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

Q4 2013 Earnings Conference Call

March 11, 2014 10:00 AM ET

Executives

Jean Fontana - ICR

Brendan Hoffman - President and CEO

Keith Plowman - EVP, CFO and PAO

Analysts

Edward Yruma - KeyBanc Capital Markets

David Glick with Buckingham Research Group

Michael Exstein - Credit Suisse

Spencer Sams - Bank of America, Merrill Lynch

Grant Jordan - Wells Fargo

Mary Gilbert - Imperial Capital

Karru Martinson - Deutsche Bank

Carla Casella - JP Morgan

Christine McDuffie - Goldman Sachs

Colleen Burns - Oppenheimer & Company

Karen Eltrich - Mitsubishi

Lauren Smith - Citi

Hal Holden - Barclays Capital

Todd Harkrider - UBS

Operator

Good day and welcome to The Bon-Ton Stores Incorporated Fiscal Fourth Quarter and Full year 2013 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jean Fontana with ICR. Please go ahead.

Jean Fontana

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

The statements contained in this conference call which are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those projected in such statements due to a number of risks and uncertainties, including those set forth in the cautionary note and the earnings release and all of which are described in the Company's filings with the SEC.

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

Brendan Hoffman

Good morning and thank you for joining us today. Before I review our fourth quarter and 2013 performance, I would like to comment on the announcement regarding my decision to not extend my contract. I truly enjoy working with the Bon-Ton team and I am proud of the accomplishments we have made to transition the Company and build a stronger foundation for long-term growth. My decision was entirely based on family considerations. I have been commuting weekly to Milwaukee from my home in New York, having school-aged children, this has been more strenuous than I anticipated and my wife and children as well as I myself and not something that I can continue long-term.

We have made great strides in executing on multiple goals and we’ll carry forward with the strategic initiatives we have underway over the next year while the Board finds a new Chief Executive Officer. I have faith that Tim Grumbacher and the Board will provide another leader that will enable Bon-Ton to reach its full potential.

Now let’s review the quarter and our plans for fiscal 2014. From the beginning of November including Black Friday up until mid-December, sales were on-track and we are pleased with our performance. But starting with the weekend of December ’13, we experienced a deceleration in sales which continued through the end of January. We attribute the majority of the sales shortfall to a sharp decline in traffic, resulting from multiple snowstorms and the extreme cold weather that blanketed our region for most of the days thereafter and long before the Polyvore text terminology became popular.

Ultimately, this caused us to miss our comparable store sales goals for the fourth quarter and even the revised guidance we provided at the beginning of January. Despite the sales pressure, we were able to achieve a gross margin rate slightly better than prior year’s period and reduce expenses. In addition, we ended the year with inventory levels approximately 5% below that of the prior year which includes a significant reduction in carryover merchandise, positioning us well for the spring season.

Now I will turn to some of the highlights from our fourth quarter. We continue to make progress in revolving our merchandise assortment to maximize productivity in our stores. We have built inventory in categories where we saw the biggest growth opportunities, including ladies’ read to wear and footwear. In addition, sales on outerwear, plus size women’s sportswear and activewear athleisure across the Company were strong. We also enhanced our private brand assortment and managed this business to improve profitability. Ruff Hewn our private brand was strong in all categories and sizes especially its roll-out in plus sizes.

We have come a long way in managing inventory from better managing markdowns, bringing more analytics around inventory planning and improving inventory flow and the addition of standalone clearance centers. We recently announced our third freestanding clearance center. This store is under the Carson’s nameplate in Morton Grove Illinois will open next month. We expect to announce additional standalone clearance centers in the near future.

We grow sales in our eCommerce business through better assortments, improved site navigation and overall site experience enabling us to grow this business to reach approximately 5% of our overall sales. We were able to more efficiently manage our return on spend with our strategic marketing approach and look forward to even more opportunities in this area going forward. I think I could sum up the full year results by stating there were great efforts made under difficult circumstances. I believe we laid a solid foundation for delivering profitable sales growth in the coming years.

Looking to the New Year, it’s all about generating top-line growth, although thanks to Mother Nature we were off to a challenging start. We faced another month of unfavorable weather in February, including a massive Northeast storm a day before Valentine’s Day. Our business improved right afterwards but better weather did not last long. Our markets continue to be materially impacted by the weather for the remainder of the month of February. So, we are just staying focused on the things we can do to drive sales in 2014.

Regarding our merchandise assortment, we believe we have more work to do to better balance the ratio of debt for spreads. We will increase emphasis on key items that drive growth and buy them more aggressively. This should result in better use of our inventory investment and enable us to drive higher store productivity. We will ensure we have depth in the most popular size color combinations in stock. We fell into the trap of buying too large a breadth of styles and colors that robbed depth for the bestsellers. Our new merchandise supporting software highlighted this for us and we believe it is easily correctable going forward.

Active has become a major focus. We are adding champion activewear in women’s and children’s and Reebok in men’s. We will expand in men’s our assortment of champion activewear as well as Puma. In addition, athleisure in ladies will be led by our continued growth in CK performance and it will be joined by expanded doors in recently launched brands including Marc New York Sport and GB Sport.

Private brand is a big part in growing this category with best of the executing. These brands all have a plus size opportunity that we aggressively are going after as well. National brands will continue to be a priority for us with Ralph Lauren and Michael Kors and COACH at the top of the list all of which will have door expansions in 2014. We expect eCommerce growth to continue to outpace the total Company as we enhance our assortment and customer engagement on this side.

In 2014 we will have a full year of this three status vendors that I just mentioned. We anticipate eCommerce to benefit significantly from key item debt. We’re very excited about the new fulfillment center in the Columbus, Ohio area that we announced last week. In response to the rapid growth in our eCommerce business we’re taking this step to ensure extraordinary service to our customers. This new fulfillment center will permit significant expansion of our shipping capacity with improved operational efficiency. We believe this is a great location in the heart of the regions in which we operate.

While still in the early stages of our localization strategy we continue with this initiative by tailoring assortments to be in synch with the local market lifestyle. We’re finding areas in our merchandise assortment where there is both a void and an opportunity to manage current vendors differently. For example we have found 20 locations that we consider extreme cold doors. Therefore, we will build up inventory levels in that product and add more extreme cold casual type product to meet that needs.

We expect this strategy to unlock meaningful store productivity growth. Our marketing efforts will continue to be customized to the local market as will the visual presentation to fit the local lifestyle and even pricing where appropriate. We believe we can do a better job maximizing our day in and day out business with our marketing effort. We want to enhance our existing events with stronger call-outs and what we believe will be important to the customer.

While we will continue to drive coupons, used coupons to drive the lion share of the business, we also know our customers recognize the deeper value offered business Bonus Buys and Door Busters. Therefore we’ll be utilizing these aggressively in our marketing going forward. Starting with our President’s Day event we have begun personalizing emails to customers, instead of only speaking broad vendor offers we’re now highlighting specific offers to individual customers based on their prior purchase behavior.

We’re also testing reducing direct mail context to customers that are more email responsive, as well as stepping up our efforts around very target of reactivation and prospecting direct mail. We will continue to adjust our use of newspaper advertising by market to optimize our return as well. Our omni-channel efforts are on full swing to ensure our customer can shop wherever, whenever and however she chooses.

Our IT area continues to provide opportunities for sales growth. This spring in introducing our let us find it software in our stores, we’re linking our POS ordering system with real time inventories, we believe this is the second largest opportunity in driving sales growth after eCommerce. Additionally, we will be utilizing RFID technology in our stores, starting in our shoe department to confirm that all shoe styles are on display. We tested this last fall with dramatic results and we’ll expand this technology to other merchandise areas as well.

We expect to continue to improve our gross margin rate while gaining traction in all of our initiatives. So many of them that I have spoken about will benefit gross margin clearly in the clearance centers, lowered inventory levels and better merchant reporting just to name a few. Expense efficiency will continue to be given strong attention. We’re working with the consultant to identify opportunities for new operating efficiencies and improvements that will ride some savings in 2014 but more in subsequent years.

In conclusion, we have made great strides in executing several strategic initiatives and will continue to focus on smarter assortments, driving our eCommerce business, revising our marketing strategy and moving forward with our localization efforts, all with an aim on improving our store productivity. We will continue to manage our inventory with great discipline and identify further opportunities for operating efficiency and cost reduction. We believe we have a strong foundation to build upon in delivering profitable sales in the years ahead.

I will now turn the call over to Keith.

Keith Plowman

Thank you Brendan and good morning everyone. Beginning with the results of our last quarter fiscal 2013 the fourth quarter delivered very disappointing results as compared to the prior year and our expectations. And it’s no surprise that the lower comp store sales was the driver of the decreased adjusted EBITDA dollars. We believe that weather was a primary driver of the comp declines every store in our footprint was negatively impacted by weather during the December, January timeframe and from our calculations approximately 20% of our store base was impacted in excess of 25 days in this period and another 50% was impacted between 10 and 25 days in this period.

As Brendan noted, we felt good about our business through mid December and then the back half of December and January was a very difficult period reflecting the weather impact. When we look at the drivers of our EBITDA margin we strengthened three of those drivers. Other income reflecting strong private label credit card performance and increased delivery revenue from increased eCommerce shipments increased the dollars and the percent of sales. Our gross margin rate increased 7 basis points above the prior year’s rate and the inventory levels were reduced by 5% to 6% compared with the prior year-end despite the difficult sales environment.

Our SG&A dollars decreased approximately $16 million from the prior year and excluding the 53rd week in 2012 our SG&A dollars decreased approximately $5 million to $6 million from the prior year period. While we improve these three EBITDA drivers in the fourth quarter this was not enough to overcome the comp store sales decline of approximately $70 million or 7.3% down as a subsequent decline in gross margin dollars. In summary of our fourth quarter results we are pleased that we have improved the EBITDA drivers just mentioned, but disappointed with the sales and bottom-line performance in our quarter. Our adjusted EBITDA dollars decreased approximately $90 million as compared with the prior period.

Turning our attention to full year results fiscal 2013 was a rollercoaster ride of results. Our first quarter was strong and we were excited about the year, then the second quarter and into the third quarter the consumer confidence dropped, gas prices elevated and there was fiscal cliff concern all presenting challenges for retail in general. As we moved through to the end of the third quarter we saw improvement in sales and the consumer confidence, but the fiscal cliff was addressed and gas prices moderated.

As discussed during our fourth quarter we were pleased with the performance through mid-December but then disappointed with the balance of the year. Full year comp sales reflecting primarily the impact of the second quarter down 6.4% and the fourth quarter down 7.3% in sales dropped 4.2%. The decrease in adjusted EBITDA dollars was caused by lower comp store sales but the improvements made to the other drivers enabled us to mitigate the drop in our adjusted EBITDA to approximately $3 million as compared with fiscal 2012.

Again looking at the EBITDA margin for the year we strengthened three drivers similar to the comments for the fourth quarter other income performance improved. Our gross margin rate increased 34 basis points above the prior year’s rate and we did this while managing our inventory very well. Our SG&A dollars decreased approximately 37 million from the prior year and excluding the 53rd week in 2012 our SG&A dollars decreased approximately $26 million to $27 million from the prior year. Thus for the year we improved the incremental benefit of comp store sales.

In summary our full year 2013 results were below our goals and expectations, but we are pleased that we made meaningful improvements in the EBITDA drivers just discussed. We are focused on improving our comp store sales performance and we look forward to more feasible weather in the spring and driving sales through the initiatives that Brendan mentioned.

Some notable points from fiscal 2013, balance sheet inventory at the end of the fourth quarter decreased approximately 6.4% compared with the prior year. Interest expense decreased 14.3 million to 68.6 million compared with 82.8 million in the prior year period which was a key driver in the improvement to our EPS which was a loss of $0.19 per share, an increase of $0.97 per share to the prior year period. Adjusted remove asset impairment EPS was $0.13 income this year versus a loss of $0.85 per share in 2012.

Our private label credit card penetration grew to 47.3% versus 45% in the prior year. At the end of the fourth quarter our excess borrowing capacity under our revolving credit facility was approximately 419 million and our debt decreased by 36.6 million as compared with the end of the fourth quarter of fiscal 2012 primarily reflecting our inventory reduction and operating cash flow.

In December we entered into an amendment to our existing $675 million asset base revolving credit facility that was scheduled to mature in March of 2016. The amendment extends the maturity date of the commitments under the facility to December 12, 2018 and it provides interest rate reductions and generally favorable revisions regarding the facility requirements.

As Brendan mentioned we are in the early phase of an expanse initiative with a third-party partner. The estimated benefit for fiscal 2014 is approximately $5 million and we estimate in later years this to exceed $30 million on an annual run rate basis. One-time costs associated with this initiative are being constructed and are expected to be incurred in fiscal 2014 and 2015. This initiative will touch upon all areas of our Company’s operations with the goal to reduce cost, increase efficiency and improve outputs.

The final point is the expense initiative just discussed does not include the benefit of the new centralized eCommerce fulfillment center we announced last week. During 2014, we expect this fulfillment initiative will add some cost to our operating structure but beginning in 2015 we believe the consolidated DC fulfillment center will improve efficiency and reduce cost beginning at a base of approximately $5 million and then growing to a number approximating $10 million on an annual basis.

Moving to some other housekeeping data, fiscal 2013 capital expenditures before netting external contributions were 77.3 million compared with 73.8 million for the prior year period and the components of our debt at the end of fiscal 2013 were as follows. Senior secured notes due 2021, 350 million, senior secured notes due 2017, 57 million, revolving credit facility, 185 million, CMBS mortgage facility 219 million and capital leases and other $54 million for a total debt of $865 million. Our outstanding letters of credit were approximately 4 million.

Regarding our fiscal 2014 guidance, we see adjusted EBITDA as defined in Note 1 of our press release in the range of $170 million to $180 million inclusive of increased performance incentives of up to approximately 20 million. Income for diluted share in the range of $0.40 to $0.70 in cash flow is defined in Note 2 of our press release in the range of 20 million to 30 million.

Some key underlying assumptions reflected in our full year guidance, our comparable stores sales in the range of 1% to 3%, this reflects weather-related recovery which we estimate to be somewhere in the range of 1% to 2%, eCommerce growth of 1.5% to 2% and other key initiatives such as our key item rationalization, mobilization rollout and order management growth.

Our gross margin rate in the range of improvement of 10 to 30 basis points over 2013, SG&A expense permitting performance incentives as percent of sales down 10 to 50 basis points as compared to 2013 and including the potential increased performance incentives of up to approximately 20 million we expect SG&A to be flat to up 20 basis points as compared to fiscal 2013.

Our SG&A expenses in 2014 will include incremental investments in our eCommerce IT systems and capabilities and startup costs associated with our recently announced fulfillment center in West Jefferson, Ohio partially offset by the expense efficiency initiative we just discussed. While we only provide annual guidance with a difficult February weather and the year-over-year quarterly comparisons we believe it’s important to note that we see comp growth in the stores and result in adjusted EBITDA that we are guiding to will be achieved in the second quarter and second half of the year of fiscal 2014. Our Form 10-K for fiscal 2012 will be available by April 17, 2014.

And we’re now happy to entertain any question you may have.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Edward Yruma with KeyBanc Capital Markets.

Edward Yruma - KeyBanc Capital Markets

Thanks for taking my question. Given the slow start to the quarter can you talk about your comfort level with the composition of inventory, are you seeing increased markdown pressure and did you have any residual inventory from 4Q?

Brendan Hoffman

Well, Ed, as Keith mentioned, I mentioned we are very pleased with the way our inventory ended the year as a continuation of our Q3 progress and so we entered the New Year with less carryover inventory, greatly reduced carryover inventory. Having said that to your point, it hasn’t moved through as quickly as we would have like based on slow traffic in the stories based on the weather, so we definitely have gotten a little bit more aggressive in trying to make sure we move through those units, but again we came in so much cleaner that we don’t anticipate that being a go forward issue.

Edward Yruma - KeyBanc Capital Markets

Got it. And how should we think about sensitivity on the free cash line to potential comp upside should you guys exceed comp range in kind of the different scenarios of free cash? Thanks.

Keith Plowman

Ed, this is Keith. Based upon what we’ve done as I mentioned on the EBITDA drivers, we feel pretty good about the incremental dollars. Our private label credit card penetration has increased substantially. We are getting additional revenues as we’ve increased our eCommerce, so we believe that those will be beneficial and then when you look at what we’ve done in controlling the SG&A cost and some of the opportunities we believe to have to get that under control and get to be more efficient look forward, as well as the gross margin rate that we’re in continuing take up 10, 20, 30 basis points. All those are going to make the incremental dollars that we get off of sales much stronger. So, we need to drive the top-line, we think we’re controlling all the factors that are underneath the sales line to grow our EBITDA and we think we have ourselves well positioned to go forward.

Edward Yruma - KeyBanc Capital Markets

Great. Thanks so much.

Operator

And we’ll take our next question from David Glick with Buckingham Research Group.

David Glick - Buckingham Research Group

Yes. Good morning, thank you. Keith, just a clarification on Q1, I think what you’re saying as you expect the EBITDA dollars to be down and I just wondered what -- I assume you expect to be EBITDA positive for the quarter and any sense on the magnitude of the decline in February and are you expecting sort of March-April combined and others in Easter shift to be in line with the balance of the year or in terms of your one to three or you looking, are you thinking about a more conservatively based on the comparison?

Keith Plowman

Alright David, trying to dissect that a little bit, first of all, I’m not going to go into specifics between the quarters, we stay on an annual basis but you definitely hit upon the point and I think Brendan noted the term materially impacted. February definitely hit us hard. We were down 6-4 in the second quarter. We were down 7-3 in the fourth quarter. We were down 2-8 in third. We’re up 1-2 in the first quarter of last year. So, the first quarter is going to be a more difficult compare for us and certainly the weather that we had in February is going to make it a much more difficult month. We see the opportunity certainly in EBITDA as we go forward we’d be in the second quarter through the end of the year, we don’t see as much opportunity here in the first quarter just because of a difficult start, as well as a tougher compare on a year-over-year basis.

David Glick - Buckingham Research Group

Okay, thank you. And then Brendan I’m not sure you can answer this question I mean you can certainly defer, but as the Board thinks about a successor, I assume this is something that the goal is to have that individual in place by this point next year and wondered if there are any kind of guidelines or parameters that they’re looking in terms of whether someone with existing CEO experience, department store experience, kind of how the Board is thinking about that if you can comment on that?

Brendan Hoffman

No I can’t go too deep but the way I think it’s fair to say the Board wants to get the best qualified candidate that’s why we have made the announcement today so that the search firm has complete freedom to be candid with the appropriate candidates and in short that we get the best possible candidate looking at all the different backgrounds.

David Glick - Buckingham Research Group

Thank you very much. Good luck.

Brendan Hoffman

Thanks, David.

Operator

And we’ll talk our next question from Michael Exstein with Credit Suisse.

Michael Exstein - Credit Suisse

Hi. Sorry about that. I had to get off from mute. Could you just sort of give us an update you opened a couple of new stores this past year and I know one was in new market completely, could you give us a sense how the Bon-Ton name is sort of transitioned to new markets and new stores?

Brendan Hoffman

Yes, well we opened up two stores. One was in Fort, Wayne Indiana and that’s a Carson’s so that really wasn’t a new market, it was more an expansion of our Indiana market. We opened up in Portland, Maine with a Bon-Ton nameplate and that was while we have some New England stores that was certainly a new market because of how far away it is from the existing stores. And I’d say candidly the results were mix we are certainly excited about that mall and what they’ve done to reenergize that mall and Bon-Ton is going to be a big part of that. But not to sound like the broken record, the weather certainly had a severe impact on judging the performance of what we could do up there. And like any new market, it takes some time to gain your customer base. I think we went in with more of a grassroots effort, preopening to try and gain some name recognition with the customers, supported some local events there. And we’re confident that will pay off and will be a solid go forward location for us.

Michael Exstein - Credit Suisse

Do you have any new locations planned for this year other than current centers?

Brendan Hoffman

Yes, we have one in Utah that we had previously announced that opens up in October at Logan, Utah.

Michael Exstein - Credit Suisse

Is that a new market?

Brendan Hoffman

Yes. I mean we opened up in Pocatello, Idaho two years ago, so it’s a few hours away from that but it’s a smaller store, 60,000 square feet and again we’re excited about what they’ve done with the mall there and think it’s an underserved market that we can perform very well in.

Michael Exstein - Credit Suisse

Well good luck to you and good luck to the Company.

Brendan Hoffman

Thanks, Michael.

Operator

And we’ll take our next question from William Reuter with Bank of America, Merrill Lynch.

Spencer Sams - Bank of America, Merrill Lynch

This is actually Spencer in for Bill. I appreciate you guys taking my questions. I was wondering if you guys could give the different buckets of CapEx for 2014?

Brendan Hoffman

Basically we’re looking about $75 million in capital included in areas of fulfillment center that we had talked about earlier, so we see that that’s part of the growth or a good portion of the growth of 70 million to 75 million that we normally spend. After that we normally see about 50% of our capital was on maintenance and we include IT in that and then another 20% to 30% is customer facing and then you have your fixture visuals, things like that that we do in the stores as well as some improvements and reconstructions.

Spencer Sams - Bank of America, Merrill Lynch

And then the IT spend both on the SG&A and CapEx side for next year is that mostly just around the new fulfillment center?

Brendan Hoffman

No. There is a lot of different initiatives. We’ve talked about reporting that we’re doing what we’re getting new reporting outflow of the merchant group and that’s part of trying to ourselves more efficient. We think we’re doing a good job there and making progress. Sterling that’s going to allows us to see inventory in a real time basis and be able to address what is happening, order management when a customer comes in the store our associates to be able to see where the inventory is, and make sure that we can satisfy that customer’s desires and wants if they’re looking for their merchandize. So we have initiatives like that that would touch in the Company in addition to what we’re doing in the fulfillment.

Spencer Sams - Bank of America, Merrill Lynch

Okay and then one last one. I think that you guys had commented previously of that eCom could reach 5% of sales. May be I missed this but where is that right now and maybe where do you think that could go?

Brendan Hoffman

It was very close to 5% just a little bit shy of that number and where we’re looking at it is this year growing to about 6% we call it 6 plus percent.

Spencer Sams - Bank of America, Merrill Lynch

Okay, thank you.

Operator

And we’ll take our next question from Grant Jordan with Wells Fargo.

Grant Jordan - Wells Fargo

Good morning. Thanks for taking the questions. Just wanted to a get little more color on your gross margin guidance. Obviously you guys did a great job in a very difficult environment this year, but looking forward to ’14 you’re estimating improved same-store sales I am surprised not the gross margin up a little bit more than what you guided to?

Keith Plowman

Well Grant, what you have built in there is that we do see improvement and as you know we did improve it in 2013 over ’12 taking up about 34 basis points. We see that continuing and we see it through the initiatives we have in place whether it be what we’re doing in the Yellow Dot process, the clearance process that we’re running through, you heard Brendan talking about inventory being down at backwards inventory, all those things will benefit us and grow the gross margin rate on a year-over-year basis. But we’re also tempering that with the substantial growth that we continue to see and are going to drive forth in the eCommerce and the additional delivery cost that we incur when we take that merchandize and deliver it to the consumers, so the net of all that is we think the 10 to 30 basis points is a realistic range for us to target in 2014.

Grant Jordan - Wells Fargo

Okay. As you build the scale on eCommerce is there a point where you think it will be little bit more in terms of margin?

Keith Plowman

Well, from the standpoint of the scale it’s going to be more comparable from the standpoint of SG&A costs and all the costs associated with supporting eCommerce, we’re starting to see that already. We’re starting to see the scale it does matter and does help us and we’re getting benefited of that as far as the operating margin, but from the standpoint of gross margin, really the scale doesn’t help the more we sell, the more cost we have. The big part is the fulfillment DC that we talked about, and that’s that $5 million as the base rate and then growing to 10 million. That’s where we’re going to see the benefit because today we ship from four different locations when we’re fulfilling orders and the same customer to get multiple packages. As we go forward and get our location West Jefferson, Ohio we’re going to be sitting to where we can ship all our fulfillment from one location, be much more efficient from the standpoint of performance, operations as well as shipping cost and that’s when we’ll start to see some reduction.

Grant Jordan - Wells Fargo

Okay, that’s helpful. And my last question, obviously there a lot of headwinds for 2013 but as you guys forecast your same-store sales to improve Q2 to Q4 what are some of the specific items that you’re basing that improvement on?

Keith Plowman

A good portion of that is weather there’s certainly in the fourth quarter weather was an impact. Hopefully as you said some of the macro headwinds, you take the second quarter through the middle of the third quarter, the consumer was concerned, the gas prices were very high, the fiscal cliff, all that. We would hope that that again also starts to moderate and gets better for us, but also eCommerce is going to be a significant portion, that’s why we’re saying we see that growing 1.5% to 2% and then the localization, key item rationalization, the sterling that we talked about in order management. Those are all items that we think can help us drive the sales to grow in 2014.

Brendan Hoffman

Yes I want to make it clear, this is Brendan, I mean we’re not sitting back here and saying it was all weather and if we just get some more benign weather things will be fine, I mean we’re being proactive, we spent a lot of time trying to extrapolate what happened in business negating the weather which wasn’t easy and really feel as Keith just listed out, we have lots of other initiatives that will drive top-line and be enhanced by getting as you said more favorable tailwinds.

Grant Jordan - Wells Fargo

Thank you.

Operator

We’ll take our next question from Mary Gilbert with Imperial Capital.

Mary Gilbert - Imperial Capital

Good morning, in talking about some of the cost savings, you’ve already baked it into your guidance for this year on the SG&A line, so is the 5 million net of some sort of cost, et cetera, so going forward you anticipate getting up to a run rate of about 30 but will there some offsets to that number and what timeframe would we get to that 30 and what would incorporated in that?

Brendan Hoffman

Okay, first off, the 5 million you had correct it’s for this year, we have estimated rough number of one-time costs I will be clear to say we may need to adjust that number as we go forward, that number could grow or could decrease from what we have estimated, so that 5 million is a number that we feel comfortable with but certainly could change a little bit. The 30 million as we go forward will also have some one-time costs associated with it, we see that becoming more realized in 2015 although possibly not all in ’15 and then ’16 as we go forward, but that is an annual run rate that we see from this initiative that we will be to the point where we’re taken and improve the performance of the Company, at the same point we got $30 million realized on an annual run rate basis with no adjustments to that.

Mary Gilbert - Imperial Capital

No adjustments, so there’s not going to be an offset to that, because of other cost increases, the billion…

Brendan Hoffman

I think we will certainly see how business is developing over the course of the year and if we think there’s an opportunity to reinvest those dollars to drive sales and accretive EBITDA, we won’t hesitate to do that, or if we continue to get some headwinds and need to drive down expenses just on the raw dollars we’ll have the flexibility to do that as well, so I think that’s more of wait and see as we certainly hope to be able to reinvest those dollars to further drive business and EBITDA.

Mary Gilbert - Imperial Capital

Okay. And then with regard to other income, what portion of that, of the number this year, I think it was about 64 million, what portion represents the non-cash component of credit card income in other words like that amortization number? And then what portion represents dip card breakage?

Brendan Hoffman

I think in round terms you’re looking at about $6 million is the amortization on a round basis and the dip card breakage is a little over $2 million.

Mary Gilbert - Imperial Capital

Okay. And then how should we look at average borrowings going forward?

Brendan Hoffman

I think you can keep average borrowings on the revolving credit facility in about 200, say somewhere between 200 million and 225 million.

Mary Gilbert - Imperial Capital

Okay. And then sorry one last question, how should we look at changes in working capital this year in terms of some of the initiatives that you have thought you manage inventories lower year-over-year, how would we look at that this year?

Brendan Hoffman

I think we feel good with our inventory levels as we said Mary, what I think you will see as we are going to be more focused on driving top-line sales and getting the sales up versus trying to pull the inventories down further than where they are today. So, we will continue to balance that between the sales performance and where we think we have the appropriate inventory and being very focused on backwards inventory which is the inventory we really want to have down that we don’t feel drive the sales volume that current merchandise does.

Mary Gilbert - Imperial Capital

Okay. So, it will be an increase?

Brendan Hoffman

No I am not saying it will be an increase I am saying that we will manage it based upon what we see going forward, if we see opportunity to bring it down from efficiencies, we will do so but we will also make sure we have the appropriate inventory level, so right now assume that our numbers of the inventory stay somewhat flattish, could be slightly up, could be slightly down.

Mary Gilbert - Imperial Capital

Okay, that’s helpful. Thank you very much.

Brendan Hoffman

You are welcome.

Operator

And we will take our next question from Karru Martinson with Deutsche Bank.

Karru Martinson - Deutsche Bank

Good morning. Just wanted to understand the EBITDA guidance for the year a little better, I mean you listed out a number of, I think of the things I think are going in your favor in terms of the private label credit card penetration, the cost savings 5 million eCommerce and easier comps in the latter part of the year here. If I just take that 5 million to the 166, I am already at the low-end of your guidance. I think you started 2013 at 180 to 200. So, is it competitive pressure or is just first quarter really that challenged here that we got to kind of build that factor in?

Brendan Hoffman

I think where we are is I think we have a transitional year in what we are doing and I think as you look at it and we have made the point of talking about the performance incentives. There’s substantial dollars that we have build in there as we go towards our guidance range. We feel it’s very important for our associates, for the Company to get its foothold here strong as we go forward. 2013 was a difficult year. So, what we build here in ’14 is what we think is an aggressive but achievable plan. We feel good about the parameters we have put out there and we feel based upon that, that the performance incentive should be build into the plan as we have discussed.

Karru Martinson - Deutsche Bank

Okay. And when we look at the free cash flow guidance that does not include any kind of one-time cost with the cost savings initiatives correct?

Brendan Hoffman

That is correct.

Karru Martinson - Deutsche Bank

And, are there any cost associated with your pending departure?

Brendan Hoffman

No, nothing material no.

Karru Martinson - Deutsche Bank

Okay. And then just in terms of the competitive challenges out there, obviously your larger competitor has been re-engaged and the consumers still kind of feel soft, I mean have you seen any change in the cadence of promotions as we go forward here?

Brendan Hoffman

Well yes I think as we talked about in the last quarterly call, most retailers have soft Q2 and so we saw from everyone an increased frequency of promotions and increased frequency of the advertising of the promotions. And so that was noticeable through the end of the year. As I said in the Q3 call, we had improved our comps to the point where we felt good about the traffic that was being driven into the malls from the competitors and being able to convert that traffic that came to the mall. I mean obviously it’s hard to read the last few months with the weather, but we still are hopeful that we can get it more engaged, customer coming to the mall and are excited about the opportunity to convert them with some of our own initiatives, as well as the changes in our frequency and media spend to try and attract more customers. So, hopefully it will end up being a positive.

Karru Martinson - Deutsche Bank

Thank you very much guys. I appreciate it.

Operator

And we will take our next question from Carla Casella with JP Morgan.

Carla Casella - JP Morgan

Hi. I am just trying to understand on the, I mean the sales were a little softer in the second and fourth quarter, margins were impressively better and inventory was clean but the [indiscernible] so was is it the clearance centers that actually help or did you just better planned inventory to sales or you have a delay receipts of merchandise?

Brendan Hoffman

No. This was an absolute continuation from what we talked about in Q3 with our inventory levels coming down. We knew that the inventories had gotten bloated over the few years without any sales to show for it. So, and this was actually something we started a year ago in terms of bringing the inventory levels down. We didn’t really get credit forward in the first half of the year because of the sales decline in Q2, but we started to see real movement in the back half of the year and as it turned out it was fortuitous because of the sales drop that we were able to proactively been so clean. But I think it’s something as Keith just mentioned, we will manage going forward. It doesn’t necessarily mean we will have a big drop in inventory levels in fact we probably will see them being flat going forward and just being able to strategically maneuver the composition of those inventory levels. But it’s certainly one of the things we are most proud of was the way our merchants managed the inventory levels down in a difficult environment.

Carla Casella - JP Morgan

That’s very impressive. But also on the clearance centers, how do margins compare from the clearance center versus regular store on a gross margin perspective?

Brendan Hoffman

Well, the clearance centers are cost avoidance so their gross margin is fairly irrelevant because it’s allowing us to clear inventory at a improved rate than what we were doing previously when we used to clear it directly in the full line stores. So I mean they still run at a negative gross margin but a far less negative gross margin than what the alternative is. So that’s why we look at these as positively accretive because they’re better than the alternative option. We don’t generally direct purchase for these stores, I mean we have had occasional buys that we have done in strategic categories but that would really be the way to get these to be margin positive and maybe that is something we do down the road but for now they are strictly meant as a cost avoidance and we’re quite pleased with the way they are performing.

Carla Casella - JP Morgan

It’s great. And then just looking at fourth quarter the costs in the quarter, were there -- sometimes during first quarter we’ll see a reversal for compensation accruals? Was there any of that this year in fourth quarter any usual accruals or reversals?

Keith Plowman

No, unfortunately based upon what happened in the second quarter and the third quarter while it improved towards the end it was still not a good quarter, I mean it was 2.8% down. When you look at the numbers there was very little adjustment that needed made in the fourth quarter. It was a matter of we needed to drive performance in the fourth quarter to generate the levels that we needed to accrue the performance.

Carla Casella - JP Morgan

Okay, great. And then have you disclosed what the fulfillment center costs, additional fulfillment center costs were in 2013 for the center that in progress, I guess for these will be cost that had time to yet being leveraged?

Keith Plowman

Well no, to be clear here now in the fulfillment center we just put that press release out, this was a build to suite site that is being constructed in West Jefferson. It’s starting construction here in the spring of ’15 to be completed in the fall of ’15 and then we will start moving in towards the end of this year, so we’re moving in ’14 towards the end but we did not have anything in 2013 whatsoever.

Carla Casella - JP Morgan

Okay. And is that included in your guidance then for ’14 or would that be one-time?

Keith Plowman

It is included in our guidance.

Carla Casella - JP Morgan

Thank you.

Brendan Hoffman

Just to clarify Keith, the construction is starting in the spring of ’14.

Keith Plowman

Yes, I’m sorry if I didn’t say that. Yes spring of ’14.

Operator

And we’ll take our next question from Christine McDuffie with Goldman Sachs.

Christine McDuffie - Goldman Sachs

My questions have been answered thanks.

Operator

And we’ll take our next question from Colleen Burns with Oppenheimer.

Colleen Burns - Oppenheimer & Company

Hi, thanks. I guess first is there any updated color you can provide around JCPenney and whether you saw any impact from improved performance there?

Brendan Hoffman

Nothing more than I alluded to a few questions ago where back in Q3 we saw an uptick in traffic to the malls and felt that helped us as we converted that customer. But then with the weather it became impossible to read. Clearly, I mean others have increased their frequency in their advertising and promotions and we’ve done likewise. But again if it drives more traffic to the malls, we think that will be a net positive.

Colleen Burns - Oppenheimer & Company

Okay, thanks and then you commented on some merchandized changes you’re making. Where are you in the traditional versus contemporary mix and where do you see that in 2014?

Brendan Hoffman

It’s pretty well balanced now, I think we continue to seek its own level sometimes those buckets are what we define them and to the customer they are far less obvious. So we have tried to not get so caught up in the way we bucket them but rather the way the customer shops. And part of the localization strategy is to allow this to be different by store and region. We now have seven regional planners that are out living in these regions and starting to provide back information to the merchants in the planning organization that we think will be extremely useful as part of our localization efforts. And so wherever the traditional versus contemporary or better versus moderate ends up falling out, I think could be very different by region and location, and that’s what we’re aiming for going forward rather than trying to force it from the top down.

Colleen Burns - Oppenheimer & Company

It sounds like they’re still in the early innings in the localization effort right and you still have a couple of more years before that fully plays out, is that correct?

Brendan Hoffman

Well I think it’s a very -- as I say here it’s a very easy concept to understand, it’s a tougher thing to execute to. So I think we’re right on-track to your point in the early innings, a lot of it was getting people in place in the field. A lot of it was giving the merchants the tools i.e. through reporting that is needed and we’re about halfway through that effort. And then was developing the processes that we’ve discussed in the past. And this season without a doubt we will start to see benefits from it and start to get reads from it. But we think we have a long way to go which I think is exciting because it means there is longer term opportunity. I think as I mentioned earlier some more shorter term impacts will be better going after key items with more depths and less breadth. But I think that’s something that is easier to impact and get some short-term wins while the localization percolates in the background for a more long-term sustainability.

Colleen Burns - Oppenheimer & Company

Okay. And then just lastly just a housekeeping item, it looks like availability on the revolver is down about 100 million versus last year, is there anything unusual there?

Brendan Hoffman

Well a couple of things to note, first off in February of 2013 we acquired back 65 million of the 2014 senior notes. So that now has anniversaried at the end of February. There was about in round terms 9 million or so in costs that we incurred when we did the 2021 note issuance which would have came out of the cash. And then a bigger portion of it is just timing wise it’s the way our inventory levels go and where we do our borrowing base certificate what I will tell you is at the end of February our excess borrowing capacity is about $10 million lower than it was in the prior year so that gap has closed up now because we’ve anniversaried the 65 million buyback and the inventory levels have moderated and are somewhat flat between periods reporting period and were running pretty close to last year’s levels.

Colleen Burns - Oppenheimer & Company

Great, thanks for the additional color.

Brendan Hoffman

You’re welcome.

Operator

And we’ll take our next question from Karen Eltrich with Mitsubishi.

Karen Eltrich - Mitsubishi

Thank you very much. Can you give some color with the announced store closures by Macy’s and JCPenney, how much overlap in malls do you have with those closures and does this open the door to renegotiating perhaps lower leases going forward?

Brendan Hoffman

Well, I talk to specifically Penney’s I know we have 11 stores of their 33 I think they announced it overlapped so we’re really studying what that could mean for us more from a top-line standpoint but certainly to your point it increases our leverage with the owners and we’ll certainly continue to take full advantage of that.

Karen Eltrich - Mitsubishi

Great. And can you may be give some color on what trends you’re seeing in your home department and your furniture and also building on the merchandizing question as you look at your percentage of stores I know you’ve tried to maximize allocation of store space with regards to higher performing categories what percentage of the store base would you say you have accomplished since?

Brendan Hoffman

Well I think that’s an ongoing process I mean I think we’ve expanded things like shoes, we’ve expanded things like women’s plus size business you’ll see a big expansion now with the athletic wear and athleisure categories we talked about so I think it’s an ongoing process we’re looking to figure out how we can double expose cosmetics and different ways we can showcase cosmetics as the consumer changes her buying patterns there. So that’s an ongoing process but I think the…

Karen Eltrich - Mitsubishi

Sorry, sorry can you actually elaborate on that what changes are you seeing then in the buying patterns for cosmetics?

Brendan Hoffman

Well, I can’t elaborate too deep about it but I think it’s pretty obvious that some of the new alternatives out there are making some of the old ways it was done a little bit antiquated and while -- the base customer still wants to shop the lady behind the counter in a white jacket we recognize that other customers are looking for different ways to shop cosmetics so we’ll do experimenting with different ways we can showcase that product. In addition we had a lot of our, not a lot, we have some of our malls where because of the change in mall traffic where we showcase cosmetics which is usually at the mall door isn’t necessarily the high traffic area anymore. So I think it gives us some an opportunity to experiment with different open sale opportunities, mixing brands and categories like some of the specialty stores have done.

Karen Eltrich - Mitsubishi

Great and sorry again if you could give some color on the trends you’re seeing in both home and furniture?

Brendan Hoffman

So I honestly can’t speak too much to furniture other than we’re seeing well with some of our custom ordering we’ve really made an effort to go after that and the customer seems to be responding to that especially in our 10 furniture galleries. In terms of home, we really think home is -- owes us business this year. We had some self inflicted wounds last year with some of the way we changed around marketing to deemphasize home. Underestimating some of the traffic drivers that home brings in the door. We’re pleased to see some things such as coffee start to bounce back and that was something it was a big driver for us in ’12 but that lost quite a bit in ’13 both the machines and the pods.

Personally as a soda drinker I’m very excited to see what happens with this Cola-Cola partnership with Green Mountain because that could be a real shot in the arm for the business in holidays if they’re able to launch the new machines and the soda pods then so I think newness is always important in home. The strongest category has been luggage throughout the last year or so and so that’s again another category that we’re looking to enhance and give more space in the stores but -- and then I guess lastly tech we really deemphasized tech items last year particularly in the fourth quarter because they are such a low margin item but have realized that they are a big entry to the door and so we’ll reemphasize that category specially during promotional times of year and hope that it has a favorable effect on the balance of the story.

Karen Eltrich - Mitsubishi

Great, thank you very much for your comments.

Operator

And we’ll take our next question from Lauren Smith with Citi.

Lauren Smith - Citi

Hi this is Lauren Smith for [indiscernible] I just had one quick question. Could you talk about online traffic trends in the quarter?

Brendan Hoffman

Yes, we’re very pleased with our online traffic trends. We saw traffic going up it has -- we had a little bit of an issue at the end of January just in terms of our conversion but we felt we could -- again there were self inflicted just not being able to load the product up quickly enough but we think we have a new procedure now that will ensure that doesn’t happen again. Also as I just mentioned we didn’t have as much of a presence in tech which during that time of year is a big converter. So, we think there are things we can do better going forward to make sure that we convert on the traffic at a higher rate but we are certainly pleased with the traffic in a way that customers engage with the site.

Lauren Smith - Citi

Okay. And then -- just one more you may have said this but how much of gross margin holding in was inventory management versus mix?

Brendan Hoffman

I’m sorry, I didn’t quite follow your question.

Lauren Smith - Citi

So how margin is holding in, how much of that was inventory management versus performance of the mix?

Brendan Hoffman

When you say margin holding in, are you talking about margin improvements?

Lauren Smith - Citi

Yes, sorry.

Brendan Hoffman

Okay, alright, just I wanted to make sure I understood the question.

Lauren Smith - Citi

Yes.

Brendan Hoffman

From the standpoint of inventory I think it really was the clearance methodology the backward inventory which we’ll see more benefit going forward into ’14, it’s really how we manage the process, I don’t think I would say as much was on mix.

Lauren Smith - Citi

Okay, great.

Keith Plowman

And I think what’s important there, the clearance centers have allowed us to change the way we liquidate in store as well and quite frankly, we certainly didn’t set out with the business trending though it was to try and protect the gross margin rate, I mean we were willing to and felt we were very aggressive at trying to drive top-line sales despite the challenges. I think it just shows that we have really built a better mouse trap here in terms of the way we buy goods and get through the goods which has allowed for margin improvement even despite challenging traffic patterns.

Lauren Smith - Citi

Great, that’s all I had.

Operator

And we’ll take our next question from Hal Holden with Barclays.

Hal Holden - Barclays Capital

Great, I just had two quick ones. When you think about the 11 stores that face-off against the JCPenney closures or just generally in malls as you think of the next couple of years, I was wondering if you could take a bigger picture standpoint and talk about how concerned you are about recent mall traffic trends and the potential for them to continue declining.

Brendan Hoffman

Well, I mean it was certainly concerning this past year both in the early part of the year as Keith mentioned because of rise in gas prices, taxes, government shutdowns over the summer and then of course weather. So, we’re hoping that a lot of those headwinds subside. We’re trying to measure it better, we’ve recently put in traffic counters in a number of our stores, so we don’t have to rely just on market data but can get more specific store data. Bu again it’s something that as we’ve talked about a few times over the last few quarters that as Penney’s gets healthier hopefully they will bring more traffic to these malls we share with them and allow us an opportunity to take advantage of that as well.

Hal Holden - Barclays Capital

Great. And then Brendan a lot of the initiatives you’ve talked about are kind of multiyear initiatives going out a number of years and I know this may be difficult to answer but is there any risk with the CEO change that the Company’s strategy theoretically changes or is this kind of a Board level set for the next couple of years?

Brendan Hoffman

Well I mean, that is hard to answer, I feel very good that the management team has brought into these strategies they’re not just mine that I have to constantly preach to them, they have taken ownership on them. Likewise the Board has been very supportive of it. They’ve been part of the development of these strategies. So, I would imagine that has been out there recruiting that they will find somebody who has similar buy in but having said that of course he or she will deserve the opportunity and the freedom to make some of their own choices and I’m sure we’ll find some new opportunities as well but I wouldn’t think that the Board would be looking for somebody to make a hard pivot from the direction we’ve been going down the last few years.

Hal Holden - Barclays Capital

Great, thank you very much.

Operator

And we’ll take our next question from Todd Harkrider with UBS.

Todd Harkrider - UBS

I think there is a couple of test in your mortgage facility if I’m not mistaken when access cash will get trapped there, do you expect the cash to be trapped there for this year? Thank you.

Brendan Hoffman

I think you’re talking about the EBITDA test and we were below that threshold the 80% threshold previously, there is minimal dollars that get trapped but it really is more of timing issue, it’s for the taxes and such and the dollars get trapped there basically flow through within that year and to the point we get above the test again those dollars don’t need to be prepaid into there. So, no risk on that the 60% threshold we’ve been well above that number. So, we think at this point minimal impact going forward.

Todd Harkrider - UBS

Okay, thank you. And then on the clearance centers, can you talk about if you think of the a bigger benefit this year or less of a benefit since it’s more seen as cost avoiding thing here in all that inventory, but you also are at a better inventory level this year any help there would be appreciated. Thank you.

Keith Plowman

I think from the standpoint of we continue to see opportunity, as there Brendan talked about if the clearance process within the store themselves and then as it gets over the clearance center we just announced that we’re opening up another standalone clearance center in Morton Grove and doing very well, we’re going to continue to look at this, we think we have opportunities to open up a couple more of those locations as we go forward, we think that the cost of cadence as Brendan termed is good for the Company, we think it will continue to benefit the Company as we go forward and we don’t see that dissipating.

Todd Harkrider - UBS

Okay, I appreciate, I know there is -- to go I would be the first one to say you’ll be missed Brendan. Thanks.

Brendan Hoffman

Thank you.

Operator

And that concludes our Q&A session. I’ll turn it back over to Brendan Hoffman for any closing remarks.

Brendan Hoffman

Thank you for your questions and your interest in The Bon-Ton. We look forward to speaking with you about the financial results of our first quarter 2014 on our conference call in May. As a reminder, we will be presenting at the Bank of America, Merrill Lynch 2014 Consumer and Retail Conference tomorrow. Our presentation is at 9:40 in the morning Eastern Time and will be webcast at bonton.com. Thank you again.

Operator

And that concludes today’s conference call. We appreciate your participation.

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