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The Bon-Ton Stores, Inc. (NASDAQ:BONT)

Q3 2013 Earnings Call

November 21, 2013 10:00 AM ET

Executives

Jean Fontana - IR

Brendan Hoffman - President and CEO

Keith Plowman - EVP, CFO and PAO

Analysts

David Glick with Buckingham Research Group

Edward Yruma - KeyBanc Capital Markets

William Reuter - Bank of America, Merrill Lynch

Grant Jordan - Wells Fargo

Mary Gilbert - Imperial Capital

Carla Casella - JP Morgan

Karru Martinson - Deutsche Bank

Hal Holden - Barclays Capital

Karen Eltrich - Mitsubishi

Operator

Good day, and welcome to Bon-Ton Stores Incorporated Third Quarter Fiscal 2013 Results Conference Call. Today's conference is being recorded, at this time I would like to turn the conference over to Ms. Jean Fontana. Please go ahead.

Jean Fontana

Thank you, good morning everyone and welcome to the Bon-Ton's third quarter fiscal 2013 conference call. Mr. Brendan Hoffman, President and CEO, and Mr. Keith Plowman, Executive Vice President and CFO will host today's call. You may access a copy of the earnings release on the company's website at www.bonton.com. You may also obtain a copy of the earnings release by calling 203-682-8200.

The statements contained in this conference call which are not historical facts may constitute forward-looking statements within the meaning 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, including those set forth in the cautionary note in the earnings release and all of which are described in the company's filings with the SEC.

I would now like to turn the call over to Mr. Brendan Hoffman.

Brendan Hoffman

Good morning and thank you for joining us today, despite a challenging environment we were pleased with the improved comparable stores sales trend towards the end of the third quarter. We saw our sales results improve as the quarter progressed and ended with the slightly positive comp in October the first since Q1. We grew 13% growth in adjusted EBITDA by holding gross margin flat and by reducing operating expenses.

While we were helped by the easing of some of the external pressures towards the end of the quarter including the government reopening, cooler weather and lower gas prices, we are even more excited about some of our internal accomplishments. Our biggest in my mind was the nearly 5% reduction in inventory compared to last year which we primarily attribute to our strategic reduction receipt. Not only is this a huge achievement and something we've been working towards for some time, but it positions us to drive higher and more profitable sales in the future. We also put into play some of our initial localization strategies that we believe will enhance store productivity. Additionally, we drove a nice lift in our e-commerce business with enhanced marketing efforts and an expanded assortment.

Overall while we are highly encouraged by the progress in our initiatives as well as the improving environment. The reality is that we are still subject to external factors. We are just in a better position to manage through headwinds as well as capitalize on any tailwind overall.

Now I will turn to some of the highlights from our quarter. We continue to refine our merchandise strategy, setting up the stores in key categories earlier than last year which allowed us to capture demand for cold weather merchandise such as ladies and men's outwear. Other cold weather related categories have also been very strong and all of this bodes well for the fourth quarter. These have been challenging categories over the past couple of holiday seasons and will provide a nice lift if the trend continues. Furthermore, our overall store wide reduced inventory levels have allowed us to go back in the market and buy additional goods that we will need at advantageous prices.

Our ladies ready-to-wear pyramid again led by outerwear in addition the plus size business our active zone in our dress business continued its improved performance. We also did well in ladies' boots, men's sportswear and luggage. We were pleased with the performance of our private brand and the inventories are cleaner than they have been in a long time and we saw lots of winners in the categories I have already mentioned. One additional successful category has been Trim A Home, while it’s not a huge business for the quarter the response by the customer to changes to we have made has been terrific and bodes well for the holiday season when this business accelerates.

Our e-commerce business continues its dramatic growth and is on track to penetrate at around 5% of our overall business. We saw a huge surge in traffic as our efforts in digital media continue to build and the customers were able to take advantage of our expanded assortment including as of last week the World of Ralph Lauren. The Ralph Lauren brand and the earlier launches that Michael Kors and Coach among others have given us an arsenal of status resources that allows us to now compete on equal footing with our peer group. Further validation came from the world retail congress which ranked our website number two in US department stores in their quarterly survey, with the focus being on user experience. We have high expectations for the continued acceleration of the business during the holiday season and beyond online. Part of these efforts include increasing our spend in TV advertising to try and reach a broader audience than we are able to do with our direct mail program. We tested some additional television during the third quarter and achieved good results. We are putting more resources behind TV during November and December in order to capture mind share and we have a good arsenal of brands at compelling prices to drive the customer in.

We opened up two new full line stores in September, a Carson's in Fort Wayne, Indiana, and a Bon-Ton in Portland, Maine. We were pleased by the customers' reactions to our openings and are looking forward to servicing these communities. We have recently announced the opening of a new store in Logan, Utah, planned for fall of 2014. This helps us keep our store base relatively constant as we announce the closing of stores in Scranton, Rochester, and Sheboygan, Wisconsin by fiscal year end. We opened our second standalone clearance center, this one is outside Chicago under the Carson's banner, and joins our suburban Milwaukee Boston Store clearance center. The results have been fantastic. We have the ability to liquidate merchandise much more efficiently that we did in the store within store concept we launched last year, and that was already an improvement on our historical process of doing it within the full line selling floor.

We expect to open up a couple or more in 2014 to optimize our liquidation ability. This along with a better Yellow Dot clearance guidance, I have talked about in the past, has allowed us to maintain our gross margin rates for the quarter despite needing to respond to the increasingly competitive environment. In addition this strategy along with our lower inventory level will allow us to reduce clearance markdowns in January and even more so in Q1 of next year. So despite the aggressive promotional environment we feel optimistic that we will be able to improve our gross margin rate going forward.

Lastly the third quarter sell offs begin to test some aspects of the localization initiatives that we have spoken to previously and that we are confident as the key to unlocking topline growth of the Bon-Ton. One of the examples of this was the testing of Versioning out our catalog, which allows us to flip out depictions, emphasize different categories and offer different discounts. We have a lot to learn but we are pleased with the initial results especially in our smaller stores which is where we see the biggest opportunity.

Some of the new brands we rolled out to these smaller stores include Hanes Men’s underwear and Lee Jeans in both men’s and women’s. We also rolled out our first phase of merchandise reporting during the quarter. This is allowing us to more easily access information and slices and dices and weighs that weren’t possible before. This ties directly into our localization efforts as it provide information that we need to properly analyze the business, and allows us to do so more efficiently which frees up hours that can be repurposed elsewhere.

This includes putting some merchants in the local field’s offices to provide real-time information on what is needed regionally. The first of these positions went live during the quarter with more expected during the fourth quarter. We are excited about the expanded opportunities we will have to regionalize our marketing, assortment and merchandising to better serve the local customer beginning this quarter.

As we look forward to fourth quarter in the holiday season, we have renewed sense of optimism that was absent until recently. While we recognize that we are operating in a choppy environment we think we are well prepared for the spring board that we believe this holiday season will be. As previously announced, we will open at 8 p.m. on Thanks Giving night four hours earlier than last year. We are excited because that should bring a broader customer base than we have seen during the midnight madness for the past couple of years and believe it will drive incremental business for the Black Friday Weekend.

I will now turn the call over to Keith.

Keith Plowman

Thank you, Brendan and good morning, everyone. Some notable points for the third quarter; comp store sales decreased 2.8%. Our gross margin rate was flat at 36.6% compared with the third quarter of last year. On a comparable basis inventory at the end of the third quarter decreased approximately 5% compared with the prior year. Operating income improved by $5 million to $15.9 million, compared with an operating income of $10.8 million in the third quarter, last year.

Adjusted EBITDA, defined as earnings before interest, income taxes depreciation and amortization including amortization of lease related interest, impairment charges and loss on exchange and extinguishment of debt increased $4.4 million to $38.4 million as compared with $34.1 million in last year’s third quarter.

As a reminder for a reconciliation of adjusted EBITDA to net loss, please refer to our earnings press release. Net interest expense decreased $3.5 million compared with the prior year period benefitting our net loss per diluted share reducing it by approximately 90% to a net loss of $0.05 per diluted share from a net loss of per diluted share of $0.55 in the prior year period.

We are very pleased with our new loyalty program and the double-digit growth in the number of elite customers as compared with the prior year. Additionally our credit penetration to total sales increased by 170 basis points to 50% in the third quarter. And at the end of the third quarter our excess borrowing capacity under our revolving credit facility was approximately $361 million with our debt decreasing by $30 million as compared with the third quarter of 2012, primarily reflecting improved operating cash flow.

Some details of the third quarter which ended November 2, 2013; total sales decreased 2.6% to $651.2 million compared with $668.7 million in the prior year period. Gross margin dollars decreased to $6.3 million to $238.2 million.

SG&A expense decreased $9.6 million to $215.2 million compared with $224.8 million in the prior year period. Our SG&A expense rate decreased to 33% of net sales compared with 33.6% in the prior year period. And our net loss improved by $9.2 million to $931,000 compared with the net loss of $10.1 million for the third quarter of fiscal 2012. A few notables for the year to date results, comparable store sales decreased 2.6%, total sales decreased to 2.6% to $1,855,200. Gross margin dollars decreased $8.5 million to $669.7 million; our gross margin rate increased 48 basis points to 36.1% of net sales, compared with 35.6% in the prior year period. The increase in the gross margin rate in the current year is largely attributable to increased cumulative mark up and decreased net markdowns.

SG&A expenses decreased $21 million to $651.6 million compared with $672.5 million in the prior year period and our SG&A expense rate decreased to 35.1% of net sales compared with 35.3% in the prior year period. Our year-to-date net loss improved by $31.1 million to a net loss of $64.9 million or $3.40 per diluted share, compared with a net loss of $96 million of $5.20 per diluted share for the prior year period.

Some key ratios and balance sheet amounts, our total balance sheet inventory at the end of third quarter decreased 4.5% compared with the prior year. Fiscal 2013 year-to-date capital expenditures before netting out external contributions were $60.8 million compared with $57.6 million for the prior year period. The components of our debt at the end of the third quarter of fiscal 2013 were 2021 senior notes $350 million, 2017 senior notes $57 million; revolving credit facility $311 million, CMBS mortgage facility $220 million and capital leases and other debt $55 million for a total debt of $993 million. And at the end of the quarter our letters of credit outstanding approximated $3 million.

Moving to our guidance, we're are reaffirming our full year fiscal 2013 guidance for adjusted EBITDA on a range of $170 million to $190 million for earnings per diluted share in a range of $0.15 to $0.75 and for cash flow in a range of $10 million to $30 million.

Regarding the underlying assumptions for our guidance based on third quarter year-to-date results we're projecting to be in a middle to lower end of our comp stores sales range, which was flat to 2.5, so somewhere in a 1.5 to 2.5 range for the year. And at the upper end of our gross margin rate range were slightly better.

Our Form 10-Q for the third quarter fiscal 2013 will be available by December 12. We will now be happy to entertain any questions you might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from David Glick with Buckingham Research Group.

David Glick - Buckingham Research Group

Congrats on the progress you are making. A lot of department stores are talking about a strong end of the quarter and a strong start to November. I know that there is a lot of business in front of you, there seems to be a renewed sense of enthusiasm that comes through certainly in your commentary. And just wanted to kind of get your sense on November trends and the prospect for a flat to positive comp in Q4 and what those drivers might be to accomplish it?

Brendan Hoffman

I mean clearly the last three, four weeks have been really encouraging, coincidently or not it was right around when the government went back to work and the weather got cold and the gas prices continued to fall. I think we started to get credit from the consumer of all the changes and initiatives we have put into place. So yeah I mean it gives us certainly more reason to be optimistic than we would have been based on the last five or six months. But I don't want to overstate one month, the scar tissue is still there from the previous quarter and the start of this quarter. But we do have reason to believe that the customers responding to what we have been doing. And it continued into the early part of November, but obviously November is all about a week from starting tonight. And so until we get through that we won't have a real clear clarity into what the customer is thinking and how that's going to play out for this month and next. But certainly the early signs are encouraging including the categories that they are purchasing in. Last year at this time Keith and I were talking to you about the belief that cold weather categories would bounce back after a real down year in 2011. And what that could mean to the business.

That never materialized last year and we told you post last Christmas that we weren't going to be fooled again and we weren't going to count on it for Q4 of 2013. I think you heard that from our peer group as well. We also said we'd be in a position to chase the business as it happened. And that's so far what's materializing and that's really good news. Because it brings in a customer, it brings in a higher margin and she buys other merchandize while she is here. So as I mentioned in our remarks our stock situation is such that we’re in great position to go out there and take advantage of additional buys. And so all that I think does fuel some increased optimism but still trying to balance it with the previous period.

David Glick - Buckingham Research Group

Thanks for that overview. I just have to ask the question because it’s on everyone’s mind in terms of JCPenney’s kind of hitting a tipping point in terms of their comp store sales and I know you’ve a high overlap and understand the negative in terms of traffic into the mall when they were underperforming so it does bring more footsteps. But how are you -- what are you seeing how you’re thinking about the prospects of JCPenney taking back some share?

Brendan Hoffman

As we’ve discussed on previous calls it’s been very inconsistent hard to read what Penney’s performance over the last couple of years has meant-to to our business. Certainly there have been some brands where we’ve benefited but we’ve really lost out in the foot traffic as you mentioned. And there was a thought out there that as their performance improved it would bring more traffic to the malls which we would then be able to convert based on the changes we’ve made and at least in October that seems to have played out that way and listening to their results with a slightly positive comp similar to ours, seems like we both benefited from both the external factors and hopefully feeding off each other. So I hope that’s a good sign that validate some of the conversations we had that it doesn’t have to be one or the other that we can both grow with the increased traffic that’s going to come to the mall.

David Glick - Buckingham Research Group

Great, thank you very much and good luck.

Operator

And we will take our next question from Edward Yruma with KeyBanc Capital Markets.

Edward Yruma - KeyBanc Capital Markets

Thanks very much for taking question, and congrats on the continued improvement. How should we think about you identified the continued addition of some of these prestige brands. I know that it had been potential longer term goal to add more than to in-store. So how do we think about your assortment of these kind of prestige brand particularly in smaller markets this holiday season versus last?

Brendan Hoffman

Well, I think that we will continue to look for places where it make sense to add these brands both because we think we can do lots of business with them but also because of the way it helps differentiate the market. And I’ve been really pleased I named three in my remark specific to online with Ralph Lauren, Michael Kors and Coach, there others as well. But it goes beyond online as you suggest and they’ve been very supportive of us to roll out additional doors both with their full collection and also with the gifting package that goes to a lot more stores during this time period.

So we will continue to look for opportunities along those lines. When we talk to our 270 stores and some of the localization initiatives obviously it needs to go a lot deeper than that because the price points they just can’t support. But I think as you tour our stores this holiday season you’ll see a greater presentation in our top 70 or 80 doors of full collections and then in another [Audio Gap]

And then I guess what’s the ability of that to offset kind of the promotional cadence should the environment remain intense in holiday? Thank you.

Brendan Hoffman

I’m sorry did you say to improve mark-up, was that your first comment?

Edward Yruma - KeyBanc Capital Markets

Yes.

Brendan Hoffman

Keith mentioned in his remarks it’s certainly a combination of the mark-up and continuing to try to reduce net mark-down. I think the mark-up is probably less I would focus less on I mean we’ve clearly gotten some benefit over the last year or so as prices overseas have come down particularly in our private brand area and while we don’t see that going the other way I don’t know if we’re going to bake lot more room going forward to continue the improvement there.

I think it really goes down to reducing the mark-downs both from having a better liquidation strategy which we talked a lot about since I’ve been here and we’re really seeing that payoff now both through the clearance centers that we’ve opened and the in-store liquidation yellow dot process, which is becoming much more effective and efficient for us as we move the goods through their lifecycle.

And then of course the inventories being lean, that’s something that I’ve spoken to you about all year. I was disappointed at the end of Q2 that we didn’t show more progress but of course that within light of the sales drop. So to be able to hit these inventory numbers with sales still being choppy, we're quite proud of and I sit with the merchants and the planners every month and I ask them point blank do you think you're missing inventory, and to a person they say no. I've been, you know, 30 or 40 stores over the last four weeks and I asked the store managers the same question and they say absolutely not so I think we’ve very really accomplished this very strategically and methodically and it puts us in great position as I said earlier to go chase merchandize as needed but the real benefit to the gross margin will come later this year, really into Q1 when we don't have to take those massive mark down of liquidation.

Edward Yruma - KeyBanc Capital Markets

Got it, thanks so much, best of luck this holiday.

Operator

And next we will go to William Reuter with Bank of America, Merrill Lynch.

William Reuter - Bank of America, Merrill Lynch

Your SG&A was substantially lower than I was anticipating. I was curious, what were the major buckets that you guys reduced those expenses in, and then whether there were any timing shifts from the third quarter into the fourth quarter on some of those?

Keith Plowman

Hi Bill, this is Keith. No, from a standpoint of the SG&A rate what we have is reductions as we've been talking about initiatives in our payroll services, supplies, utilities, those type areas to name a few and we'll continue to focus there, we do believe that what we have through the first nine months is a run rate that's sustainable for the sales volume we're at. And then the one part that is in there is there're some incentive reduction that we have in the third quarter, as you look at in a year over year basis for the first nine months it's a very small portion the $21 million that we're down probably 10% or so and that could swing between third and fourth quarter. But the majority of it is sustainable reduction in the expense run rate, it's what we started in 2012, we're continuing to be focused on in 2013 and we continue that going forward. That's really why we're sitting with saying we'll down, potentially down two-tenth a percent to flat as a percent of sales for the full year.

William Reuter - Bank of America, Merrill Lynch

Okay great, and then I'm curious, you talked about strategic inventory reduction. I guess what were some of these categories that you've strategically been reducing your inventories?

Brendon Hoffman

Well I mean, the easy answer is it's across the board, we had just, I think I'd mentioned this in our previous call, we had just let the inventory creep up over the last three or four years to unhealthy levels and it certainly was concentrated in areas like ready-to-wear which is very easy to let the merchandize get stale because it has, suppose that's such a quick turn and if it doesn't sell the new inventory comes on top of the old inventory and tends to build up but you know it was really a change that was strategic across the entire company that when we compare the inventory levels to years passed, it just grown to an unhealthy level without the sales to accompany it.

So, it's across the board and it's something Keith and I both manage every month, with Jimmy Mansker, Head of Planning, to ensure that the merchants stay within the range that we’ve approved and they've really bought into this and they really are, appreciate now the flexibility it gives them and makes these meetings a lot more enjoyable for all of us to attend, so I think it’s something that's baked in now to our organization psyche and we'll continue to leverage for the foreseeable future.

William Reuter - Bank of America, Merrill Lynch

Okay, and then just lastly from me, you talked about total better performance and mentioned weather, can you talk about how the, what the increase might have been in weather sensitive categories on a percentage basis?

Brendon Hoffman

It was dramatic, I mean it was more than just a little, it was dramatic and potentially (Ph) the fine weather related categories, certainly sweaters saw an uptick too, jackets beyond just outerwear. So it was sizeable and it gave a lift to other areas as well and again I think it was the weather but I also think it was the gas prices which is, it really impacts our Midwest customer and her disposable income.

William Reuter - Bank of America, Merrill Lynch

Was it double digits?

Brendon Hoffman

Yes, outwear was double digits.

Operator

And our next question comes from Grant Jordan with Wells Fargo.

Grant Jordan - Wells Fargo

I was hoping you could give us a little more color on the gross margin, like obviously you did a great job getting inventory down. How much of that was accomplished through using your strategic clearance centers versus just taking markdowns to try to clear it?

Brendon Hoffman

It was really a combination, as I said earlier. We were more aggressive on the upfront markdowns but with the relatively fresh merchandize because we felt we had to based on what was happening out there competitively. So if we had a 15% coupon last year, it might have been 20% this year, so we really pushed the pedal on that.

But then we made it back on both the standalone clearance center liquidation that you just talked about but I think a lot of it also was done on the in store liquidation under our yellow dot umbrella, you know the merchants and planners have really taken to some of the changes we've made to that process and found ways to improve it beyond what I had even envisioned which is exciting for me to see.

And really figuring out ways to maximize the sell-throughs at a higher average in a retail than we've been getting in the past and I think that in our remarks the reason Keith and I have optimism that that will continue for Q4 beyond is because we see how well the organization and the store team has adapted to moving into these inventories and appreciating with every dollar we save drops like the bottom line.

Grant Jordan - Wells Fargo

Great, and then my only other question being, because you planned your promotional calendar and events for Q4, does it look significantly different last year?

Brendon Hoffman

Well it does in the sense that we have one week less between Thanksgiving and Christmas, so that forced a recalibration of events; we dropped out. Last year we had a many goodwill events that we dropped out this year. Obviously we are opening up the stores earlier on Black Friday and have besides that event a little bit, so. I think there are also two big changes. Beyond that it is minor tweaks. As I said earlier as what happened in Q3, perhaps going a little bit deeper on some of the advertised items or the coupons to stay competitive with our peer group.

Probably the biggest change we’ve just made over the last month is we have gone back and invested a little bit more into the marketing efforts for December specifically. You know that’s one thing, it was clear to us in Q3, the competition stepped up there, marketing efforts and the frequency of getting their name out there and we think we need to do that in Q4 to take advantage of the traffic that’s out there. So we’ve made a little bit of investment there that we think will pay off. But other than those big events I just talked about, the marketing overall won’t look all that different to last year.

Operator

And next we go to Mary Gilbert with Imperial Capital

Mary Gilbert - Imperial Capital

Good morning. Good results in the quarter. I wanted to find out, in breaking down the gross margin improvement and I appreciate the description on the clearance versus the markup, and then what about some of the initiatives on the, or actually could you give us some components of the gross margin improvement, not only the clearance but also slower and going forward, how that’s benefitted gross margin?

Keith Plowman

You really can’t advocate those, Mary, when you’re looking at it, because as Brendan said, a lot of that happened not just in the clearance centers which we do see how we are selling through. He had talked about opening up another standalone clearance center. We are seeing much better sell through there.

We’re getting better realization as we look at those standalone locations. But you can't break out what we are doing in a clearance in the company itself as we go through the Yellow Dot process and we move through the inventory as well as we have reduced the inventories and taken and taken it to wherein now we are able to chase inventory and have opportune buys, things like that.

It’s really everything together, and certain cases as Brendan said, we’re more promotional on certain areas, to be competitive. And other areas we are able to realize back savings. We’re offsetting those repurposing them and really managing gross margins, a total category with the inventory.

Brendon Hoffman

And just to be clear, the reduction of the inventory levels that we ended the quarter with, that was obviously receipts that came in during the quarter, so in terms of going into the liquidation process we haven’t gotten the benefit of that yet. I mean we came into the quarter, I don’t have the numbers in front of me, but heavier than last year in inventories, had to liquidate that through which we did more effectively and efficiently, for the reasons we just discussed. I think the reduced inventory levels will benefit us as that inventory would have normally hit the clearance cycles in January, February, and March.

Mary Gilbert - Imperial Capital

And then in looking at November our comp have modestly, like in the 2% or 3% range so far?

Brendon Hoffman

We are not going to give any specifics beyond that, and I would, just as we stated we are pleased to see the better trends continue in November as we saw in October.

Mary Gilbert - Imperial Capital

Okay, and what kind of reductions can we see going further on the SG&A line going into 2014?

Keith Plowman

I think at is point, you know, Mary; we’re very focused on repurposing dollars, as we find areas to take dollars out. You know we talked about some things, initiatives this year with the localization. We talked about initiatives with reporting and other items that we are trying to do. So we are not looking at any big initiatives at this point to talk about. We will continue to look for opportunities but we really want to make sure we are investing in the future and having ourselves positioned that as the recovery comes back through in a stronger way we can enjoy that and drop more to the bottom line in profits.

Mary Gilbert - Imperial Capital

Okay, then can you give us an update on how we should look at working capital year-over-year at the end of the year with the inventory reductions that you’ve been able to take, could we see cash generation. And then how should we look at outperforming?

Keith Plowman

Okay, from the standpoint of what we see on working capital, no question, the inventory you know what we have pulled out, you saw we were down about 4.5% approaching $50 million on inventory on a year-over-year basis. And we really will continue to manage that very tight and would expect that as we go forward we will be able to continue to keep those dollars out there and try and look to keep the dollars down.

I think from the standpoint, Mary, other working capital objectives or initiatives, that’s really the major one we control. It will have some impact from the standpoint of the accounts payable as that works through. And it also does have some impact quite frankly on our excess borrowing capacity, because we can borrow against that inventories, we go forward. But I think we’ve managed that very well. I talked about the excess borrowing capacity we have. I would see us continue to draw

I talked about the excess borrowing capacity we have. I would see us continue to draw, excuse me generate additional cash flow that we can draw upon to pay down the 2017 senior notes as we go forward. We obviously have quite a runway there, but there are also higher cost debt that we want to utilize our excess capacities we go forward to reduce.

Mary Gilbert - Imperial Capital

And what would average borrowing season?

Keith Plowman

Average borrowings have been running in the $200 million range, so I don't see a whole of change from that.

Operator

Next up is Carla Casella with JP Morgan.

Carla Casella - JP Morgan

Hi just a quick one on refinancing, what do you see your best options for refinancing with CMBS when that comes through?

Keith Plowman

We think there is a couple of options that are out there and obviously we're not real deep into it yet because we have couple of years runway on it, I know we have mentioned in the past that we have made whole provision that really says we'll do something here later in 2015 and the early 2016 time frame, but we're looking at it.

We think we have opportunities because and I believe again we have talked on this in the past, where we'll be at loan to value ratio from the original appraisals back in 2006, we'd be somewhere around $0.60 or 60%. So we think that gives us opportunity. Its 23 stores and one distribution center, they are very good properties, they are very cash generating; they give us good EBITDA on fore wall cash flow. So we think that opens opportunities.

We think whether we go into another CMBS or whether we look at some kind of real estate tranche or something specific to the real estate, we think we have options out there that should not have a big impact one direction or rather on the amount of borrowings we have for that facility.

Carla Casella - JP Morgan

And then do you give traffic for the sequential month during the quarter?

Keith Plowman

We don't have traffic counters; we subscribe some generic shopper track data for the malls. But we don't have specific store counters.

Carla Casella - JP Morgan

And then I think on a prior call you did imply the SG&A would be about 15 million over last year. It seems like that, that would be a huge increase in the fourth quarter. Did I miss or did you change that guidance?

Keith Plowman

No we didn't change the guidance. It still depends on how we perform in the fourth quarter. Remember I mentioned earlier about the incentive depending on how we perform that could be additional incentive dollars that are accrued in there. But we feel very good in where we sit in being that flat to down two tenths percent to the sales.

Carla Casella - JP Morgan

And then one more, did you disclose in event of the clearance what percentage of your merchandise is clearance this year versus last? I am assuming that's part of which helps your gross margins?

Keith Plowman

I think if you look at overall clearance overall what we have in the clearance centers, clearance in stores and our whole, I will call it the MCFP process as we look through inventory there is not a whole lot of change between those on a year-over-year basis. How we have designated them and how we're moving them through to clear them through the process, what we think is more efficient has been changed. But the actual total dollars have overall stayed somewhat constant.

Brendan Hoffman

Again as I mentioned why the inventory reductions were from this past quarter, so those were in the clearance bucket Keith mentioned.

Operator

And next we go to Karru Martinson with Deutsche Bank.

Karru Martinson - Deutsche Bank

When we look at the outlet channel here, what do you feel is the opportunity from a big picture let's say three years to four years out for the outlets that's kind of a separate chain here.

Brendan Hoffman

Right now they are just purely being looked as liquidation vehicle and whether that means we have four or five of them and we'll work through that as we get through Q4 and have some better history to go on. I think you're probably taking it one step further could it go beyond and as others have done and be a kind of profit channel where direct purchasing for the stores and roll out more.

The answer is I am not sure yet, I mean I think that it's not something we have really spent much time on yet, I think it probably differs in that case by banner. I think there is certain banners we have in different parts of the country that probably because of their history and their importance to that community and that competitive nature probably could open up a more of an outlet version of themselves under the banner and play off the name. And that's something we'll look at, but that's a few years away from really being considered.

Karru Martinson - Deutsche Bank

When we look at the banners do you feel there are certainly parts of the country that were stronger than others, kind of what the outperformers for you guys this quarter?

Brendan Hoffman

We really kind of see our, as playing in the Northern mid-west and fell that they were pretty equally impacted by the weather and the gas prices both positively and negatively that we talked about earlier. We think it's not banner specific but more store type that the smaller stores have a real opportunity to take advantage of the localization initiative that's underway and we start to see that pay off towards the end of the quarter and have hopes about this quarter and beyond.

But that's less specific to Herbert and those yonkers (Ph) and more about where it’s located and who the customer is and what the competitive nature of the market is.

Karru Martinson - Deutsche Bank

If we're rolling the clock maybe a year, we spent a lot of time talking about contemporary versus traditional merchandise and I think that's something that you have definitely changed here. When you look at that big mix today I mean how do you feel about that split is with your customer base?

Brendan Hoffman

I think it’s pretty even. I think we were at one point very traditionally based and try to swing that to be much contemporarily and now we I think balance that to the appropriate levels which is pretty much split 50-50, some of the areas in sports where that are working on the plus size business both in contemporary and traditional, so that’s very exciting for us.

And even our junior business or we call it our Young Contemporary business which is something that everyone has been struggling with. We redefined that within our stores, we’ve redefined it differently by different stores we changed around where it’s location. And we’re starting to see some signs of life there.

So I think the big difference is we’ll let the customer help guide us where we should go in terms of inventory mix and balance as opposed to what I think we try to do with down the nearest path. And again the linear our inventory levels are the more we can be flexible and they changes in seasons that’s we see some of the trends develop.

Unidentified Analyst

Thank you very much guys, appreciate it.

Operator

And next up is Hal Holden with Barclays.

Hal Holden - Barclays Capital

Thank, just two very quick ones. When do you think you will sort of be completed with the localization effort I think in the next year or beyond that?

Brendan Hoffman

No, I mean I think this is, the nice thing about this is that long legs I mean right now we’re just scratching the surface even in the way of which we’re defining the different ways we localize the regions. And we’ve gone to two versions of advertising but could it be four, could it be six, I think it has a real long life to it which is exciting because it means there will be continued opportunity once we really get it rolling in.

And this is obviously not something that we came up with others have been talking about for long time. And I take, I'm pleased to hear that they are still talking about it because I think that validate so this is something that can keep paying back dividends once we really get the right path.

Hal Holden - Barclays Capital

Great, and then I don’t know Brendan the usual analogy when you think about ’14, are you thinking about more headwinds or tailwinds or I guess flat there?

Brendan Hoffman

Well, I mean even flat there I guess would be nice compared to the last couple of years. I’ll go back to what I said earlier it’s nice to feel the wind at your back a little bit for the last four or five weeks but that doesn’t make me forget the winds in our face for the previous six months and before that. And so we want to temper our enthusiasm for what we’ve seen the last few weeks with an appreciation that as you just mentioned there.

There could be more headwinds and that’s hard to predict. But at least the next week it looks like it’s going to be cold and dry so that boards well for Black Friday and so we’ll kind of take one week in a time when it comes to the weather.

Hal Holden - Barclays Capital

Great, thank you very much.

Operator

And we will take our last question from Karen Eltrich with Mitsubishi.

Karen Eltrich - Mitsubishi

Thank you. Following up on the clearance centers, what makes with regards to clearing out inventory a better channel for you the centers versus the Internet what you find to be the more optimal margin destination for you?

Brendan Hoffman

Well, I mean they’re both important channels for us. Clearly being able to liquidate more online is very helpful for us it drives traffic online. We have to be a little bit careful there with in terms of the price points and making sure that the shipping chart make sense because the price points gets pretty low and how that factors into the margin. But I think just like on the full line side you want a healthy multichannel business and they reinforce each other.

And having ratchet up our ability to liquidate merchandize online means we can get more aggressive about the emails we’ve sent, talking to yellow dot or talking to the clearance centers which reinforce both channels. So we need them to work hand in hand, they’re starting to do that and I think that just offers more opportunity for both channels moving forward.

Karen Eltrich - Mitsubishi

Great, and as you expand with your TV advertising I mean what are the challenges that you’re facing given that you do have a multi brand platform? And what are you doing to get around that?

Brendan Hoffman

Well, I mean I think that is we’re having the multi banners does hurt us a little bit but we have a tea that’s been doing the multi banners now for a number of years. We’ve gone to a different media placement firm who understand the local markets better than we were using before, so that was something Luis Fernandez, our Head of Marketing recognized that we probably work with the right placement, media buying firm because of what you just suggested and we needed to understand the local markets better because we don’t have a national banner and a national platform to advertise on.

So we think that’s part of why we’re seeing more success there is because of the placements we’ve made and as I mentioned earlier we’ve overcommitted a little bit to December to try and make sure we can get that message across in what we know will be a crowded environment with our peer group.

Karen Eltrich - Mitsubishi

Great, and final question with the localization effort you mentioned how new systems helping you in this process. How much are you utilizing your employees at the store level and I guess what kind of feedback are they providing you in terms of how you merchandise going forward?

Brendan Hoffman

I mean we certainly count in store organization and are giving them a lot more freedom than they’ve ever had before to make decisions at the local level. But as alluded to in my remarks we’re also using some of the, we're also transferring some of the payroll that we’re saving with the new systems into people in the field.

So we’re placing, we just started to place people in Q3 and we’ll continue in Q4 in all the regions that come from our buying office or come from another organizations buying a planning office that will living that region work with the stores but have the training to look at it from a buyer and planner and allocator level which we think will be really important to make the immediate change felt.

So it will certainly be a combination of the stores’ voice being heard and also giving them a better microphone with these new short field planers to get their message across.

Karen Eltrich - Mitsubishi

Great, thank you very much.

Brendan Hoffman

Thank you for your question and your interest in the Bon Ton. Everyone, please enjoy your holidays and we look forward to speaking with you about the financial results of our fourth quarter and fiscal 2013 on our conference call in March. Thanks very much.

Operator

And that does conclude today’s conference. We do thank you for your participation. You may now disconnect and have a great rest of your day

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