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

Q4 2009 Earnings Call

March 10, 2010 10:00 am ET

Executives

Jean Fontana – IR

Bud Bergren – President and CEO

Keith Plowman – EVP, CFO and Principal Accounting Officer

Tony Buccina – Vice Chairman and President, Merchandising

Analysts

Tom Roller – Credit Suisse

Bill Reuter – Bank of America Merrill Lynch

Grant Jordan – Wells Fargo

Emily Shanks – Barclays Capital

Leah Hartman – CRT Capital

Ameel Shaphino [ph] – Cantor Fitzgerald

Kent Holden – HAM Funds

Ken Band [ph] – Jefferies & Co.

Operator

Good day, ladies and gentlemen, and welcome to today’s Bon-Ton Stores Fourth Quarter and Fiscal 2009 Earnings Conference Call. At this time all participants aer in a listen-only mode. Following the presentation we will conduct a question and answer session and instructions will be provided at that time for you to queue up for your questions. As a reminder today’s conference is being recorded.

And now I would like to turn the conference over to Jean Fontana. Please go ahead.

Jean Fontana

Thank you. Good morning, everyone, and welcome to Bon-Ton Fourth Quarter and Full Year Fiscal 2009 conference call. Today, Mr. Bud Bergren, President and CEO; Tony Buccina, Vice Chairman and President of Merchandising; and Keith Plowman, Executive Vice President, Chief Financial Officer and Principal Accounting Officer will host the call.

You may access the copy of the Company’s earnings release at the Company’s Web site at 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 meaning of the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those projected and such statements due to a number of risks and uncertainties, all of which are described in the Company’s filings with the SEC.

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

Bud Bergren

Good morning, and thank you for joining us. I’ll begin with comments on the fourth quarter and full year 2009. Keith will then provide details on the fourth quarter and full year 2009 financial results and outline the financial guidance and assumptions for 2010. Tony will discuss the quarter’s merchandise results and merchandising initiatives for 2010. After that I’ll make some closing remarks and then we’ll be available to address your questions.

Before discussing our fourth quarter results, I would like to comment on the year as a whole. We recognized early on the challenges we are going to face in 2009. In fact, initiatives were identified and implemented throughout 2008 and 2009 to improve our cost structure and better position the company for the weakened economy as well as for the long-term.

We managed our inventories conservatively, which contributed to 350 basis points of gross margin improvement in the fourth quarter and 210 basis points improvements for the year.

We controlled expenses and reduced our selling and general and administrative expenses by approximately $70 million on a year-over-year basis. We believe that as a result of these actions, our organization is more appropriately structured for the environment and we have emerged as a stronger company.

The team executed and delivered results above expectations. In merchandising, we controlled inventories, flowed fresh goods on demand, carried less clearance and at a higher gross margin rate and our vendor relations are better than ever.

In marketing, new promotions, a new mix between print and TV and a value image proved to be very successful. In stores, we reorganized, reexamined practices and did some restructuring such as work load reductions and a customer service surveys are giving us a very positive feedback. And finally, we managed our expenses and used our capital very prudently.

I want to extend my congratulations to the entire team and thank all of our associates for their hard work and dedication.

In addition to these accomplishments, we have the support of banks and lending communities which is apparent in our amended and restated revolving credit agreements. The facilities combined with our 2009 performance has strengthened the excess borrowing capacity as compared with last year.

Now, some highlights from the fourth quarter of 2009, which we are very proud of, including the following

Our gross margin rate improved 350 basis points to 38.2%, primarily reflecting a decreased net mark down rate due to our inventory management, the best gross margin rate since the fourth quarter of 2006.

We reduced our comparable store inventories by approximately 3% at the end of the quarter versus a year ago and our clearance levels decreased approximately 10% compared with the prior year period.

EBITDA increased by $18.6 million to $135.3 million compared to $116.7 million in the prior period.

Our excess borrowing capacity at the end of the quarter was approximately $358 million, well above the $75 million minimum available covenant under our current facility.

Our private brand sales grew to approximately 19% of sales and our e-commerce sales grew substantially.

Merchandise optimization, which we began, implementing in the spring of 2008, is now in all areas, except missy ready-to-wear, which is currently being rolled out.

With merchandize optimization, we have realigned buyer and planning jobs in processes and redefined jobs and responsibilities. The big benefit is better use of our inventory and improved allocation of merchandise to the correct store, with the goal being to increase gross margin and comp sales, which we are already realizing.

We assumed control of the fine jewelry department. We are in very early stages, but we believe this operation will grow and enhance overall profitability of our company.

And the fourth quarter regional sales results reflect strength in Michigan, Wisconsin, Minnesota and New York. Our best performing markets to prior year period were Detroit, Buffalo, Minneapolis and York Lancaster. The worst performing region was Eastern Pennsylvania.

Tony will provide greater detail on merchandise accomplishments and initiatives shortly.

Looking ahead to 2010 and beyond, we will continue to focus on cost control, borrowing capacity, profitability, and growth opportunities. The drivers we see are our key item program, our IVP program and private label, fine jewelry, e-commerce, marketing initiatives, our loyalty program and merchandise optimization resulting in an appropriate inventory allocation and continued inventory control. Overall, we will maintain our emphasis on distinct quality merchandise at outstanding values.

In summary, we are very pleased with our fourth quarter and full year 2009 performance and the success of the initiatives we put in place over a year ago to strengthen our company and meet the challenges of this difficult environment. We are encouraged by our success in the fourth quarter, but we will continue to control expenses and inventory.

With that said, we believe the Company’s initiatives will drive top-line growth in 2010 through our execution. We have benefited from the initiatives implemented in the past two years, we believe we have organized ourselves for 2010 and we are excited about the future.

At this time, I would like to turn the call over to Keith.

Keith Plowman

Thank you, Bud, and good morning, everyone. I will review the income statement and balance sheet components and then discuss our fiscal 2010 guidance and the assumptions reflected in this guidance.

Before reviewing the details, a few comments regarding fiscal 2009, and a noteworthy accomplishment in a difficult environment.

With a 5.4% decline in comp store sales and increased gross margin rate, the gross margin dollars on an absolute basis about the prior year. We reduced our selling, general and administration costs. We controlled capital expenditures.

We improved our EBITDA defined as Earnings before Interest, Taxes Depreciation and Amortization, including amortization of lease related interest and impairment charges and EBITDA is a non-GAAP term. So we ask you refer to our press release for reconciliation.

We significantly reduced our debt levels and correspondingly, we significantly reduced our debt-to-EBITDA leverage ratio through the debt reductions as well as EBITDA increases. And finally, we drove financial results close to, but above our third quarter fiscal 2009 guidance and generated substantial cash flow.

Moving to a detailed review of the fourth quarter and fiscal 2009 results, net income improved $80.3 million or $4.34 per diluted share for the fourth quarter of fiscal 2009 compared with a net loss of $87.7 million or $5.22 per diluted share for the fourth quarter of fiscal 2008.

The Company recorded non-cash impairment charge of $5.4 million related to long-lived and intangible assets and a favorable tax carry back of $6.3 million in the fourth quarter of fiscal 2009.

In the fourth quarter of fiscal 2008 the Company recorded charges of $25.9 million to reduced reported value of long-lived and intangible assets and $108.5 million to provide a deferred tax asset evaluation allowance.

For fiscal 2009, the net loss was $4.1 million or $0.24 cents per diluted share, compared with a net loss of $116.9 million or $10.12 per diluted share in the prior year.

The Company recorded non-cash impairment charges totaling $5.9 million related to long-lived and intangible assets and a favorable tax benefit of $6.3 million in fiscal 2009.

In the fourth quarter of fiscal 2008, the Company recorded charges of $25.9 million to reduce the reported value of long-lived and intangible assets and $108.5 million to provide a deferred tax asset evaluation allowance.

In addition, in the second quarter fiscal 2008, the Company recorded $17.8 million impairment charge to write-off the value of its goodwill.

For the fourth quarter, comparable store sales decreased 2.4% with the prior year period. Total sales for the 13 weeks decreased 2.8% to $1,002.1 million, compared with $1,031.4 million for the prior year period.

Fiscal 2009 comparable store sales decreased 5.4%. Fiscal 2009 total sales decreased 5.4% to $2,959.8 million, compared with $3,130.0 million for the same period last year.

Other income in the fourth quarter decreased to $22 million compared with $28.4 million in the fourth quarter of 2008. Fiscal 2009 other income decreased to $75.1 million compared with $95.4 million in the prior year period.

The fourth quarter and fiscal 2009 amounts reflect reduced leased department income from fine jewelry, particularly in the fourth quarter and reduced income from our proprietary credit card.

Gross margin dollars in the fourth quarter increased by $24.7 million to $382.4 million. The fourth quarter gross margin rate increased 350 basis points to 38.2% of net sales compared with 34.7% in the prior year period, primarily reflecting a decrease net markdown rate due to our inventory management.

Fiscal 2009 gross margin dollars increased $2.6 million compared with the prior year. Fiscal 2009 gross margin rate improved 210 basis points to 37.1%, compared with 35% in the prior year period.

SG&A expenses including performance incentive accruals decreased by $400,000 compared with the prior year period. The fourth quarter SG&A expense rate was 26.9% compared with 26.1% in the fourth quarter of 2008.

Fiscal 2009 SG&A expenses decreased $69.9 million compared with the prior year period. Fiscal 2009 SG&A expense rate was 32.6% compared with 33% in the prior year period reflecting the 2009 cost saving initiatives.

EBITDA increased $18.6 million in the fourth quarter to $135.3 million compared with $116.7 million in the prior year period. Fiscal 2009 EBITDA increased $52.2 million to $209.1 million compared with $156.9 million in the prior year.

Depreciation and amortization expense, including amortization of lease-related interests decreased $1.4 million to $28.5 million compared with $29.9 million in the fourth quarter of 2008.

Fiscal 2009 depreciation and amortization expense, including amortization of lease-related interests decreased $5.7 million to $116.5 million compared to $122.2 million in the prior year period.

Company recorded non-cash impairment charges of $5.9 million in fiscal 2009 related to reduction in reported value of certain long lived and intangible assets. And similarly, the Company recorded charges of $25.9 million to reduce reported value of long-lived and intangible assets in the fourth quarter of fiscal 2008.

In addition, in the second quarter of fiscal 2008, the Company recorded a $17.8 million non-cash impairment charge to write-off the value of its goodwill.

Net interest expense increased $5.1 million to $29.5 million compared with $24.4 million in the fourth quarter of 2008. The increase in the fourth quarter was primarily due to increased interest rates, costs associated with ineffectiveness of the Company’s swaps and deferred fees as a result of the Company’s amended and new credit facilities.

Fiscal 2009 net interest expense increased $1 million to $98.8 million compared with $97.8 million in the prior year period due to the increased costs in the fourth quarter that were discussed above, partially offset by reduced borrowings and reduced interest rates in the first three quarters of 2009.

An income tax benefit of $8.4 million was recorded in the fourth quarter of fiscal 2009, which primarily reflects $6.3 million related to carry-back provisions of The Worker, Homeownership and Business Assistance Act of 2009.

This compares favorably with an income tax provision of $124.1 million in the fourth quarter of fiscal 2008, which was largely comprised of a deferred tax asset valuation allowance increase of $108.5 million.

The fiscal 2009 income tax benefit was $8 million compared with an income tax provision of $63.1 million in the prior year period.

Moving to some key ratios, measures and balance sheet amount. Our working capital decreased to approximately $366.9 million, as of January 30th 2010 compared with $424.4 million as of January 31st 2009 or a reduction of $57.5 million. This decrease primarily reflects the current year reduction of an income tax receivable and increased accounts payable support.

Total debt including capital leases was $1,029.3 million at January 30th, 2010, compared with $1,157.6 million at January 31st 2009, a reduction of $128.3 million or 11%.

Our debt breakout is senior notes $510 million, asset baseline revolver $120 million, the CMBS mortgage facility, $243 million, other mortgages and loans, $11 million, second lien term loan $75 million and capital lease obligations $70 million, which comprises the $1,029 million that we had in long-term debt.

Our outstanding position on swaps is $18.1 million, which is down from the high of approximately $67.2 million during 2009. Our debt-to-EBITDA ratio improved from 7.4 times at the end of 2008 to 4.9 times at the end of 2009 and is close to approximating the level that we were at in 2007 of 4.6 times.

Book value per share was $7.64 this year versus $7.67 in the prior year. Our fiscal 2009 capital expenditures not reduced by landlord contributions were $32.3 million compared with $84.8 million for the prior year.

And our excess borrowing capacity at the end of the year was $358 million versus the prior year of $269 million, and at the end of February; we were at $393 million versus the prior year February at $197 million.

Moving to our outlook, we are providing full year 2010 guidance as follows

EBITDA in the range of $225 million to $240 million. Income from diluted share in a range of $0.30 to a $1.10. And cash flow as you find in our press release in a range of $70 million to $85 million.

The underlying assumptions reflect in our fiscal 2010 guidance include comparable store sales flat to a 2% increase, gross margin rate of 37.1%, a reduction of $20 million to $25 million in SG&A expense and effective tax rate of 0%, capital expenditures not to exceed 50 million, net of external contribution and 18.5 to 19 million average shares outstanding which reflects the company being in an income position in 2010.

We believe our results reflect the benefit of carefully executed initiatives we implemented in 2008 and 2009. 2009 was in our belief a time for strong controls and as we transition into 2010 we will maintain these controls and balance them with initiatives for future growth and profitable opportunities.

Our Form 10-K for fiscal 2009 will be available by April 15th.

And at this time, I would like to turn the call over to Tony.

Tony Buccina

Thank you, Keith. We were extremely pleased with our sales performance in the fourth quarter. Our comparable store sales were negative 2.4% for the quarter, which was significantly better than our original sales plan.

Although sales in the quarter started out slowly due to the warmer weather in November, holiday traffic picked up and January came in with a positive comp store sales despite having less clearance inventory. In January, we were able to drive sales with our transitional and new spring merchandise.

Our fourth quarter transactions were down just 0.5% to prior year showing significant gains as the year progressed. Third quarter transactions were down approximately 1% and spring transactions were down 9%.

Our 350 basis point gross margin improvement for the quarter was driven by several merchandising initiatives. First, the significant improvement in both our private brand sales and gross margin rates versus a year ago.

Second, a reduction of clearance inventory as a percentage of the overall mix.

Third, we increased offerings in our Incredible Value program. Sales for the quarter on IVP items were 34% above last year and carry higher margins.

Fourth, we increased the sales penetration in moderate, ready-to-wear, shoes, handbags, which carry higher margin rate than the overall company average.

Fifth and finally, we continue to implement our merchandise optimization strategy. We have increased the planning and allocation organization to support the merchants and establish new analytical tools and processes. Two-thirds of the merchandise areas are now on a new process and the remaining areas will convert in the first quarter of 2010.

Looking at our sales performance, our best sales results for the quarter were accessories, moderate Missy’s sportswear, soft home, shoes and children. The toughest areas were hard home, furniture, ladies outerwear and better missy sports wear.

Customers continue to respond to our value message. The moderate zones outperformed the better zones, especially in missy sportswear, petites, large sizes, shoes and handbags.

In our better zones our private brand merchandise posted better sales and margin performance than the branded vendors. We feel our better private brands represent the value in our better zones.

Our e-commerce business also continue to grow and we will explore opportunities coming from this initiative.

And we established a new fine jewelry business in 86 stores. While the sales were not up to our original plan due to start-up delays, we have the merchandise and systems in place to drive this business in 2010.

Many of our merchandising initiatives are contributing to our improving trends. Franchise businesses beat our sales plan for the quarter, with better comp sales performance than the total company. The best franchise businesses were ladies shoes and petite sportswear.

Next, our men’s outdoor apparel focus business exceeded our sales and margin expectations for the fourth quarter. The best brands were Timberland, Woolrich and our own private brand Ruff Hewn.

Sales for men’s outdoor apparel were substantially better than the total company. Men’s outdoor apparel is a perfect category for us in most of our markets and we will continue to expand this opportunity in 2010.

We expanded our key item initiative. Key items increased significantly in penetration to total company sales. With this initiative, a large portion of the game was in the Incredible Value program, a program whose success I talked about all fall.

Penetration in the IVP items was 8.3% in the fourth quarter versus 6% last year. Our customers love the value in this merchandise and we will continue to grow IVP in 2010.

And finally, private brand sales outperformed the company average for the fourth quarter. Sales penetration grew to 18.6% of the company, without furniture or fine jewelry.

Margin rates were terrific, several hundred basis points better than the domestic brands and the prior year period. The best performing brands were Breckenridge, Living Quarters and Miss Attitude.

We were also very pleased with the sales and margin performance coming from our newest brands that we launched last fall, including Victor Alfaro, Relativity Career and Kenneth Roberts.

Sales and margins of our new brands were considerably improved versus last year. As we focus more and more of our resources and efforts on this very important part of the business, we expect this momentum to continue.

For the quarter, overall product differentiation was 32.6%. Both private brand and non-private brand unique merchandise increased in sales penetration from last year. Private brand accounted for 57% of our differentiated merchandise.

Looking ahead to 2010, we started 2010 with 3% less inventory than a year ago. Clearance inventory is down 10% and fresh inventories along with our continued strong emphasis on value for the customer will help us continue the sales momentum that began in fall. We have inventory in the right areas, so we can deliver the sales plan. The flow of new merchandise will be in step with our sales increases.

Franchise businesses once again, are expected to grow faster than the company. And our store wide key item program is planned to be over 27% of our total sales in the spring, a significant increase from last spring.

The Incredible Value program should be over 9% of total sales, also up over last spring.

We will continue to grow our private brand sales penetration and we anticipate margin rates in private brand will continue to be higher than the branded vendors.

We are excited about the expansion of our most popular and highly recognized brands into other category extensions of business. For instance, Ruff Hewn introduced hand painted casual dinner ware and accessories. Semiprecious jewelry by relativity will mix metals with semiprecious stones giving the customer great modern looks at costume jewelry price points.

Laura Ashley will introduce Laura Ashley weekend, a new casual line and ready-to-wear. And Loft, by LivingQuarters, both bedding and towels, a modern and updated look and ramped up with active looks for boys aged 20, a skater influence which has been a void in our assortments.

Semiprecious, Loft and Ramp-Up have already hit our floors and the merchandise looks terrific. And the initial customer response is very good.

We are looking to grow e-commerce in 2010 on top of the growth we experienced in 2009. We will add more vendors and more items to our sites, especially in the areas that are currently under represented, such as men’s, accessories, dresses and better Missy sportswear.

Fine jewelry will be a nice addition to our business in 2010. The merchandise selection, staffing and marketing are in place to drive sales this spring.

In summary, our merchandise strategies have been consistent and have been proven to be successful over the past several years. This is the primary reason we have been able to weather the economic storm of the last two years. Our customers respond to our merchandise strategy, which still conveys value and quality.

Our vendors once again stepped up to the plate. I would like to thank them for the excellent relationships we enjoy. Through good times and challenging times, our vendor partnerships remain strong.

In 2010, we are more optimistic about business conditions than we have been in the last two years. We look forward to growing our sales and profits by enhancing the same initiatives that gave us improved performance results last quarter and executing them with authority.

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

Bud Bergren

Thank you, Tony. We are pleased with our fourth quarter and full year 2009 performance and the success of the initiatives we put in place the last two years to strengthen our company and meet the challenges of the environment. We believe we are well-positioned for the opportunities and challenges in 2010 and beyond.

At this time, we’d like to open the phone for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). And first we’ll go to Tom Roller with Credit Suisse.

Tom Roller – Credit Suisse

Good morning.

Keith Plowman

Morning, Tom.

Tom Roller – Credit Suisse

I was just wondering if you could elaborate on some of the initiatives you have that lead you to forecast future net SG&A cost savings in 2010?

Bud Bergren

I’ll take that, Tom. Basically, we have really looked at processes, not only in the stores, but in the corporate office. We have really dug in and eliminated tasks that we didn’t think we contributed to the bottom-line and really did a good job all last year attacking that and some of that obviously continue into 2010 and there are some more things that we have looked in 2010. So it’s through initiatives and changing how we’re doing tasks.

Tom Roller – Credit Suisse

Okay, great, thank you.

Operator

Next we’ll hear from Bill Reuter with Bank of America Merrill Lynch.

Bill Reuter – Bank of America Merrill Lynch

Good morning, guys.

Bud Bergren

Morning, Bill.

Keith Plowman

Morning, Bill.

Bill Reuter – Bank of America Merrill Lynch

In terms of the SG&A cuts, are these going to be more front end loaded or do you think that these are going to flow pretty evenly by quarter throughout the year?

Keith Plowman

Bill, we believe these will be pretty radical throughout the year. As Bud mentioned, some of this is carry forward from what was put in, in 2009, but there is also initiatives that we began in a very first part of this year. And we do believe that you’ll see that roll through pretty evenly throughout 2010.

Bill Reuter – Bank of America Merrill Lynch

Okay. And you talked about e-commerce as being an area of strength. I wonder if you can talk about kind of where we are with this business as a percentage of sales and where you think this might be going to overtime.

Tony Buccina

The business is growing like a weed. It’s still a small business, but it’s doubling in size. And we plan to continue to grow that until it gets to be a more serious piece of our business. And we think in the future it is going to become a big, important piece of our business.

Bill Reuter – Bank of America Merrill Lynch

Okay. At this point, can you provide what percentage of your sales it is?

Keith Plowman

No.

Bill Reuter – Bank of America Merrill Lynch

Okay. And then lastly, if the sales, if your sales results come in, in the range you guys provided for guidance of flat to up 2%, should we assume that inventories would probably be up in that same range as well?

Keith Plowman

Yes, inventories, we expect, Bill, will track with what happens to the sales performance. It’s what we’ve done in the past. And if you look at where we’re at, we have clearance inventories in a very good position. The currency of our inventory is stronger at the end of 2009 than it was at the end of 2008 and really that’s the way, Tony and his team and management will continue doing that through 2010.

Bill Reuter – Bank of America Merrill Lynch

All right, that’s it for me. Thanks, guys.

Keith Plowman

Thanks, Bill.

Tony Buccina

Thanks, Bill.

Operator

And to Wells Fargo, Grant Jordan.

Grant Jordan – Wells Fargo

Great. Thanks for taking the question. Looking at your guidance, obviously, the SG&A is very helpful. Looks like you are looking for gross margins in the flat range. Is that somewhat dependent on the level of comps you achieve or what could be the driver to move gross margins higher?

Bud Bergren

I think we still have a lot of initiatives in place that could benefit gross margin. But really for this year, we really want to look at targeting sales and getting back on track. As you know the first half of the year we were down over 9%, in the fourth quarter we were down 2.4.

So sales are trending in the right direction. But we want to be sure that we see a longer trend before we did it. But we want to see a trend in longer direction and I think sales growth in 2010 is key for us. We want to establish some of that business back in our stores.

Grant Jordan – Wells Fargo

And obviously the comps are a huge driver for financial results. Is there an opportunity to increase SG&A investments in certain spots with advertising or other initiatives to try to drive comps more?

Bud Bergren

Well, we have done some of that already. We are very happy with what’s happening with our marketing department currently. We think that was instrumental in changing our trend around in the fourth quarter. We’ve done some initiatives in there, but we are doing it more refined.

We are putting more money into what the consumer sees in marketing and taking it out of what the consumer doesn’t see in the way of processes again or costs that go into the business. So, we are investing more into marketing. And you will see, if sales pick up, you will see more expenses go into cover those sales too, in the way of stores.

Grant Jordan – Wells Fargo

That’s helpful. And then last, you talked about generating a good amount of free cash flow here in the next year. Just thinking about how the cash will be used, is it safe to assume that you use it to pay down the ABL first and then wait for the second lien term loan that call premium on that to drop?

Keith Plowman

At this point the way it’s set up, Grant, is you cannot pay down the loan until November of this year. It’s a 5% premium in the second year of 3% premium in the third and none in the fourth. So obviously we will look at everything to see what’s best utilizing our cash to make sure that we get the best return. There is a lot of indicators out there that still don’t say we’re out of the woods with everything in the economy and we feel it was very prudent to put this fixed piece in there to support the excess capacity.

Obviously, as you look at numbers, they are substantially before where they were in the prior year, showing the strength of the company, the borrowing availability, and we’ll continue to be prudent in our management there and then make the right decision to get toward the end of this year.

Grant Jordan – Wells Fargo

Great, thanks very much.

Keith Plowman

You are welcome, Grant.

Bud Bergren

Welcome.

Operator

And next we’ll move on to Emily Shanks, Barclays Capital.

Emily Shanks – Barclays Capital

Good morning. I was hoping you could give us a little color around your shore footprint. Are you planning any expansions or contraction for 2010?

Tony Buccina

No, at this point, Emily, we are really not. We do have one location that is being pretty much, I’ll say, from the ground up redone, with the support from the landlord and we’ve talked about that. That started last year. But at this point we don’t have any substantial contractions or additions that we’re looking at. We do continue to look at opportunities.

We’ll continue to do that based upon what happens in the environment, but right now, we are making sure anything we do has a good return to the company, both from a leverage as well as a return standpoint.

Emily Shanks – Barclays Capital

Great. And then as it relates to the competitors that you face in expected store openings or closures, is there anything notable in your markets that you are seeing?

Bud Bergren

Really there is nothing notable in the way of openings or closings against our markets that we see at all. That’s been announced by any of our competitors.

Emily Shanks – Barclays Capital

That’s good. And then my last question is around working capital management you had noted that we should expect to see inventories increase with sales. But is there any further room for working capital, managing working capital down or should we expect that to be more of a source of cash over 2010?

Keith Plowman

Yes, I don’t think, Emily, there’s a whole lot of change will happen on working capital. We did disclose the worker act; I’ll just call it to shorten it the tax carry back. On an actual cash basis we’re going to get close to $7 million of money back and we expect to do the same thing we did last year and trying to accelerate that to somewhere within the first half of the year to get the benefit of the additional cash.

But beyond that the only thing I could see or the only thing we could see as a company is that we start to see good sales trends, I’m sure that Tony and his team will want to invest more money in inventory and move forward to capitalize on that but I don’t see a whole lot of change otherwise.

Emily Shanks – Barclays Capital

Okay, great, thanks. Good luck, guys.

Bud Bergren

Thank you.

Keith Plowman

Thank you

Operator

And we move on to Leah Hartman, CRT Capital.

Leah Hartman – CRT Capital

Good morning and congratulations on such a wonderful quarter. Many of my questions have been answered, but would you mind repeating the letters of credit outstanding at the end of the quarter?

Keith Plowman

The letters of credit outstanding were $18.1 million at the end of the quarter and again, we had noted that the high point within 2009 was somewhere around $67.2 million.

Leah Hartman – CRT Capital

Okay, that’s very helpful. Best wishes for the spring season.

Keith Plowman

Thank you.

Bud Bergren

Thank you.

Operator

Ameel Shaphino [ph] with Cantor Fitzgerald. Please go ahead.

Ameel Shaphino – Cantor Fitzgerald

Good morning. Could you talk a little bit more about the change in mix and advertising between print and TV that you alluded to. Cost savings, success that you had with the change and what you might be planning for this year?

Bud Bergren

Yes, I’ll be glad to. Some of the changes that were done is we have moved more of our advertising dollars into the weekend and a little off of the mid-week period. We’ve really cut back on ROP advertising and putting more into television and direct mail. And direct mail we more refined it by the results that we can get by tracking each consumer the results we can get from that consumer so it’s more a pinpointed.

The different events that we refined last year show more value in the pieces. We’re pushing what’s called bonus buys, very strong, because we have had great results on them. And the key item program that Tony talked about is instrumental in those vehicles. That really drives the sales. Where we are getting some of the cost savings, is in paper costs and printing and some of those things that have been negotiated. That’s really where the savings is coming from.

Ameel Shaphino – Cantor Fitzgerald

Okay, thank you very much.

Bud Bergren

Thank you

Operator

(Operator instructions) We’ll go next to Kent Holden with HAM Funds.

Kent Holden – HAM Funds

Good morning. Congratulations on the quarter. Most of my questions have been asked and answered. But I did want to ask about the other long-term assets, increased looks to be about $21 million in the fourth quarter. What’s included in that category?

Keith Plowman

In other long-term assets. Bear with me just a second. There’s nothing notable that I would say there (inaudible). We have reflection of what’s happening between our intangibles and our tax assets. There is nothing there that will be notable, I would say, as to an increase or decrease of any substantial numbers.

Kent Holden – HAM Funds

Okay. This will be footnoted in the K, I assume?

Keith Plowman

Yes, it will. We put full descriptions in there. But there is nothing in there of any substantial numbers as I’m looking down through that would be anything of significance.

Kent Holden – HAM Funds

All right. Thank you.

Keith Plowman

You’re welcome.

Operator

And we’ll take our next question Ken Band [ph] from Jefferies & Co.

Ken Band – Jefferies & Co.

Hi, good morning. I was wondering if you have had any further success in negotiating with some of your landlords in getting some reductions in your costs in the various malls. And also in eastern Pennsylvania, which you said is continuing to be somewhat weak., are you seeing any other occupants in some of those malls, either leave those malls or is there any money being put into those malls to improve the conditions in those malls?

Bud Bergren

From a negotiation standpoint, as leases come up, which they do all the time when you have 280 stores, you have quite a few that come up every year, we have been able to reduce some of the rent charges and cam charges and stuff with our developers. And that has been successful. But that’s a slow process as you go through it. And we think it’s something that will continue as you know the real estate markets are a little soft right now.

Eastern Pennsylvania were mainly having a tough time as the Lehigh Valley, Allentown area, and that has been that way for a couple of years for us. Last time, I toured there or talked to our people in that area, I haven’t seen any major changes in the attendance of the mall or people leaving or actually no one’s coming in. At this point I don’t see any changes that are going on in that market.

Ken Band – Jefferies & Co.

Okay great. And any other markets are you seeing much in the way of changes of either occupancy in the malls that you are in or –?

Bud Bergren

No, nothing of any magnitude that we’ve seen.

Ken Band – Jefferies & Co.

Okay, great, thank you very much.

Bud Bergren

Thank you

Operator

(Operator instructions). And Mr. Bergren, there are no further questions at this time. We’ll turn the conference back over to you for any additional or closing comments.

Bud Bergren

Well, thank you very much for your questions and your interest in our progress and accomplishments in 2009. And we look forward to speaking with you about our first quarter 2010 financial results in our conference call in May. Thanks for joining us today.

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. Q4 2009 Earnings Call Transcript

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