cost savings here are sustainable or how should we think about that going forward?

Keith E. Plowman

We’re putting initiatives in place here and we’re identifying additional areas where we think we can challenge the business and try and increase profitability. I mean, one thing I will be very clear on, the financing that we put in place cost more than what we put in place in 2006. You know that I think is expected by everyone in today’s market. You know you certainly don’t know whether the aberration was the 2006 financing levels where the rates were very low, or today where they’re much higher. They have certainly improved and we thought the timing was right to hit it. But we’re going to do the same thing that we do with our business when we got hit with the macroeconomic environment. We’re going to continue to address areas that we think we can improve the business, whether it be gross margin or expense control or anywhere, and we expect to have some additional initiatives in place for 2010 to benefit us.

Karru Martinson - Deutsche Bank

On CapEx for next year should we expect kind of similar levels as this year?

Keith E. Plowman

We’re really not giving any guidance for next year, Karru, but I would tell you overall you shouldn’t expect to see any real changes in capital as we go forward until we start to see the improvement in the economy and the consumer coming back and things starting to move where we want to look for more expansion.

Operator

Your next question comes from Grant Jordan - Wells Fargo.

Grant Jordan - Wells Fargo

Keith, I know you said that the details of the facility would be filed by Tuesday. Can you give us the maturity date on the second lien term loan?

Keith E. Plowman

Second lien term loan has a four year term.

Grant Jordan - Wells Fargo

Okay. Its four years.

Keith E. Plowman

Right. And we’re looking on the revised ABL, the amended and restated would be a three-and-a-half year term.

Grant Jordan - Wells Fargo

So would the second lien mature inside of the senior notes or outside of it?

Keith E. Plowman

They would mature inside the senior notes. They mature in 2014, March.

Grant Jordan - Wells Fargo

Second question and I think you got at this a little bit on the guidance, and you guys have done a great job of reducing SG&A costs, particularly in Q3. As I look at Q4, I guess is your guidance saying that, you know, a lot of the cost saves you’ve gotten to date may not flow through into Q4 just because you had already started some of those last year?

Keith E. Plowman

No, really what you’re seeing there are two things. One, if we get towards the upper end of the range of the guidance you know the lower comp sales decrease is the way I would say it, we do expect that we’ll have some additional dollars we’ll want to spend in the stores to continue the sales trend and get the benefits. So there is some variable piece there. But additionally, as we get to the performance, you know, as we talked about going from $140 to $155, we certainly had an internal plan to try and achieve higher than that level, but we have now moved above our internal plan and we do expect that there will be some incentive compensations and things like that that will kick in here in the fourth quarter that will have some offsetting impact to the savings that we’ll realize.

Grant Jordan - Wells Fargo

You guys have done a great job of managing working capital, you know, given the environment. You know one of the potential benefits I guess you could see from a new revolver and kind of upgraded capital structure would be maybe better terms from your vendors. Do you think that could be a source of working capital for you going into 2010?

Keith E. Plowman

Yes, I guess we would believe so. In fact, I would say that we’ve seen that with quite a few of our partners out there already in the third quarter. You saw what our excess capacity number was at the end of October which really was reflecting more realistically where it should have been because we’re increasing inventories. And it’s appropriate to get a more frequent reporting there, Grant. So we got some benefit there. And certainly in the conversations I’m having and I believe what I’m hearing from Tony and his merchant team is the vendors get it. They see where things are going. And I believe with the addition of this term loan here that’s going to increase that availability even higher. We really do expect the partnerships continue to get strengthened. As we go forward from both the factor and the vendor area, we’re looking for more support.

Grant Jordan - Wells Fargo

My last question, maybe you could just kind of help think through expectations, on the comp sales guidance obviously October was up 3%. You’re saying the high end of your guidance gets you to down 1% for the quarter. You know is it that October was just exceptionally strong or do you think consumer will, maybe as we move into the holidays, maybe going to pull back some more?

Keith E. Plowman

I think the two key points that management keeps very focused on and why we’re managing the business the way we are is remember unemployment is well over 10% and consumer confidence surveys that have been coming out have actually been showing a downturn. So while we are very pleased with the 2.6 down in the third quarter, we definitely think that we are you know pushing a lot by using a 1% down and also going the other direction when we use the 5.5% down. So we’re just trying to give a range of what the impact would be to the company within those dollar amounts, within those sale dollar amounts and comp percentages, because right now, Grant, you know the visibility is very difficult.

Operator

Your next question comes from Bill [Royter] – Bank of America Securities.

Bill [Royter] – Bank of America Securities

Were there any one time items that affected your gross margins positively in the third quarter?

Keith E. Plowman

No. No. The third quarter essentially we kept our old age reserved and the way we look at our, you know, the aging of the inventory and what we need to accrue there, what has not been marked down and moved through was done on a consistent basis from what we did last year. What you’re really seeing is the initiatives that Tony and Bud were going through, where we are improving the gross margin rate through private brand, through IVP, through the optimization programs as well as the controlled inventory is definitely benefiting us because we had, you know, as Tony mentioned about 20% less clearance at the end of October. As we keep that clearance down the net markdowns are being benefited.

Bill [Royter] – Bank of America Securities

And you guys called out cold weather products as something that helped out your October comps. Can you just qualitatively or quantitatively comment on how much cold weather products are in October?

Byron L. Bergren

We won’t tell you how much they are, but I will tell you they did perform well and we track that merchandise throughout all categories of business, whether it’s in the home store, in the mens store, in the ladies store, and they did improve in October versus the prior year. They accelerated in October and for the third quarter they were up high single digits. So it wasn’t just in October performance. It did occur all third quarter.

You know when you look at the improvement in October in comps, you just can’t say its cold weather. Okay? In an e-commerce business that doubled, you had a private brand business that was up in the high double digits and you had an improvement in 11 of our 17 chief merchandise categories that produce comp. So it was a combination of a lot of things, not just cold weather.

Bill [Royter] – Bank of America Securities

Are those products a little higher margin than your I guess basket as a whole?

Byron L. Bergren

Some are and some are not. It depends on the category.

Bill [Royter] – Bank of America Securities

And as you guys look at the level of CapEx that you guys spent this year, do you think that there’s been a change in the overall level of how your store looks or the condition of the stores, you know, for better or for worse?

Anthony J. Buccina

We haven’t done anything in the way of capital that would interfere with the stores at all. So there’s been no cutbacks on maintenance capital or those type of things in the store, so I guess my answer would be no, I don’t think there’s been any affect on it.

Operator

Your next question comes from Emily Shanks - Barclays Capital.

Emily Shanks - Barclays Capital

Can you comment on how traffic trended during the quarter? And then potentially the last couple of weeks?

Anthony J. Buccina

I would tell you for the quarter we don’t report how we’re doing during the month until the month ends. But for the quarter, as I said, our transactions for the quarter were down 1%. For the spring season, they were down 9%. They actually had a positive in the month of October, which was the best increase in transactions we’ve had in over a year.

Byron L. Bergren

Emily, when we look at transactions, we have no counts or anything on traffic.

Emily Shanks - Barclays Capital

And as we look into this holiday season, are you guys planning any promotional cadence shifts that are different than the last holiday season?

Anthony J. Buccina

No major shifts at all. We think we have a pretty good calendar right now, that some of the changes we’ve done in marketing to project more value to the customer. But no major shifts.

Emily Shanks - Barclays Capital

Have you or can you give us a sense of what you’re going to look to spend in fiscal 2010 on CapEx?

Keith E. Plowman

What we said, Emily, is we can’t really give guidance to 2010, but I think the way to look at it is we’ll determine after we hit the fourth quarter here and really see where the consumer is with their confidence and their shopping and so forth. But you should not expect the company to change significantly from where we’re heading this year going forward until we start to see a recovery. As Bud mentioned that one question was asked, we are making sure maintenance and repair, you know things that affect safety, quality, appearance, you know the shopping experience for the consumer, anything that is necessary, also IT, those are all items that we’ll continue to spend on. Where we’re not really spending on is doing large expansions, large remodels or relocations, new facilities, so forth.

Emily Shanks - Barclays Capital

So specifically should we assume, there are no new stores in the pipeline. Correct? For ’10.

Keith E. Plowman

That’s correct. There’s no new stores. We have talked about one location, that we’re doing some expansion and remodel, but that’s being done with the strong support of the landlord, and that’s really all that we have at this point.

Emily Shanks - Barclays Capital

My last question is just around your positioning versus your competitors, I just wanted to get a sense from you how you think you’re differentiating yourselves from a J.C. Penney or a Macy’s. I know you probably don’t want to comment on that exactly.

Byron L. Bergren

In a way, our product mix is the way we, you know there’s a lot of things we do to differentiate, but in a way we really measure is through product mix. And as I said we are about 33.8% different from our department store competitor which you would say is Macy’s and we’re still on that 80% to 85% difference from our what you would call the mass department stores, J.C. Penney, Kohl’s, and we track that quarterly.

Operator

Your next question comes from Tom Roller - Credit Suisse.

Tom Roller - Credit Suisse

You mentioned in the press release the effective tax rate excluding the potential favorable benefit from the Worker, Home Ownership and Business Assistance Act? I was wondering if you could expand on the potential benefit there that could possibly materialize in the fourth quarter.

Keith E. Plowman

Tom, it won’t be anything like what we had remember in the second quarter this year we got like a $2.7 million tax refund from the carry back. It won’t be anything into that magnitude because we did realize a decent portion. But we definitely have some benefit here and we’re a little unique in that because of the three year cumulative loss which we talked about last year, anything that we realize will essentially have significant impact to our earnings also. So we do expect to have something in our 10-Q that will be filed by December. We’ll have a better idea of the numbers, but you know we are talking millions of dollars here that we’ll still get benefit because we’ll be able to carry back either 2008 or 2009. You have to make a selection. And we will get some benefit from it. We just thought it was prudent not to put anything in an estimate today because we really don’t know where it will be and we won’t be firm on that until we go a little further down the road.

Tom Roller - Credit Suisse

Would that benefit cash taxes or book taxes?

Keith E. Plowman

Both. But from the standpoint essentially, the carry back definitely gives you cash taxes, so we will get cash tax benefit. We’re a little unique in that we had to write off any kind of assets we had out there because of the three year cumulative and therefore we will actually have also an income benefit besides the cash piece.

Operator

Your next question comes from Leah Hartman - CRT Capital.

Leah Hartman - CRT Capital

With respect to the new revolver, is it going to be as the existing one is a no covenant loan as long as you maintain an access availability level?

Keith E. Plowman

One of the things that is that we wanted to make sure we stayed covenant light both in the term loan that we set up as well as the new ABL or I should say the amended restated ABL that we’re putting together here. So the $75 million excess capacity requirement will be the financial covenant.

Leah Hartman - CRT Capital

My first question is on SG&A and just a follow up. Could you give us any sense of how much is variable and how much is permanent as we look into 2010 and hopefully we see a stabilization of comp?

Keith E. Plowman

That’s not a real easy question to answer simply because there’s a step horizon as you go through costs. I mean it’s not where if you add $1 here, you’ve got to add $0.20 here. It’s a matter of when you get to different staffing levels and you have to add increased dollars. So it’s not a straight ratio. I will tell you we always look at our SG&A expenses and we believe we have about 40% of our expenses are variable, which would include your fuel, would include you know your rates and things like that, but again it is not a pure standard, fixed variable that you can say is absolute. So it really does switch around.

And could you walk through the individual amount outstanding under the mortgage facility since that’s amortizing monthly? And the current balance on the revolver plus letters of credit?

Keith E. Plowman

Right. I’ll give you all the balances we have. The essential [inaudible] notes as you know are at $510 million. The asset base minus the revolver is around $391 million. The CMBS mortgage is around $244. We then have other miscellaneous loans and mortgages of about $11 million. And the capital lease obligations are about $72 million. And also because it often comes up, we have LC’s outstanding of about $64 million as of the end of October.

Leah Hartman - CRT Capital

Your next question comes from Christina Boni - RBC Capital Markets.

Christina Boni - RBC Capital Markets

Just a follow up to private label, you talked about an increase in penetration. Do you see further opportunities to increase those levels? Do you have a target rate that you hope to get to in terms of your overall mix?

Byron L. Bergren

Not further out than 2010. We do have our plans in place and we’re planning at about a 21% penetration, which would be slightly up from this year.

Christina Boni - RBC Capital Markets

On your comps and looking at October and you talked a bit about how your mix is different from some of your competitors, you know, what do you think in terms of October drove the out performance? You talked to some of your performance in outerwear, but as you look at yourself vis a vie your competitors, even on a two year basis it looks like you stacked up well to the competition. How would you depict that?

Byron L. Bergren

Well, I think I said it before, the October was a combination of a bunch of things that really worked for us. The way we track our business and plan it is by we call chief merchandise categories, and 11 out of the 17 produced. So that was well rounded throughout home store, men’s, ladies and center core. Our e-commerce business that we weren’t in it two years ago is growing like a weed and doubling in size. And the private brand performance, we actually didn’t have it planned that penetration, it actually exceeded our planned penetration. So we had a lot of good things working for us in the quarter and it really culminated I think in October.

Christina Boni - RBC Capital Markets

I know you said you’ll have the filings on the details on the term loan and the credit facility shortly, but could you give us a sense, it sounds like the liquidity will increase but pro forma for the transaction? What your availability will be?

Keith E. Plowman

You know, that’s sort of difficult but we’d be going out into next year. I’d do it but I’d be putting in something that gives additional guidance here, Christina, so the best way I can tell you is that we feel good and I think you should look at it as the $75 million term loan net of fees and expenses of closing the facility, just what’s going to give us a pop up on the excess availability as we’ve been reporting it.

Operator

Your next question comes from [Colleen Burns] – Oppenheimer & Co.

[Colleen Burns] – Oppenheimer & Co.

I know you don’t want to talk about recent weeks of November, but in the month of October did you see consistency on a week-by-week basis in sales trends? Were trends stronger in the beginning of the month versus the end?

Byron L. Bergren

We saw it really consistently throughout the month. You really can’t say it was tougher in the beginning or better in the end. We had a good performance solidly each week. It was pretty balanced throughout each of the four weeks in October.

[Colleen Burns] – Oppenheimer & Co.

Some of your weaker markets, Chicago and eastern Pennsylvania I think you called out, and for the quarter as well, did you see any improvement on a sequential basis in the third quarter versus the second quarter? And what do you think is driving the weaker performance in Chicago? Is it competition?

Byron L. Bergren

No, I don’t think its competition in Chicago. There’s two parts in Chicago that are affecting us. One is the south side and I think we have some changes in our assortment that has to be done to reach that customer. And the other is the furniture business. We’re highly penetrated in furniture in Chicago and the furniture business, even though it’s improved a little bit is continuing to be difficult.

And on eastern Pennsylvania I don’t think its competition either. I just think the economy has been more difficult in that environment when we look at employment rates and so forth.

[Colleen Burns] – Oppenheimer & Co.

Do you think you saw any improvement on a sequential basis in those markets?

Byron L. Bergren

A little bit in Chicago. We are seeing improvements in Chicago and we did see improvements in the eastern Pennsylvania market, too. But obviously both of them are still running under what the company’s comps are.

[Colleen Burns] – Oppenheimer & Co.

And then just lastly on the inventory side, you guys have done a good job of managing inventory, are you worried about being too lean in any areas? And then is there any color you can provide on current private label? Is that running in line with the overall inventory trends, down mid to high single digits as well?

Anthony J. Buccina

Yes it is. The private brand piece of it. But we felt that, if you look at last year, we really had with the turns on the economy we really had what we would call burn up a lot of our inventory with markdowns to get to the appropriate levels to begin next year more in line with the sales trend. We have enough inventory in the right places to really make our fourth quarter sales and even beat them.

Operator

Your next question comes from Michael [Shaygraft] – Longacre.

Michael [Shaygraft] – Longacre

Can you guys just talk a little bit why you were bringing the jewelry business back inhouse? And then a follow up from that, if you took furniture out of the comp would your comp increase even better or would it look worse?

Anthony J. Buccina

Well, first of all on the jewelry, the part when we were leasing it, the company we were leasing the space to went Chapter 11 and closed and went out of business, so it was a decision that we were sort of forced to do. And as we looked at it, we had a lot of options and a way to do it. And we believe the best thing for the profit of the company was to bring it inhouse. And that’s the decision we ended up making and that we have transitioned in the first of November. It’s all in our own running currently.

The furniture business has had an effect on our comps. Furniture is a little less than 4% of our total business.

Michael [Shaygraft] – Longacre

So it’s not significant.

Anthony J. Buccina

Not majorly significant, but it does have an effect.

Michael [Shaygraft] – Longacre

When you look at the sector now, do you think there’s room for additional consolidation within the sector? I mean now that we see that adding stores really probably isn’t the way to generate a lot of value in the business, given the slowdown in consumer spending.

Byron L. Bergren

The retail business for the last 50 years I think has been a business that’s consolidating, so I don’t see any reason that’ll change.

Michael [Shaygraft] – Longacre

And do you have a view whether you would like to be a consolidator or would be open to any kind of discussions from others that might be interested?

Byron L. Bergren

I can’t comment that much on the future. If you look at our past, that’s the way we’ve grown is through consolidation and we’ve been the consolidators. But I can’t comment really on anything in the future.

Operator

And there are no further questions at this time. Management, I’ll turn it back to you for any further or closing comments.

Byron L. Bergren

Thank you for your questions and your interest in our progress this year. We look forward to speaking with you about our fourth quarter and physical 2009 financial results on our conference call in March. And thanks for joining us and your interest in Bon-Ton and hope everyone has a good holiday season. Thank you.

Operator

Ladies and gentlemen, that does conclude today’s conference. We thank you for your participation. You may now disconnect.

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Source: The Bon-Ton Stores, Inc. Q3 2009 Earnings Call Transcript
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