Charming Shoppes, Inc. (NASDAQ:CHRS)
F4Q09 Earnings Call
March 30, 2010 9:00 am ET
Jim Fogarty - President and CEO
Eric Specter - CFO and Executive Vice President
Gayle Coolick - Vice President of Investor Relations
Tom Filandro – Susquehanna International Group
Jeff Stein - Soleil Securities
Ed McCormick – Stevens Asset Management
(Operator Instructions) Welcome to the Charming Shoppes Fourth Quarter Fiscal Year 2009 Earnings Conference Call. With us today are Jim Fogarty, President and CEO of Charming Shoppes, and Eric Specter, CFO and Executive Vice President. I would now like to turn the call over to your host, Ms. Gayle Coolick, Vice President of Investor Relations for Charming Shoppes, Inc.
Today's discussion will contain certain forward looking statements concerning the company's operations, performance and financial condition, including sales, expenses, gross margins, capital expenditures, comparable store sales, store openings and closings, and other matters. Such forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those indicated.
Information regarding risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K, quarterly reports on Form 10-Q and other company filings with the Securities and Exchange Commission. Our complete safe harbor statement and today's prepared remarks are available at www.charmingshoppes.com.
Our quarterly and annual income statements along with our balance sheet and cash flow statements are provided with today's press release. With us today are Jim Fogarty, our President and CEO, and Eric Specter, CFO of Charming Shoppes.
In my remarks today I will focus both on the fourth quarter and provide some perspective on the year. Over the last year we have had two primary objectives, first to stabilize and strengthen the capital base and liquidity profile of the company, second to stabilize and begin to grow the business.
As to that first task of stabilizing and strengthening the capital base and liquidity profile, goal accomplished. In July we refinanced our revolving credit facility well ahead of its expiration on favorable terms. Also in July we decided to end the exploration of the sale of our food and gift business, Figis, we could have folded and sold the business at fire sale prices but in retrospect, keeping the business was a prudent move as Figis was a solid contributor to our adjusted EBITDA for the year.
In August we entered into an agreement with Alliance Data to sell our private label credit card business, which dramatically improved the strength of our capital base and removed the financing risk associated with both the credit card receivable securitization program and the underlying credit card portfolio. We closed this transaction in October.
As a result of these actions at the end of the quarter and year, our liquidity totaled $328 million compared to $280 million one year ago, and we ended the year with a cash position of $187 million compared to $100 million one year ago. Our leverage reflected debt net of cash and investments of $33 million compared to $212 million in the prior year.
On to the quarter, our fourth quarter consolidated revenue declined $93 million or 15%, this 15% decline reflected 152 net store closings over the last 12 months, a comparable store sales decline of 12% and a 10% increase in ecommerce sales.
As to that second task of stabilizing and beginning to grow our business, we are a work in process. While we drove incremental adjusted EBITDA in the third and fourth quarters and for the year, our comp store sales were -13% in the third quarter and improved only modestly to -12% in the fourth quarter.
As you know, there are lead times for adjusting assortments in apparel. The fourth quarter showed only modest improvement and reflected very similar assortment issues to those we referenced in the third quarter, primarily a lack of focus on our core customer and a failure to provide her with a strong core tops and bottoms assortment.
During the third and fourth quarters we were working hard to better position our forward merchandise assortments. Our work though may be beginning to pay off. Our first quarter 2010 quarter to date comp through eight weeks was approximately -4%. While still lousy compared to the rest of the market, we improved across all of our brands from our fourth quarter comps and are making progress with our spring assortments.
By brand, Lane Bryant’s quarter to date comp was -5%, Fashion Bug was -4% and Catherines was -1%. Our improvement has been aided by both our offensive assortment positioning and at least a temporal improvement in the consumer environment, somewhat offset by crummy weather experienced in February.
We are beginning to see strength in recent launches of core apparel programs which I will review in a moment. Further, our internet business was up 35% in that same period, benefiting from the August launch of new websites as well as the February launch of our universal shopping cart, linking our four apparel websites.
On to earning power. Our adjusted EBITDA for the quarter was -$12.9 million or -2.4% of the revenue compared to -$18 million or -2.9% of revenue in the prior year, a $5 million improvement year over year. Our latest 12 month adjusted EBITDA, also our full year, was $50.5 million or 2.4% of revenues compared to prior year adjusted EBITDA of $29.6 million or 1.2% of revenues, a $21 million full year improvement.
GAAP to non-GAAP reconciliations are available on our website, whatever measure one utilizes we do continue to make progress on EBITDA but we remain disappointed with the absolute levels of our profitable revenue and our earning power.
Some additional comments, recall our key priorities are: number one, focus on the customer, stabilize and begin to grow profitable revenue, increase EBITDA, increase cash flow, and number five, employee accountability.
Similar to the third quarter, and giving consideration to lead times to address forward assortments, in the fourth quarter we again fell short on our focus on the customer. We had relative strength in accessories and intimates but we did not provide our customer with a strong enough core tops and bottoms assortment. In addition, in the context of the current difficult economic environment we did not have a strong enough entry price assortment.
Finally, our bottoms assortment did not have sufficient depth and sizing and alternative lengths, that is petites and talls. As we said on our last call, we were and are listening more closely to our customer and better aligning our assortments as we worked into spring 2010 and beyond. We are working to hard to ensure that our early 2010 comps provide a long awaited pivot point for our business.
On to some results by brand. At Lane Bryant in the quarter, LB delivered $227 million of revenue and EBITDA of $7 million or 3% of revenue. Revenue declined 15% on a comparable stores basis, compared to a 14% comp decline in the third quarter. Our outlet stores represented 12% of the brands revenue in the quarter. EBITDA declined at LB $5 million to $7 million compared to a year ago and the EBITDA margin declined by 120 basis points to 3% driven by negative leverage on our comp sales decreases. For the year, Lane Bryant’s EBITDA declined $7 million to $98 million for the year.
As discussed, our assortment issues are consistent with those in the third quarter. I’ll not repeat the more detailed Lane Bryant assessment I shared in the third quarter. In summary, what was working, Cacique intimates program, magalog marketing, accessories and jewelry and fashion denim. What was not working in the quarter, understanding of our customer and her need for fit and value, sufficient depth in sizing and lengths and lack of a strong core tops and bottoms assortment.
During the third quarter we executed an extensive study of our Lane Bryant customer and assortment. For our Lane Bryant customer, priority number one and the price of entries, product that fits, and second in a styling and at a value that works for her. With our spring and summer 2010 assortments we have a stronger core tops and bottoms assortment and improved value proposition through both our day in and day out price pointing and through our stronger promotional programs.
If you were to walk into our Lane Bryant store today I would note this focus in the following areas:
Our Supima cotton knit top program, marketing handle the cashmere of cotton with an everyday value at a $19.50 buy two or more price point.
Our woven shirt program, marketing handle the perfect shirt, everyday value at a $29.50 buy two or more price point.
Our recent $20 off all pants and $10 off all crops promotion.
Our new assortments in shoes, particularly ballet flats, swimwear in 200 stores and online, Seven7 denim and active. Additionally, Lane Bryant will be adding a broader footwear assortment to nearly 500 stores.
For the fall timeframe we will be re-launching and overhauled long length pant program including our right fit technology, but in traditional sizing in both denim and wear to work pants, and we’ll add back petite lengths to all stores and tall length assortment to select stores.
As their first effort in this long length pant overhaul, Lane Bryant just launched a wear to work pant, the classic pant in our red fit, which is moderately curvy. For August, we plan to offer the classic pant in all right fits, yellow, red, blue, straight, moderately curvy and curvy. And we’ll also offer in tall, average, and petite lengths.
On to the brand awareness front. We are getting behind our stronger assortment at Lane Bryant through a series of national television advertising spots during this spring’s American Idol. Lane Bryant will be showcasing two spots, one will be built around our sportswear assortment, and the second will be built around our Cacique franchise. It will run on every Tuesday and Wednesday from April 27th through May 18th. American Idol’s Tuesday and Wednesday evening shows are the number one and number two rated programs in broadcast television for female viewers aged 25 to 54 which is perfectly aligned with our customer base.
This will be an important part of our efforts to bend the traffic curve at our key franchise. We will spend approximately $4 million on the campaign and yes, Eric and I expect the Lane Bryant team to drive an ROI from this support.
On to Fashion Bug. In the quarter, Fashion Bug delivered $161 million of revenue and EBITDA of -$18 million or -11% of revenue. Revenues declined 8% on a comparable store basis an improving trend compared to our 14% decline in the third quarter. EBITDA declined $8 million to -$18 million versus EBITDA of -$10 million in the same period of the prior year. For the year, EBITDA decline $9 million at Fashion Bug to $8 million for the full year. We recognize that the absolute level of Fashion Bug EBITDA for the year is lousy. I will discuss our 2010 Fashion Bug offense shortly.
As discussed, our assortment issues are consistent with the third quarter. I’ll again not repeat the more detailed Fashion Bug assessment shared in the third quarter call, but in summary what was working was accessories, intimate apparel, and footwear. What was not working was our core tops and pants assortments.
After we studied Lane Bryant during the third quarter, we turned our attention to studying Fashion Bug during the fourth quarter. Many of you may ask where are we going with Fashion Bug. I will focus on our key insights and actions.
Action area one, real estate. We have studied our real estate at Fashion Bug. First the basics, we have approximately 800 stores, 7 million square feet and on an LTM basis a paltry $89 sales per square foot. In our study, what became a key insight for us is that from a real estate standpoint we have two very different Fashion Bug chains. We have a metro chain of approximately 400 stores and a non-metro chain of approximately 400 stores.
Non-metro has an average population of 100,000 within a 10 mile radius while metro has an average population of 700,000 within that same 10 mile radius. Within those 10 miles the population in metro markets has 50 retail choices, while our rural non-metro markets have as few as three choices. We have strong market share with the women in these towns and we are an important resource to her and believe we can leverage that strength.
This insight and a broader understanding of our excess Fashion Bug real estate generally have led us tot he following actions. We will be putting Juniors back initially into approximately 280 stores in the back to school timeframe to provide needed assortment choices to our customers, particularly in non-metro markets. We will also be putting a Junior Plus assortment into approximately 50 Fashion Bug stores. We will be added extended assortments into approximately 100 stores with excess real estate, extended assortments will include our Essentials Plus assortment, footwear and intimate apparel.
We will also be testing approximately 20 to 25 stores in various scenarios including carrying sister brands as we call it, Lane Bryant and/or Catherines with Fashion Bug as well as conversions to those individual concepts.
Finally, we will be closing approximately 60 Fashion Bug stores during the year. This will leave us with approximately 740 stores and as appropriate we will continue to look at additional store closings over time. That concludes action area number one, all with the overriding goal to both better serve our customer and improve our Fashion Bug four wall economics.
One to action area number two, the Fashion Bug assortment itself. We have revisited our customer profile through research, input from our field organization, and input from longer tenured folks on the Fashion Bug product team. We had recently repositioned our product approach to be very cleaned up and traditional. You may recall she was called Felicia. We do have a customer who wants this product but the selling on this product has not been carrying our inventory investment nor our box.
The problem is we also had a customer who wanted relatively edgier or sexier product, not out there fashion but proven looks. Our customer profiling was not allowing us to take care of this customer need. We are positioning our customer profiles and attendant assortment to better address this need as we move through 2010.
Fashion Bug will be adding more fashionable, embellished denim and tops to its assortments and for fall we will also be re-launching right fit pant assortments both in wear to work and in denim, including petite lengths in all stores and tall lengths in select stores. Yes, in red, yellow and blue, and also all in traditional sizing.
Fashion Bug is also presenting a core assortment of bottoms in alternative lengths, i.e. capris, crops and shorts, as well as adding key items to its intimate apparel assortment such as the back smoother bra and shape wear. We believe these real estate and assortment action areas in concert will allow us to make solid progress at the Bug.
Now on to Catherines. In the quarter, Catherines delivered $66 million of revenue and EBITDA of -$3 million or -5% of revenue. Revenues declined 6% on a comparable store basis, the best comp sales performance of our three brands, deteriorating modestly compared to a 5% comp decline in the third quarter. EBITDA declined by $4 million to -$3 million versus last year and the EBITDA margin decreased 640 basis points.
We remain focused on stabilizing revenue and delivering improved earnings at Catherines. For the year, EBITDA improved slightly to $19.6 million compared to the prior year. In summary, what was working; sweaters, knit tops, active and cold weather accessories. What was not working; intimate apparel, coats, dresses, and swimwear.
We recently expanded our Catherines footprint in February opening an additional 28 stores in outlet centers which were our previous Petite Sophisticate outlet locations. These locations average 2,600 square feet compared to the 4,200 foot full line Catherines stores. Catherines remains focused on being the comfort and fit destination for its customers. For this spring, Catherines has expanded their sizing range to include size 0X which is a 14-16. The full range of sizes now to be offered at Catherines will be 0X – 5X or 14-16 – 34-36.
On to Figis team emerged from our sale process and proceeded to deliver a solid performance for the year. They delivered $105 million of revenue and EBITDA of $8.7 million or 8% of revenues. Revenues were comparable to the prior year period and Figis full year EBITDA of $8.7 million increased by $2 million or 33% versus last year.
Just a few more comments. Internet, our internet revenue across our three brands for the quarter was $27.8 million reflecting a 10% increase versus last year. Even more exciting, we reported our internet revenue trend improved to an increase of 35% in the first quarter to date.
During August, we launched completely rebuilt websites, all to make it easier for our customers to shop with us online. Last month we debuted a single checkout linking our four apparel websites, LaneBryant.com, Casique.com, FashionBug.com, and Catherines.com. This offers our customers the ease and convenience of shopping our entire family of brands online with one universal checkout.
Additionally, free shipping is available for customers who choose to pick up their packages at any of our companies 2,100 store locations with approximately 25% of our customers choosing ship to store. The feature is driving increased store visits and opportunities for further up sell in our stores. Shipping is also available to customer’s homes for a flat $7 shipping rate.
The new functionality allows us to leverage the strength of our great brands while maintaining what is unique and compelling about each brands identity. We remain focused on growing profitable revenue in our internet business across all of our brands.
Sourcing, I was in Hong Kong in China last week with our sourcing team. Our sourcing team will help us execute both on our defense and our on our offense. On defense we’ve been working hard to get our goods cheaper in 2010. On offense we are becoming more strategic, identifying core fabrics, positioning those fabrics at mills and factories, all to allow us to speed up those elements of our supply chain, and both more into and out of product more quickly.
Store base, we began the year with 2,301 stores and ended the year with 2,149 stores. Net closing 7% of our store base or 152 stores. During the year we opened eight previously committed stores and we closed 160 stores. We closed 97 Fashion Bugs, 39 Lane Bryants, 16 Petite Sophisticates, and 8 Catherines stores. Through these closures and downsizings we eliminated 1.1 million square feet or 7% of our space and we ended the year with 14 million square feet of space. These and other changes we have made and are making will continue to support our key priorities.
With that, over to Eric.
I’m going to give some color on the release of our fourth quarter earnings, talk through the one time charges and then some selected balance sheet information.
Starting with sales, net sales for the quarter were $539 million a decrease of $93 million versus a year ago, our comparable store sales declined 12%. For the quarter, average inventory decreased 6% on a same store basis while inventory increased 1% on a same store basis at the end of the period. Same store inventories represent increased receipt of spring product while fall and holiday inventory levels declined year over year.
By brand, comp sales declined by 15% at Lane Bryant, and comp inventory increased 2%. At Fashion Bug, comp sales declined 8% while comp inventory increased 3%. At Catherines, our comp store sales declined by 6% and comp inventory was down 4%.
As a housekeeping item, we do not normally update as to our interim same store sales nor our internet business. However, due to the increased elapsed time between year end actuals and reporting we have updated this morning. Going forward we will only be updating our comp store sales at year end as we are doing so today.
Gross profit was $235 million in the quarter a decrease of $29 million or 11%. The gross margin improved by 190 basis points to 43.7% of sales compared to 41.8% of sales for the year ago period. The increase was driven by improved gross margin in the company’s direct to consumer segment following the close of the Lane Bryant women catalog in the first half of fiscal year 2009 and lower average inventories resulting in reduced markdowns on seasonal merchandise at Lane Bryant, somewhat offset by increased markdowns on seasonal merchandise at the Fashion Bug and Catherines brands.
Total operating expenses excluding restructuring and one time charges decreased $36 million or 12%. Occupancy and buying expense decreased $16 million or 15% related to the operation of fewer stores and rent reductions related to lease renegotiations. Our SG&A expense decreased $17 million or 10% to $156 million in the fourth quarter compared to $173 million in the same quarter last year, primarily related to the lack of leverage on a declining sale base.
I would note that total operating expenses for the year excluding certain items were down $162 million or 13%. We surpassed our initial cost reduction program and approximately $136 million of the total expense reductions are associated with the company’s previously announced cost reduction program of $125 million for the 2009 fiscal year.
We recorded impairment and restructuring charges of $16 million in the quarter, primarily for the identification of 89 stores with asset carrying value in excess of their forecasted undiscounted cash flows. We also recorded a small residual charge as a result of the sale of the proprietary credit card receivable program in the amount of $900,000 primarily related to transaction related costs.
We continue to analyze our store portfolio to identify underperforming stores for closure. During the fiscal year ended January 31, 2010, we were often successful in achieving significant occupancy cost reductions through renegotiation of leases with our landlords, while sometimes unsuccessful, resulting in store closures. We expect to achieve further occupancy cost reductions through the continued negotiation of lease terms with our landlords and to the extent that improved terms are not possible through the closing of stores.
Accordingly, we are announcing a new program for the closing of 100 to 120 underperforming stores in fiscal 2010. We estimate the cost to execute the store closing program to be approximately $7 to $9 million primarily related to lease termination charges.
In summary for the quarter, gross profit declined 11% and total operating expenses excluding certain charges, declined 12% while allowed us to modestly improve adjusted EBITDA by $5 million.
Jim’s comments included detail and profitability by brand. In summary, we experienced year over year profit declines in our retail store segment while our result that are direct to consumer segment improved over last year’s performance following the closing of the Lane Bryant women catalog in the first half of 2009. As we are committed to providing increased levels of transparency for our brands results, these performance metrics are more fully detailed in our Form 10-K which we have filed this morning.
I’d now like to provide some comments on our balance sheet and liquidity. Our balance sheet remains strong and our total liquidity was $328 million at the end of the quarter. Our liquidity includes $187 million in cash and net availability of $141 million on our fully committed and un-drawn revolving line of credit.
During the fourth quarter we repurchased $16.1 million of our convertible notes for a cash purchase price of $11.3 million or 70% of par. As of the end of the quarter the principal amount of the notes was $190 million which represents the original $275 million issuance less the $85 million face value for an aggregate purchase price of $51 million which we have repurchased from the beginning of the year through the end of the fourth quarter.
Year over year changes to our consolidated balance sheet related to the sale of our credit card receivables program include the monetization of investment in asset backed securities, an increase in cash, and a decrease in prepayments and other. As we said last quarter, we have no further financing obligations with respect to the credit card program.
Prior to the sale of the credit portfolio we routinely disclosed information about the profitability of the credit business unit. The credit card program is now operated by Alliance Data and we will no longer be providing that metric.
Our income tax benefit for the fiscal 2009 fourth quarter was $24 million as compared to a tax provision of $2 million for the fiscal 2008 fourth quarter. Our fiscal 2009 fourth quarter includes the impact of a net operating loss carry back in accordance with the worker, homeownership and business assistance act of 2009.
I’d like to recap the increase in our cash position for the year. The major components include an increase of $136 million related to the sale of a proprietary credit program, an increase of approximately $29 million related to income tax refunds, offset by our net loss for the year, a decrease of $51 million related to the repurchases of our convertible debt, and a decrease of $33 million related to capital expenditures.
For the fiscal year ended January 30, 2010, our gross capital expenditures were approximately $23 million representing a 59% reduction to the $56 million in gross capital expenditures for the fiscal year ended January 31, 2009. Expectations for capital expenditures for fiscal year 2010 are approximately $50 million for the opening of six to eight new stores, remodels and refurbishments to existing stores, to fund fixturing programs for new merchandise assortments in our three brands, and to test brand combinations and conversions, and for the implementation of information technology tools to assist in improving our business results.
Depreciation and amortization for fiscal year 2009 was $76.3 million a 19% reduction compared to $93.7 million in fiscal year 2008. The decrease is primarily related to operating fewer stores in the year ago period. Forecasts for depreciation and amortization for fiscal year 2010 are approximately $65 million.
Finally, while we continue to closely manage and plan our inventory levels, we are playing offense by strategically investing in inventory that supports the improvements we have made in our core merchandise assortments as well as investment in new assortments.
At this point we’ll now open the call for question and answer period.
(Operator Instructions) Your first question comes from Tom Filandro – Susquehanna International Group
Tom Filandro – Susquehanna International Group
My first question is, I want dig a little deeper if we can into the marketing spend on the TV, you talked about giving an ROI and a $4 million spend. Can you give us a sense of overall marketing spend and what does that actually mean in terms of demand to get a return on that?
My second question is, as it relates to the 4% decline in same store sales, kudos to that, could you give us a little better understanding about the metrics that are driving the improved results, where you’re seeing the biggest variance of changes at UPTs, ATB or transaction?
On the first question on the ROI on marketing and spend, maybe just to give perspective on how we’re thinking about marketing generally. The company had historically spent its money very much around direct mail to our existing customers, talking to our existing customers through Lane Bryant Magalog and through Fashion Bug and so forth in their monthly books.
What we have done is we’ve spent a lot of time improving our understanding of the incremental profit over control groups that our spending is driving. What that’s allowed us to do is to tune up and reduce some of the spending we’ve been making against our existing active customers to free up monies to spend in other ways on acquisitions. I think when you take into account the $4 million plus that we will spend on the national campaign for Lane Bryant, some parts of that will be incremental to our spend but some parts we are trying to have the existing spending working harder.
With respect to just ROI generally throughout all of our marketing spend when we’re talking to our existing customer we are looking for an ROI which would mean incremental profit against a control over which means incremental profit against not having marketed to them at all to pay for marketing to existing customers.
When we’re getting new customers through either reactivation or acquisition, which a national campaign would have an element of acquisition, we take into account the mathematics of the incremental we’re getting off of mailing the piece but we’re also then taking into account the new customer that we get and the lifetime value that that new customer will bring to us. Long winded way, I just wanted to explain our overall marketing thinking.
As to then the spend on the national campaign, what we’re truly after at the end of the day is an ROI including the lifetime value or the discounted forward stream of the profits that a new customer will bring to us, all being in excess of the spend that we’ll make on the campaign. When Eric and are looking for an ROI from that team that’s what that means.
On comps and turning, hopefully hitting this pivot point which we’re very much looking forward to in this company. In terms of turning the comps a little bit here from what we experienced in the fourth quarter, we really do think it’s been, if I just sort of focus on Lane Bryant, just to have an example to speak to, it’s been the focus on the core assortments which you’ll see in that Supima cotton program, the woven shirt program, just an overall stronger positioning which we learned from our research we needed a much stronger positioning of our core assortments.
The customer we actually have is much more of a moderate customer than I think we might have believed. When you have a chain that’s 800 stores around the country you have to service middle America and you’ve got to the thoughtful about it and make sure you present your assortments in a way that’ll appeal to them and allow you compete with department stores and specialty stores. Rambled a little bit, I realize, but I wanted to give you a full answer there.
Your next question comes from Jeff Stein - Soleil Securities
Jeff Stein - Soleil Securities
A follow up on that, I think in your last conference call you indicated that your price points for spring were going to be down about 10%. If that’s the case, I’m curious how that converts into what you’re seeing presently in the way of average dollar transaction, what the customers actually spending in the store year on year and whether or not you’re capturing more transactions and conversions to offset that decline?
There’s been a number of questions around the increase in the under $50 price points that we’re offering in the assortment and isn’t that in and of itself going to put pressure on the top line. We think we’re making a good trade on driving ultimately, our goal is period full stop to drive gross profit dollars, it’s not to drive margin rate, it’s not to drive top line, it’s to drive gross profit dollars. Having said that, we think you shouldn’t just read into it that we have an overall dilution in the overall top line either because what’s happening is the mix is actually changing in the assortment as well. Let me have Eric frame that because it’s a good question we’ve been asked a few times. Let me have him frame that for you.
Let me just expand on the question. What Jim has said and I’ll just add to it is that what we’ve done, this was particularly at Lane Bryant when we talked about it the last call, increasing the average retail dollars on an item, increasing the percentage of under $50 items. What we’ve done is architected the plan and it’s in the mix.
So although we are increasing the under $50 penetration from where it was of roughly about 60% of the assortment to closer to between 75% and 80% of the assortment, within the mix and with higher initial markups that we have been getting, mostly due to the cost reduction initiative on product costs, we are able to for the spring plans, able to drive a higher average unit retail still out the doors compared to last year. But your point about us looking to sell more units is absolutely accurate. We are going to with our same store inventories slightly up.
As I mentioned in my comments, at Lane Bryant, low single digit comps inventories that also includes increases in number of units. We’re expecting for the spring to sell more units at a slightly higher average unit retail even with this mix of stronger entry level price points and a greater percentage of under $50 product, as well as looking for increased conversion within our stores with the stronger promotional position.
Let me connect it back to Tom’s question, just again to hit on those two programs which are succeeding for us, the Supima cotton program and the woven shirt program. As you recall, it’s a buy two or more program and in terms of driving units, very interesting in our Supima cotton program we are selling multiples, i.e. more than one, 70% of the time. In the woven shirt program we’re selling multiples again two or more, 55% of the time. That is allowing us to drive some units or tonnage in the business.
Jeff Stein - Soleil Securities
Given the fact that you have fewer stores and are going to continue to downsize your store base, can you give us a little bit of guidance in terms of what we should expect in the way of occupancy expenses and also how this is going to affect the SG&A line as well, and if you could talk a little bit about how the sale of the credit card business is going to change the way the SG&A line looks to us in future quarters.
Let me take the occupancy, as you’re well aware the most significant part of our cost reduction initiative has been now realized through the fourth quarter and with my prepared comments relative to exceeding the initial $125 million cost reduction program that we announced beginning of last year. The more significant reductions, which occupancy was one of the larger components of that initiative, through the stores that we were able to renegotiate lower rents for, that program is for the most part now annualized. There’s a little of spill over as we get into the first half of 2010 but no where near the magnitude of the reductions we were seeing in the buying and occupancy line in 2009.
Of course we will still realize, since our store base is shrinking, it shrunk approximately 7% last year with the closing of 160 stores and of course with our announcement this morning that an additional 100 to 120 stores will be closed. Although it will be back ended so the majority of those stores will close throughout the year but the more significant closing program will be back ended after the Christmas or during the fourth quarter.
We will see some benefit from those stores not being in the portfolio but for the most part the occupancy reductions year over year on the existing store base have already been embedded into the buying and occupancy costs through the four quarters.
As it relates to SG&A we certainly will get the benefit of the selling expenses being removed as we have closed these stores. We certainly are always looking at right sizing the G&A piece of SG&A relative to us running fewer stores in the portfolio, particularly the more significant closing are at the Fashion Bug brand.
As Jim mentioned with the planned closing for 2010 of approximately 60 additional Fashion Bug stores we will operate at the end of the year 740 stores, we opened the year at 800, and had almost 900 at the beginning of last fiscal year. We are focused on that, ensuring that we’re able to right size the SG&A percentage in order to be able to get some modest leverage on the sales of the brands and the consolidated results as a whole.
As it relates to the credit, and I mentioned that since we no longer own or operate the credit business unit, that metric no longer will be out there, in terms of where we’re recording the benefit we’re getting from the sale of the file to Alliance Data, that benefit and any stream of income we receive from Alliance Data, as we talked at the third quarter call, will be a set off in our SG&A expenses. You’re asking about fourth quarter, the income we received was comparable to what was earned in the prior year’s fourth quarter when we ran the file through our own bank.
Your next question comes from Tom Filandro – Susquehanna International Group
Tom Filandro – Susquehanna International Group
Can you give us an understanding of the inventory for the balance of the year, what you’re thinking? In terms of the merchandise margin, you had an improvement obviously in 2009, you sure improved markdown rates, inventories are well controlled but we are starting to build inventory here to fund the top line. How should we think about merchandise margin in 2010 and how should we think about the markdown rate in 2010 as well?
Let me try to break that in two parts. Although we’re eight weeks into the spring season, we are planning a little bit more aggressively, going on the offense. I will say that we certainly had inventory levels a year ago this spring that were significantly below, as you recall we had taken out a lot of inventory last fall in 2008 going into the spring 2009 timetable. So although we are modestly increasing our spring inventories, based on the comments I made earlier in terms of low single digits at Lane Bryant and Fashion Bug, they are off really below normal kinds of baseline numbers.
That said, we are still playing both offense and defense and a lot of the offense has been strategic. In other words, beefing up the core assortments that Jim commented on for Lane Bryant, the knit program, the woven shirt program, the capri and short programs where we were deficient a year ago as we ultimately cut inventories and ran out of product as we were moving through the spring/summer season.
We’ve done the same at Fashion Bug and Catherines, of course not quite to the extent in terms of the number of units but we feel that we’ve positioned it appropriately in core programs that have a little bit longer life, meaning that these are programs like the Supima cotton knit program that have life from March right through the summer selling season of June/July.
That is where the majority of the inventories have gone, investments gone; including some of the extended categories that Jim alluded to that we’re positioning Lane Bryant, positioning swimwear in the stores for the first time in 200 stores, and starting to develop their shoe assortment. Jim alluded to the fact we’ll have a full shoe business for fall 2010 but as you’re out in the stores now you see a presence in the sandal classification, the ballet classification, and some selected styles of shoes in some of the other dressier classifications. There is some additional funding for those extended assortments and categories.
Overall we are managing those inventories still tightly. Again, not getting too far ahead of our expected plans. At this point, we’ll be in a better position at the end of the first quarter to comment on fall. We’re still putting those plans together as we speak. At this point they’re not finalized, the full holiday season.
Even though we are adding to the inventory, I saw it was up 1% at the end of the year, and we have a bias to be more on offense as we think about the business for 2010. We’re trying to do it smartly and we actually believe by doing these programs and the Lane Bryant team’s been very strategic about for instance their Supima program and their woven shirt program. By doing it in core fabrics and positioning fabrics appropriately in the supply chain, that we can come in and out of bodies and styles and colors quickly and not, by the way they’re constructed as year round programs anyway.
This is not like taking an inventory bet and putting it into fashion product that’s going to live for 10 weeks kind of stuff. I think it’s important to keep that in mind that we’re trying to be very strategic about how we make these bets. Yes, we’re going to drive into inventory bets more aggressively in the year.
Tom Filandro – Susquehanna International Group
The margin piece?
As far as the more significant improvements that we were recording through 2009 and even through the fourth quarter, with the improvement of 190 basis points. As Jim’s mentioned, we are focused on driving gross margin dollars and EBITDA dollars. We feel we have left a lot of business on the table last year, deficient in these core programs, particularly at Lane Bryant and Fashion Bug that we spoke to at the third quarter call and some of the comments Jim made on this call.
Therefore we’re looking at; we need to have stronger promotions in store. Again, some of that is evidenced by this early spring, the pants promotion that Jim alluded to with Lane Bryant, these promotions were not there a year ago. They still are done at very healthy gross margins but we are clearly now looking at a strategy to drive more dollars as well as more EBITDA dollars as we work through 2010 as opposed to just focusing solely on rate.
Tom Filandro – Susquehanna International Group
Could you guys give us an update on the success of Seven7 how many stores is it in now and I also noticed a deluxe line in Seven7, any comments on that?
Seven7 is out there in about 400 stores go forward. It’s providing very nice fashion denim alternative for our customer. Our customer likes the brand, asks for the brand and so that was brought back in over the last number of month. It had been in the stores once before but it’s doing well for us. The customer likes the fashion quotient in that denim and we’re in about 400 stores go forward with it.
Your next question comes from Jeff Stein - Soleil Securities
Jeff Stein - Soleil Securities
A question regarding the merchandising strategy. It would seem to me that you’re reducing the risk to some degree by going with more of a core basics program that’s going to last deeper into the season but by the same token it would also seem to imply, at least to me, that there’s less fashion in the store, which means you’re going to have less differentiation which means really giving the customer less reason to shop you versus someone else since it seems like your competing more now on commodity items. Can you help me understand that a little bit?
Also, it seems like over the last couple years you guys have built design teams for each of the brands. Going more with core basic programs seems to almost conflict with that strategy.
Call it fashion basics as opposed to core basics. If you look, just to pick one of those programs that Supima cotton program and you look at how the product evolves and how the product is going to continue to evolve. Samples were out on our forward seasons and seeing them last week over in Asia and so forth. The design team actually has been doing a great job at Lane Bryant in terms of taking those core programs and continuing to evolve them. You’re right, if it’s just a t-shirt program like basic t-shirts in all of the department stores, then it would not work for us.
If you watch what’s happening to that product, the amount of different ways they’ve thought about using that core fabric and the different styling that they’re able to put into those basics. We believe over time, as long as we keep mixing up the fashion basics that we continue to give the customer a reason to keep coming back and buying and replenishing that product.
I think it’s a mistake to think of it as just basic t’s that they’ll get tired of. The onus is on us to make sure that doesn’t happen. In fact, to some degree that’s what was wrong with our historical right fit pant program. It was a really big core program but it wasn’t refreshed and so I think our teams have learned from that history and we’re making sure that we can financially play the lower risk profile of a core program while continuing to keep it interesting and keep the customer coming back for more.
Your next question comes from Ed McCormick – Stevens Asset Management
Ed McCormick – Stevens Asset Management
You guys have been doing a great job of culling the underperforming stores and repositioning the store footprint for some growth going forward. How are the stores that you’re getting rid of today different than the stores you were getting rid of a couple of years ago? What’s the incremental sales per square foot? How can I think about the store base going forward?
I don’t know about numbers of years ago but versus a year ago we initially, when Eric and I started working on this together, we wanted to call the base and attack negative EBITDA stores and do math against how it would cost to get out of those stores and so on after we had negotiations with the landlords to see how much reduction we could otherwise get and so forth.
When we were doing that math we were actually initially requiring a very quick payback or requiring a very, very high ROI because we wanted to give the brands a little bit of time to sort of settle in and figure out where our base is. That was, call it nine months ago.
In this most recent round we have actually tightened up and we feel like we have some settle out on where our business is and we understand our business better, so we’re now more requiring of our boxes. We’ve brought that hurdle down and we’re allowing the payback on an investment to get out of the store to take a little longer because just feel like we can be more targeted and precise.
In other words, if I go back in time were being more careful about it because we didn’t want to shut a bunch of stores and then the business had turned around and then we’d say man I wish I had those stores back. Where we are right now is we feel like we have a better understanding of our base and so we’re able to be more targeted which is ultimately the 100 or 120 stores that are called out went through that rigorous process. Back prior to over the last year, Eric I don’t know if you can put that into context.
The focus was and continues to Jim’s comments to looking to get rid of, we’d like to get out of the portfolio the negative cash flow, or negative EBITDA stores. That’s the portfolio, that’s the targeted group that we’ve isolated. To the extent now with the program we announced this morning with the investment we need to make that we’ve framed at $7 to $9 million for lease early exits and lease terminations we’d have to pay the landlord, those stores that are targeted all are sitting with negative cash flows and EBITDA.
To Jim’s point, we now had sufficient time to look at those specific markets, specific stores within that market and these are the stores that we’d like to exit and keep the portfolio as positive cash flow as possible. This would be a majority of the remaining stores in the portfolio that have negative cash flows for the trailing 12 months.
Ed McCormick – Stevens Asset Management
On comps, obviously coming forward is earlier this year and as we’ve chatted about in the past you tend to do a pretty strong Easter business. How much of your down 4% comps would you say is attributable to an early Easter?
That way I would characterize it in our business, particularly the last four or five years, Easter’s become almost a one week event. It is a very strong build for Easter week, again just to clarify the numbers we released through eight weeks or through last week so it does not include any of the current Easter week sales.
Just to clarify, there are five weeks left in the quarter. The week we’re sitting in, which is Easter week, which again was not included. The following week, which will have a harder comp against the prior year Easter timing and then three more weeks to finish out. That puts it into context.
We have no further questions at this time. I’ll now turn the floor back over to management for any closing comments.
I don’t have anything further. I think we read in a long script because we had a lot going on, it’s year end and we wanted to keep you updated. We appreciate everyone’s support and we really have one interest in mind is trying to drive shareholder value over time. We’re working hard at it and accomplished one of the two things. The most important thing now is in front of us to accomplish which is getting this business turned around and moving in a positive forward direction. We thank you for all of your time and support.
This does conclude today’s teleconference. You may disconnect your lines at this time. We thank you for your participation.
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