Byron Bergren - Chief Executive Officer, President and Director
Keith Plowman - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance
Anthony Buccina - Vice Chairman and President of Merchandising
Jean Fontana - Integrated Corporate Relations
Emily Shanks - Lehman Brothers
Grant Jordan - Wachovia
M. Grant Jordan
Bon-Ton Stores (BONT) Q1 2010 Earnings Call May 20, 2010 10:00 AM ET
Good afternoon, ladies and gentlemen. Welcome to today's Bon-Ton Stores First Quarter 2010 Earnings Conference Call. [Operator Instructions] And now I would like to turn the conference over to Jean Fontana of ICR. Please go ahead, ma'am.
Thank you. Good morning, everyone, and welcome to Bon-Ton's First Quarter 2010 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 a copy of the company's earnings release at the company’s website at www.bonton.com. 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 forwardlooking statements within the meanings of the Private Securities Litigation Reform Act of 1985 (sic) . Actual results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company’s filings with the SEC. I would now like to turn the call over to Bud Bergren, President and CEO.
Good morning, and thank you for joining us. I'll be giving you some general comments on the first quarter of 2010. Keith will then provide details on the first quarter's financial results and update you on our financial guidance and assumptions for 2010. Tony will discuss the merchandising results for the first quarter and what to expect in the second quarter. After that, I'll make some closing remarks and then we'll be available to answer your questions.
We're very pleased with our first quarter results and confident the initiatives we have in place are working, and our team is doing an excellent job at execution. We are controlling expenses and inventory levels while generating sales and gross margin improvements. The strategy works well and we plan on continuing it. Here are some highlights from the first quarter.
We had a 3% comparable store sales increase and a 2.6% total sales increase. While business is expected to remain choppy this year until the high levels of unemployment improve, we do believe we can sustain our comparable store sales in positive territory for the year. In merchandising, we controlled inventory, flow of fresh goods on demand, carried less clearance and achieved our highest first quarter gross margin rate in the last several years. Our private brand and Incredible Value program contributed to the improved gross margin performance.
Substantial growth continues to come from e-commerce. Tony will provide greater details on merchandising accomplishments and initiatives. We also reduced selling and general administration (sic) [administrative] expense both in dollars and percent, demonstrating our continuous focus on expense control and promoting efficiencies throughout the company. And at marketing, new promotions and a value image continues to be successful. EBITDA increased $27.2 million to $33 million compared with $5.7 million in the first quarter of 2009. In addition to these accomplishments, our excess borrowing capacity of approximately $407 million at the end of April remains well above the required minimum of $75 million.
First quarter regional sales results reflect strength in Minnesota, Wisconsin, Michigan and New York. The worst-performing region was Central Pennsylvania. Over the past year and a half, we have benefited from merchandising programs that had delivered quality merchandise and outstanding values to our loyal customers. We have completed our merchandise optimization program and our expense plan is working throughout the company, all of which have combined to help us manage through a very challenging macroeconomic environment, and we are now driving positive operating income and EBITDA growth. We are running our business smarter and more efficiently and are well positioned to serve our customers in our local markets. At this time, I'd like to turn the call over to Keith.
Thank you, Bud, and good morning, everyone. I will review a few of the major accomplishments in the first quarter of fiscal 2010, and then I will touch upon the income statement and balance sheet components as well as our fiscal 2010 guidance.
We are pleased with our performance in the first quarter of fiscal 2010, which reflects positive comparable store sales and significant increase in EBITDA. Comp store sales rose 3% in the quarter while our gross margin rate increased to 37.4% of net sales. We continue to reduce our selling, general and administrative cost to strengthen our cash flow. Our debt levels decreased by 13% from the comparable first quarter of the prior-year level.
Our EBITDA, as Bud had noted, defined as earnings before interest, taxes, depreciation and amortization, including amortization of lease-related interests, increased $27.2 million. We do want to note that is a non-GAAP Reg G item, and there's a reconciliation in our press release for you to see. And as noted in the company's May 6, 2010, sales press release, our excess borrowing capacity at the end of the first quarter fiscal 2010 under our revolving credit facility was approximately $407 million, well above the prior-year amount. The increase in excess borrowing capacity over the prior-year amount of $165 million reflects improved operating performance and initiatives implemented over the last several years.
Moving to the details of our first quarter, our net loss was $23.5 million or $1.33 per share for the first quarter of fiscal 2010 compared with a net loss of $45.4 million or $2.67 per share for the first quarter of fiscal 2009. For the first quarter, comparable store sales increased 3% compared with the prior-year period, and total sales for the 13 weeks increased 2.6% to $661.4 million compared with $644.5 million for the prior-year period. Other income in the first quarter decreased to $13.8 million compared with $18.4 million in the first quarter of 2009. The current year first quarter reflects reduced leased department income, the result of a conversion in late 2009 of fine jewelry to an owned department and reduced proprietary credit card income.
Gross margin dollars in the first quarter increased $22.9 million to $247 million. The first quarter gross margin rate increased 260 basis points to 37.4% of net sales compared with 34.8% in the prior-year period. This improvement primarily reflects increased net markup and a decreased net markdown rate. SG&A expenses decreased by $8.9 million compared with the prior-year period. The first quarter SG&A expense rate as percent of net sales was 34.5% compared with 36.7% in the first quarter of 2009.
As previously mentioned, EBITDA increased $27.2 million in the first quarter of 2010 to $33 million compared with $5.7 million in the prior-year period. Depreciation and amortization expense, including amortization of lease-related interests, decreased $2 million to $27.4 million compared with $29.3 million in the first quarter of 2009. Interest expense, on a net basis, increased $5.6 million to $28.5 million compared with $22.9 million in the first quarter of 2009. The increase reflects higher interest rate as a result of our amended and new credit facilities, partially offset by reduced net borrowings. We recorded income tax provision of $617,000 in the first quarter of 2010, which compares to an income tax benefit of $1.1 million in the first quarter of fiscal 2009.
Reviewing certain key ratios and balance sheet amounts, our working capital decreased to approximately $373 million as of May 1, 2010, compared with $441 million as of May 2, 2009, or a reduction of $68 million. The decrease primarily reflects reductions of merchandise inventories and an income tax receivable. Total debt including capital leases was $1,034,400,000 at May 1, 2010, compared with $1,191,800,000 at May 2, 2009, or a reduction of $157.4 million or 13%. Letters of credit at the end of the first quarter was $6.6 million versus last year's first quarter amount of $49.1 million. Book value per share was $6.17 this year versus $4.86 in the prior year. And first quarter capital expenditures not reduced by third-party contributions were $6.6 million compared with $6.1 million for the prior-year period.
Moving to a discussion of our guidance, we are increasing our full year fiscal 2010 guidance as follows: EBITDA to a range of $235 million to $250 million and income per diluted share in a range of $0.80 to $1.60. Additionally, our estimate for cash flow as defined in Note 2 of our press release is a range of $80 million to $95 million. Assumptions reflected in our full year guidance include comparable store sales in a range of 1% to a 3% increase, gross margin rate of 37.2% to 37.3%, a reduction of $20 million to $25 million in SG&A expenses, an effective tax rate of 0%, capital expenditures not to exceed $50 million net of external contributions and estimated 18.5 million to 19 million average shares outstanding.
We believe our first quarter results reflect the ongoing benefits of initiatives we implemented throughout 2008 and 2009. We feel good about our start to fiscal 2010 but maintain our expense controls and inventory discipline and balance them with initiatives for future growth and profitable opportunities. Our form 10-Q for the first quarter of fiscal 2010 will be available around June 10. And at this time, I would like to turn the call over to Tony.
Thanks, Keith. We were extremely pleased with our sales performance in the first quarter. Our comparable store sales increased 3% for the quarter which exceeded our expectations. Our first quarter transactions were up 3.3% to prior-year period, showing gains in traffic. We were very pleased with our first quarter margin results. The margin rate increased approximately 260 basis points as compared with the first quarter of 2009.
Our gross margin improvement was driven by several merchandising initiatives. First, private brand sales had significant improvement in both the gross margin rate and dollars versus the prior-year period. Second, a reduction in clearance inventory drove quality merchandise sales, kept our merchandise assortment fresher than the prior year and reduced our markdowns for the quarter.
Third, we continue to increase sales penetration in the moderate zones including moderate missy, petites, large sizes and moderate shoes. Moderate zones also have a higher margin rate than the overall company average. And fourth, our merchandise optimization strategy benefited our margin. The final areas were added in the first quarter, and we now have completed the rollout of this strategy across all businesses.
Looking at our sales performance, our best sales results for the quarter were: Shoes, accessories, children's coats and soft home. The toughest areas were hard home and furniture, although furniture was better than expected.
Our value message continues to resonate with our customers. The moderate zones outperformed the company average, especially at missy sportswear, petites, large sizes and shoes. We also had positive results in several of our better zones. Missy better sportswear, men's better sportswear, better handbags and better shoes all had sales increases for the quarter.
Our E-Commerce business continued to grow. E-Commerce sales significantly outpaced the company, and we have initiatives in place to sustain the momentum. We are six months into our strategy of taking back the Fine Jewelry business, and we are pleased with our progress. Our customers are responding to the new merchandise assortment.
Many of our merchandising initiatives are contributing to our improving trends. Franchise businesses exceeded sales plan in prior year. The best franchise businesses were ladies' shoes and moderate updated sportswear. Our men's outdoor apparel achieved significant growth in sales and margin for the first quarter. The best brands were Timberland, Woolrich and our 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 our stores and we expect continued growth.
Our storewide key items initiative continues to grow. Key items sales increased significantly in penetration to the total company's sales. Penetration in the Incredible Value key item program was 8.7% in the first quarter versus 8% in the prior-year period. The customer recognizes the value in this merchandise and gets it.
Private brand was also a big part of our success in the first quarter. Sales grew faster than total company. Gross margin was a huge improvement to last year and continues to be several hundred basis points higher than the branded merchandise. Private brand penetrated a 20.3% to total company versus 20% to prior-year period. The best performing private brands were Breckenridge, LivingQuarters, Intimate Essentials, Relativity Career and Casual and Men's Paradise Collection.
For the quarter, overall product differentiation was 32.9%. Both private brand and non-private brand unique merchandise increased in sales from prior-year period. Private brand accounted for 62% of our differentiated merchandise.
Looking ahead to the second quarter, clearance inventory is down 14% and fresh inventories, along with our continued strong emphasis on value for the customer, will help us maintain the sales momentum that began in first quarter. We believe we have inventory in the right areas so we can deliver or exceed the sales plan. We intend to flow additional receipts to the areas that have improved sales trends, but the overall inventory level will be similar to last year. The reduction in clearance inventory should benefit our margin rate from prior year even though the second quarter of 2009 had an excellent margin rate.
Franchise businesses once again are expected to grow faster than the company, and our storewide key item program is on track to be over 27% of our total sales in the spring, a significant increase from last spring. The Incredible Value program should be almost 9% of total sales, up over last spring's 7.8%. 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 expect significant growth from e-commerce in 2010 on top of the growth we experienced in 2009. We are adding more vendors and more items to our site, especially in areas that are currently underrepresented such as men's, accessories, dresses and better missy sportswear. Changes in our site will be installed this summer to improve the customer experience and increase our conversion rate.
Fine jewelry will be a nice addition to our business in 2010. The merchandise staffing and marketing are in place to achieve our sales plans.
In summary, we believe our consistent merchandising strategies are working. We know our customer and she's responding favorably to our merchandise assortment, which conveys tremendous value and quality. We believe we will grow our sales and profits by enhancing the same initiatives that gave us improved performance results in the first quarter and execute those initiatives with authority. I will now turn the call back to Bud.
Thank you, Tony. We are pleased with our first quarter performance and the continued success of the initiatives we put in place the last two years to strengthen our company. We believe our initiatives will provide growth opportunities and continued EBITDA and earnings improvement throughout this year. At this time, we will open the discussion to questions.
[Operator Instructions] And our first question comes from Grant Jordan with Wells Fargo.
M. Grant Jordan
Just want to drill down a little bit on your guidance. I definitely appreciate the fact that there's no real need to raise guidance ahead of, before you see trends. But the way I'm backing into it is that basically at the low end of your guidance, you're assuming EBITDA will be flat for the rest of the year, is that correct?
That is correct, Grant.
Grant Jordan - Wachovia
And is that based on concern over same-store sales or do you feel like you're going to see some cost inflation?
It's not cost inflation, Grant. It's more the uncertain environment that exists out there. The change in the guidance that you're seeing, that's more in the company has put together, really reflect the performance strength that we had in the first quarter. And we're tempering that with the uncertain economic environment out there, which I think everyone seen over the last couple weeks, certainly shows that it's very temperamental and reacts strong and quickly to any kind of news that come through.
M. Grant Jordan
And then as you kind of look at spending trends of your consumers, obviously, there's some timing shifts as we move throughout the second quarter. But are you more concerned now as we get into the second quarter than what you saw from Q1?
No, I think what we're seeing that consumer is still shopping for value and they're responding to that. But as Tony indicated, we have had some movement in the better merchandise areas.
M. Grant Jordan
It looks like you were able to get better leverage on your accounts payable during Q1. Was there any timing issue there or is that something that should stay with you throughout the year?
We would expect that to stay. And actually, I think you'll see some improvement as we go through the year, Grant. You saw where we are with the letters of credit being down to about $6.6 million versus the level last year, being in the high 40s. So there's been a substantial decrease in that. We see terms as being very standard out there, normalized with what we have on our relationships. And as we said throughout 2009, we continue to have very good relationships with our vendor partners. And with the strength of the company and the excess capacity position, I believe everyone is feeling very comfortable about 2010.
Our next question will come from Emily Shanks with Barclays Capital.
Emily Shanks - Lehman Brothers
Apologies if I missed this, but what did you spend for CapEx in the quarter?
CapEx was about $6.6 million this year. That is not, in other words, it's not net of third-party contributions which were a couple of million dollars. And that compares to about $6.1 million last year. So it's very comparable this year first quarter of last year.
Emily Shanks - Lehman Brothers
As you look at leases that you may have rolling off this year, are there any significant ones?
There's nothing really significant that we continue to go through, and we have mentioned in the past that we expect a couple of percentage point improvement in what we'll have in lease cost throughout there. But every year, we'll have somewhere in a range of 30 or so leases that come up for review. We have a lot of good locations. We continue to renew those locations, and we don't see anything material dropping off in this year.
Emily Shanks - Lehman Brothers
And then just in terms of free cash flow generation, it's obviously very substantial. What are you targeting for that free cash flow?
Free cash flow, essentially in a range of $80 million to $95 million. And we've defined that in the press release, Emily, trying to keep it pretty simplistic. The only working capital adjustment we're putting in there at this point is for the tax refund that we have coming in the second quarter of approximately $7 million. Essentially, everything else deals with looking at EBITDA and the requirements for interest as well as capital expenditures.
Emily Shanks - Lehman Brothers
I was wondering what you're targeting the use of that free cash flow towards?
It will be used to reduce our debt levels. We continue to bring down the leverage. You saw that in our guidance. We had a target at the end of the year of getting ourselves somewhere down to around 4x debt to EBITDA, and we feel that we're comfortably moving toward that target.
Emily Shanks - Lehman Brothers
For Tony, obviously, it looks like the differentiated product continues to be customers continue to respond well to it. Are there any new exclusive or differentiated product offerings that you plan on rolling out in the back half of this year that are going to be new and incremental?
No, not any new brands. Last year, some of the new brands that we rolled out, we've rolled them out during a recession period of time. They're getting good traction for us right now, so we still feel that we have a lot of opportunity to grow our current brands that are exclusive in both private brand and under domestic exclusive brands. We will have category extension of those brands for fall like Laura Ashley. We will start to roll out Laura Ashley casual wear into about 50 locations for the fall season, but no new brands will be launched.
[Operator Instructions] And we'll take a question from Colleen Burns [ph] (38:10) with Oppenheimer.
Can you talk a little bit about what you're seeing kind of in sales trends across different geographies that have been pretty consistent or have you seen any major differences there?
Not many huge differences. Our two best markets are Detroit and Minneapolis, and our most difficult market is Central Pennsylvania, which has been difficult for us awhile and which has been in the high value in the Harrisburg area. Actually, in the Lancaster and York part of that country, we're doing very well. The rest of the markets have been pretty consistent. So it's just the top end of Detroit and Minneapolis doing extremely well.
And that outer market still, is that running kind of 12% to 13% or 12% to 15% of your sales? Is that kind of where that's sort of today?
Yes, it's running about 13% or 14% of our sales right now. And actually, it was -- not majorly but just a tick above our company's average. So we see the outer market area is actually coming back a little bit.
And then just on SG&A savings, I think you kind of got a big chunk of them in the first quarter. How should the rest of the year unfold? Should it be more evenly dispersed over the next three quarters?
Yes, I think it'll be somewhat evenly dispersed. We do believe there's going to be a little bit more opportunity in the second quarter here just because some of the initiatives we put in place in 2009 took some time to be effective and generate the benefit that we were looking for. So I think you'll see a little bit stronger in the second quarter and then fairly well evened out through the balance of the year.
And then just on the cash flow paying down debt, I mean, do you expect to just pay down the second lien term loan or how are you thinking about reducing that towards the end of the year?
Well at this point, the second lien term loan is you cannot pay it down. It has a restriction against it. That is in place until November. Then there's a 5% premium for one year at 3% premium for the next year, and then it's no premium in the last year of the agreement. At this point, we want to continue to monitor what happens in the environment around us. As you can see, we're obviously generating substantial cash flow. Our cash position is very strong, and we do realize that's a more expensive debt. But we will take everything into account as we go through this year, and then we'll make a decision what we think is appropriate as we get to the end of this year.
[Operator Instructions] And we'll take a question from Howard Weinberg with UBS.
I would like to just make sure I understand some of your same-store sales guidance. When we think about the first quarter comp of up 3%, yes, the relatively easy comp last year, the second quarter, you likewise have a relatively easy comp. If we assume that you're going to have a similar comp and momentum continues at the same pace, would that imply the back half of the year you're foreseeing it to be potentially negative, to average out that 1% to 3% range for the year or am I thinking about it incorrectly?
Well, the only thing I would challenge a little bit on your question is you are correct that when you compare back only the 2009, we were down 9.2% in the first half of the year and down in round terms only 2.5% in the second half. But if you go back and really look at when all this started to unfold in 2008, you'll see that in round terms, we were down about 5% in the spring of 2008. And we were down closer to 8% to 9% in the second half of 2008. So you really have to accumulate those impacts that we saw in sales over that two-year period. When you do that, that does bring them within a percent or two of each other. So in our guidance, what we are assuming is more of an even trend as we go throughout the year, that not necessarily second quarter will be strong and the third and fourth weaker. We're assuming overall that, that trend of the 1% or 3% for the year would be indicative of the performance, even out somewhat through the second, third and fourth quarter.
And just one cleanup item, I don't know if you mentioned it, but did you mention your revolver balance at the end of the quarter?
As far as our debt, we had basically $1,034,000,000 of debt outstanding. The senior notes, as you know are fixed throughout there, $510 million. The CMBS facility was about $241 million. The revolver was about $128.5 million. Second lien is fixed at $75 million and then I'll call it miscellaneous mortgages and capital leases were about another $80 million.
And we have no further questions at this time. I'll turn the call back over to the speakers for any additional or closing remarks.
Thank you. We look forward to speaking with you about our second quarter 2010 financial results on our conference call in August. Thanks for joining us this morning, and thanks for your interest in Bon-Ton.
Thank you, sir. That does conclude today's teleconference. We do thank you all for your participation.
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