Bon-Ton Stores' CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug.18.11 | About: The Bon-Ton (BONT)

Bon-Ton Stores (NASDAQ:BONT)

Q2 2011 Earnings Call

August 18, 2011 10:00 am ET

Executives

Byron Bergren - Chief Executive Officer, President and Director

Joseph Teklits - Senior Managing Director

Keith Plowman - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Anthony Buccina - Vice Chairman and President of Merchandising

Analysts

Karru Martinson - Deutsche Bank AG

William Reuter - BofA Merrill Lynch

Grant Jordan - Wells Fargo Securities, LLC

Leah Hartman - CRT Capital Group LLC

Trey Schorgl

Edward Yruma - KeyBanc Capital Markets Inc.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's Bon-Ton Stores Inc. Second Quarter 2011 Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. And now I would like to turn the conference over to Joe Teklits from ICR. Please go ahead, sir.

Joseph Teklits

Okay. Thanks. Good morning. Welcome, everybody, to Bon-Ton's Second Quarter Fiscal 2011 Conference Call. This morning, Mr. Bud Bergren, President and CEO; Mr. Tony Buccina, Vice Chairman and President of Merchandising; and Mr. Keith Plowman, Executive Vice President and Chief Financial Officer, will host the call.

You can access a copy of the earnings release on the company's website at www.bonton.com or by calling (203) 682-8200.

As a reminder, the statements contained in the conference call which are not historical facts may constitute forward-looking statements within the meanings 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, all of which are described in the company’s filings with the SEC.

With that, I'll turn the call over to Bud Bergren.

Byron Bergren

Good morning, and thank you for joining us. I'll begin with some general comments on the second quarter and the first half of 2011 and then touch upon our perspective regarding the remainder of the year. Keith will provide details on the second quarter and update our guidance and assumptions for 2011. Tony will discuss the quarter's merchandise results and the merchandise initiatives for the remainder of the year. After that, I'll make some closing remarks, and then we'll be able to address your questions.

During the second quarter, we improved our net loss by $0.13 per share through a reduction of SG&A, interest expense and in addition to a favorable tax benefit. While our comparable store sales and gross margin did not perform to the desired levels, we believe the adjustments we have made to our merchandise assortment will yield improved performance in the second half. Specifically, we expanded our strong-performing assortment of updated and better fashion and scaled back our slower-selling traditional apparel. In addition, the introduction of new brands, John Bartlett in our men's division and Mambo in our young men's and boy's division, both exclusive to us, are well aligned with our customer preferences. And we are enthusiastic about these launches.

We also completed renovations to 17 stores, increasing square footage dedicated to our growth businesses, especially shoes, which we believe will drive improved sales results. Tony will go into more detail about our merchandise initiatives going into fall.

Our second quarter results include the following: Comparable store sales decreased 1.5%. Our best-performing markets were Detroit, Des Moines, Minneapolis, Omaha and Buffalo. Our softest market was Eastern Pennsylvania. We generated outstanding growth in our e-commerce business. Sales were up 64% in the second quarter compared to the prior year period. Penetration of our own credit card sales increased in the second quarter over the prior year period.

During the quarter, we announced plans to remodel our location in Southridge Mall, Greendale, Wisconsin, to be completed in the summer of 2012. As a reminder, we are opening 2 new stores in November of this year. We continued to control our SG&A expenses, resulting in a reduction as compared to the prior year period.

Let me discuss my perspective of the remainder of the year. We've taken significant steps we believe will benefit sales, initiatives our customers are already -- are responding to already, such as the ones I mentioned earlier. I also see opportunities in the following areas: businesses such as cosmetics, ladies updated sportswear and shoes; our differentiated and exclusive product, which includes further development of our private brands; and we continue to explore new and exclusive lines like Bartlett and Mambo to distinguish us in our markets.

Also, our key item program, including the Incredible Value Program, and the development of a younger-attitude customer with new, updated merchandise brands. Also, growth in e-commerce by at least 1% of our total company sales each year. We've tailored our merchandise assortments by store and expanded our store planners. We've reallocated square footage in our stores, expanding and emphasizing growth businesses both with assortments and visual enhancements. Also, expansion of our digital advertising, which includes the emerging media channels, mobile, e-mail and text, to reach our customers her way. And our initiatives called Customer First will put new focus on our customers' shopping experience.

As I mentioned previously, we recently completed renovations to 17 locations, out of which we designated 7 as pilot stores. Based on customer surveys and focus groups, we identified initiatives and opportunities that are our road map to grow our business and provide our customers an exceptional shopping experience. For example, customers will see new brands, styles and assortments on our selling floor. And additional customer service training sessions are being conducted for both management and all other associates. State-of-the-art kiosks are being installed in 12 stores that will allow our customer to access her expanded online merchandise assortments, a virtual endless aisle. We will monitor the successes of these initiatives and will adjust our strategies accordingly.

Next, I would like to update you on sourcing and costs. We instituted price increases in spring of 2011 to reflect cost increases of approximately 5% to 8%. We found some price resistance in basic commodity products while we saw little impact on price increases on fashion merchandise. We will be increasing prices in early fall 2011 in fashion merchandise to offset the 18% to 15% expected increase in cost. Our pricing strategy consists of increasing prices on fashion merchandise and holding select key items to last year's prices.

As far as spring of 2012 pricing outlook, cost pressures have moderated, and cotton prices have dropped sharply from spring '11 highs. Chinese domestic demand has slowed, and factory production is down in response to U.S. and Europe demand. We expect some cost reductions beginning late fall 2011 from current levels, and we expect this to continue going into spring of 2012.

In conclusion, we will monitor the macroeconomic environment as we enter the second half of the year. We cannot ignore all the issues going on in the world, so we will remain cautious but optimistic. We believe in the strategies we have in place and feel confident they will benefit sales performance in the second half of the year.

And with that, I'd like to turn over the call to Keith to review the financials. Keith?

Keith Plowman

Thank you, Bud, and good morning, everyone. I will review our financial results for the second quarter and then update our full year guidance and assumptions for 2011.

Some notable items in the second quarter. First, EBITDA, defined as earnings before interest, taxes, depreciation and amortization, including amortization of lease-related interests, decreased to $15.6 million as compared to $21.3 million in last year's second quarter. A reminder that for a reconciliation of EBITDA to net loss, please refer to our earnings press release.

Second, we improved our net loss from $33.7 million to $32.3 million, reflecting lower selling, general, administrative and interest expenses and a favorable tax benefit.

Third, at the end of the second quarter, our excess borrowing capacity under our revolving credit facility was approximately $386 million, which compares well with $391 million available at the end of the prior year second quarter, particularly in light of a voluntary prepayment of the $75 million second lien term loan.

And fourth, our total debt levels were approximately $63.4 million or 6% lower compared with the prior year period. Our lower debt levels and decreased borrowing rates have allowed us to reduce our interest expense as compared with the prior year by $5.4 million in the second quarter. We believe these efforts will continue to benefit our capital structure.

Details of the second quarter are as follows: Comparable store sales decreased 1.5%; total sales decreased 2.2% to $595.5 million; other income was $13.8 million compared with $14 million in the second quarter of 2010; gross margin dollars decreased $9.9 million to $221.6 million; our second quarter gross margin rate decreased to 37.2% of net sales compared with 38% in the prior year period, primarily reflecting increased net markdowns due to the acceleration of the markdown cadence to address slower-selling spring merchandise; SG&A expenses decreased $4.4 million to $219.8 million compared with $224.2 million in the second quarter of fiscal 2010.

The improvement in the SG&A dollars reflects cost controls, a favorable insurance receipt and reduced incentive compensation accruals, which were partially offset by increased spending to invest in marketing, private brands and e-commerce. The SG&A expense rate for the second quarter was 36.9% compared with 36.8% in the prior year period. Depreciation and amortization expense, including amortization of lease-related interests, decreased approximately $200,000 to $27.4 million compared with $27.7 million in the second quarter of fiscal 2010.

Net interest expense decreased $5.4 million to $22.8 million compared with $28.2 million in the second quarter of fiscal 2010. The decrease reflects reduced borrowing levels and lower interest rates as a result of prepayment of our second lien term loan as well as the amendment to our revolving credit facility.

An income tax benefit of $2.3 million, which includes a $3.2 million reclassification from shareholders' equity associated with interest rate swap contracts that expired in July of this year, was recorded in the second quarter compared with the $804,000 benefit recorded in the prior year period.

Our net loss was $32.3 million or $1.78 per diluted share compared with a net loss of $33.7 million or $1.91 per diluted share for the second quarter of fiscal 2010.

Moving to the first half of the year. Comparable store sales decreased 1.4%, and total sales decreased 1.9% to $1,245.4 million. Other income was $28.4 million compared with $27.9 million in the first half of 2010. Gross margin dollars decreased $26.3 million to $452.2 million. Our year-to-date gross margin rate decreased to 36.3% of net sales compared with 37.7% in the prior year period.

SG&A expenses decreased $10.3 million to $441.8 million compared with $452.1 million in the first half of fiscal 2010. The SG&A expense rate for the spring season was 35.5%, which compares favorably with 35.6% in the prior year period. The decreases reflect the factors we discussed for the quarter.

Depreciation and amortization expense, including amortization of lease-related interest, decreased $1.9 million to $53.1 million compared with $55 million in the prior year period.

Interest expense decreased $10.6 million to $46.1 million compared with $56.7 million in the prior year. A reminder that in the first quarter of fiscal 2011, we recorded a $9.5 million loss on extinguishment of debt for fees and accelerated amortization of deferred fees associated with a voluntary prepayment of the company's second lien term loan and the amendment and restatement of our revolving credit facility agreement.

We recorded an income tax benefit of $1.6 million in the first half of fiscal 2011. This compares with an income tax benefit of $187,000 in the prior year period. And our net loss was $68.3 million or $3.79 per diluted share compared with the net loss of $57.3 million or $3.24 per diluted share for the prior year period. The first quarter of fiscal 2011 included a charge of $0.52 per diluted share associated with the loss on the extinguishment of the debt.

Looking at some key ratios and balance sheet amounts. Our balance sheet inventory at the end of the second quarter increased 2.4% as compared with the prior year, including increased in-transit merchandise for the fall season. Reflecting the increased in-transit merchandise inventory, our accounts payable also increased by 5.9% compared with the prior year.

Total debt, including capital leases, was $940.5 million at July 30, 2011, compared with $1,004 million at July 31, 2010, a reduction of $63.4 million or approximately 6%.

2011 year-to-date capital expenditures before netting third-party contributions were $26.7 million compared with $20.1 million for the prior year period.

Turning to our 2011 guidance. We are decreasing our full year fiscal 2011 guidance as follows: EBITDA in the range of $225 million to $235 million and income per diluted share in the range of $0.70 to $1 per share. Additionally, our estimate for cash flow as defined in Note 2 of our press release is expected to be in the range of $50 million to $60 million.

Assumptions reflected in our full year guidance are comparable store sales in the range of flat to 1% increase, gross margin rate down 70 to 80 basis points from fiscal 2010, SG&A expense as a percent of sales flat with or slightly below fiscal 2010, an effective tax rate of 38%, capital expenditures not to exceed $70 million net of external contributions and an estimated 19.5 million to 20 million average diluted shares outstanding.

Also note, as discussed in our conference call, the provided guidance does not reflect the potential income tax benefit of reducing or removing the valuation allowance recorded for deferred tax assets in fiscal 2008. If the company achieves results within the provided fiscal 2011 earnings per share guidance range, a favorable adjustment to the valuation on -- valuation allowance on deferred tax assets is expected.

We will continue to control expenses, capital and inventories, but we are also very focused on opportunities to grow top line sales and benefit gross margin dollars. Our Form 10-Q for the second quarter of fiscal 2011 will be available around September 8.

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

Anthony Buccina

Thank you, Keith. Our sales performance did not meet our expectations. Warm weather merchandise did not perform well throughout the second quarter and accounted for the majority of our decrease in our comp sales. And while the customer responded well to our new receipts and updated styles, traditional moderate merchandise struggled for the quarter. Our fall merchandise mix is significantly shifted to reflect this preference, and we expect to deliver positive comp sales for fall.

Now some second quarter details. By category, our best-performing businesses were hard home, better missy sportswear, better men's sportswear, cosmetics and fine jewelry. Our fashion watches and luggage also continued their strong growth. Hard home was driven by small electrics, coffee in particular. Better merchandise continued to have improved trends versus moderate. Customers continue to love all the new technology in the cosmetic treatment lines that’s giving great top line. Fine Jewelry continues to grow, and we have more opportunities in the fall. E-commerce had another strong quarter with a double-digit growth. The increased inventory and expanded SKU offerings continue to drive the online business. Our IVP, Incredible Value Program, sales were up double digits and the penetration to total sales increased in the second quarter. The weakest areas in the second quarter were furniture, junior's, children's and men's furnishings.

Transactions in the second quarter were down 6.8% compared with the prior year period. The average retail transaction was up 5.3%. Gross margin rate for the second quarter was 37.2% versus 38% in the same quarter last year. We aggressively took markdowns to clear seasonal merchandise, which enabled us to maintain a current inventory position and get ready for the fall season.

Aged inventory is in good shape. We have more inventory in the 0 to 180-day category than in the prior year period and less inventory in all categories greater than 180 days. Retail inventory on a comp store basis was up 1.5% versus the end of July last year. We continue to fund our growth areas of e-commerce, private brand, shoes and cosmetics.

Although clearance inventory was up, it has decreased, and the sell-throughs improved in July.

Private brand sales were down slightly for the second quarter. Penetration was 21.2%, an increase over the prior year period. The margin rate continued to be greater than the total company.

Our best-performing private brands were Relativity Career and Casual, Kenneth Roberts, Paradise Collections, Victor Alfaro, and Missy Ruff Hewn. Our weakest labels were Studio Works, Intimate Essentials and Miss Attitude. The moderate traditional labels had the softest sales trend and the updated labels continued to get stronger.

Franchise businesses, those that we call our growth categories, grew faster than the total store and had positive comps. Cosmetics and moderate updated sportswear in Missy, women's and petites had the best comp sales of the franchise businesses.

Our storewide key item program penetrated at 29.2% of the total in the second quarter, and that is within our target range for key items of 25% to 30%. Overall, product differentiation was 35.2% of total store for the second quarter. Private brand accounted for over 60% of the differentiated merchandise.

Looking ahead to fall. Here are some of the moves that we made. We have shifted fall receipts out of moderate traditional areas into more updated merchandise. The areas we were able to accomplish this in the second quarter were some of our best performers, such as better sportswear, moderate updated sportswear and updated shoes. Our better areas are planned to grow faster than our total company in Missy, men's, shoes and handbags. We believe these changes in our merchandise mix will drive our business as we transition into fall assortments in the third quarter, both in branded and private brand areas.

Private brand sales trend should improve in the third quarter with the increased receipts in the updated labels like Relativity Career and Casual, Kenneth Roberts, Ruff Hewn. We have started to receive the new labels of John Bartlett in men's and Mambo in young men's, junior's and children's. Mambo is exclusive to us in the U.S.A. and gives us some exciting looks in our younger categories. This iconic Australian surf and street wear line will differentiate us from our competition and drive sales in our back-to-school zones.

The private brand men's moderate updated merchandise designed by John Bartlett started to arrive in our stores near the end of the second quarter. These new looks are exactly what our customers want in affordable and fashionable men's sportswear and furnishings.

Our core merchandise strategies of franchised businesses, key items and differentiation will continue in the fall. Shifting out of moderate traditional areas into moderate updated and better updated in Missy and men's sportswear, shoes and handbags will make these strategies even stronger. We have the right initiatives in place to turn our business around and have positive comp sales in the fall season. Our inventory is well positioned, so we can attack the opportunities that surface this fall.

I will now turn the call back to Bud.

Byron Bergren

Thank you, Tony. We believe we have the right initiatives in place to change our current sales trend going into the fall season. With that, we'll be happy take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question, we'll hear from Ed Yruma with KeyBanc Capital Markets.

Edward Yruma - KeyBanc Capital Markets Inc.

Questions on the current business trends. I know that you obviously had some cautious commentary about the macroenvironment, but obviously, you're guardedly optimistic for 3Q and 4Q. Is there anything you've seen over the past couple of weeks that has kind of demonstrated a slowdown in the consumer?

Byron Bergren

Nothing in particular in the change itself. I mean, what we're seeing is what Tony talked about a few minutes ago, is the change in more what the customer is buying, the trend in the merchandise that really have changed to more of a better and updated looks versus traditional and moderate. But otherwise, no major change from what's happens in the last couple of weeks or I guess what's happening to the market, too, today, Ed.

Edward Yruma - KeyBanc Capital Markets Inc.

Got you. I noticed, obviously, you've made some key changes to your inventory composition during the quarter to be more on trend. In terms of having inventory flexibility for the aggregate amount in the back half, if the consumer does slow, do you at this stage still have the ability to change your holiday buys?

Anthony Buccina

Yes. Ed, we feel that we've really made the right changes in the domestic market actually in the second quarter. We were quite pleased where we able to shift that traditional moderate business into updated and better, really, in the domestic brands. Where we fell short was really in our private brands. It takes a little bit longer lead time, and you're starting to see those changes right now coming in the third quarter. But we were happy with the changes we made in the second quarter domestically. In private brand, we, unfortunately, weren't able to change that, so the lead time was further out. We feel we've made those appropriate shifts from traditional moderate merchandise to updated in our better labels.

Edward Yruma - KeyBanc Capital Markets Inc.

Great. And final question, I noticed that you did indicate that you were not able to take up pricing in basics because of customer sensitivity. Can you give us an idea of the type of margin compression that you've seen in some of these basic businesses and how we should think about that for the back half of the year?

Anthony Buccina

Well, I think for the spring season in the basics, we said that we were up in that 5% to 8% category, where -- I'll give you a couple of instances, where we would -- took some basic commodities in some of our traditional merchandise and private brand, we took them up $1 or $2, particularly in the kid's area. We found that there was price resistance, and we had to move them back down to the pricing from last year, okay? In the domestic market where you have Levi denim in the men's area, there was no effect at all. We sold more units, and we sold them at a higher average price. What we've done is we've kept for fall the basic commodity items like turtlenecks and scrunch necks, we kept them at last year's prices, and we passed on increases where we felt we could get them in more of the fashion merchandise.

Operator

And we'll move on to Michael Exstein with Crédit Suisse.

Trey Schorgl

This is Trey Schorgl in for Michael Exstein. We were just wondering if you could maybe give us some direction on what depreciation and amortization may look like in the back half.

Keith Plowman

Yes. I think -- and, Trey, this question had come up in the first quarter, and we still feel confident in what we said at that time. In round terms, you could take the first quarter run rate, and we annualized that out or just multiply it by 4. That's what we'll end up with for the year. Part of what you're seeing is some of the timing. We go through this each year. If you look back, you'll see that we do have higher depreciation and amortization in the second quarter as we're trying to estimate those projects that are put in place that will be capitalized and run through the costs. We also have some impairment costs that we recognize. It's just the timing of what you're seeing. We still feel pretty confident we'll end up about the same place on depreciation and amortization for the year.

Operator

And we'll move on to Grant Jordan with Wells Fargo.

Grant Jordan - Wells Fargo Securities, LLC

My first question. If you can just give us a little bit more perspective, over the last few months or quarters, it seems like Bon-Ton's relative revenue performance has been a little bit below maybe where some of your competitors are. Just give us your thoughts on market share and if that is part of your commentary about trying to shift the merchandise a bit.

Byron Bergren

Yes. I believe we've had a few issues in the spring season. In the first quarter and part of the early second quarter, we did have weather issues that was -- being totally in the northern climate when we didn't have success at selling warmer weather goods, that was part of it. But a bigger part, I think, was the assortments that we were carrying in the transition. The goods that we carry now that are updated and in the better categories are selling much faster than the traditional, as Tony mentioned, the traditional areas or the moderate areas. And that's the transition you're seeing going into fall. So we think we will be very competitive on our sales trend in the fall season compared to our competitors. In the way of competition, we do get areas of market share from certain areas, and we don't see us necessary losing market share. But obviously, our sales trends differ. But we're in the regional versus a national bunch [ph] you're comparing us against.

Grant Jordan - Wells Fargo Securities, LLC

Understood. As you look forward to your guidance for same-store sales, flat to up 1%, how much of that is ticket driven versus transactions?

Anthony Buccina

I'd say it's really both. We're planning to sell -- we're planning to really sell a higher average price where we really felt that we can get the higher average price. And our transactions will be slightly -- we feel that our transactions will continue to be slightly down. We will sell a higher average ticket.

Grant Jordan - Wells Fargo Securities, LLC

Okay. And then, Keith, finally, just kind of looking at the balance sheet. Clearly, you guys took advantage of the market last year and obtained a good amount of revolver availability. As you kind of look forward to your balance sheet, where your bonds are trading, where your stock's trading, what are your thoughts on kind of what you can do and how you can utilize your liquidity?

Keith Plowman

Grant, good question. There's no question that today, there's a lot volatility out there. We understand the market was fluctuating down a couple hundred points this morning again. We've watched what's happened with the bonds. They've traded all over the place over the last 6 months. We expect that they'll continue to trade, fluctuate up and down as we go forward here. We have quite a bit of time left on those bonds. We're at about 2.5 years. And right now, we're going to continue to watch the market. If you look at our excess capacity at $386 million versus our covenant, it's $51 million, we've got $335 million of room there. We'll generate somewhere in the range of $50 million to $60 million of positive cash flow, which as you know, will happen in the fourth quarter. That's really when we generate the majority of our cash flow. So we feel good where we sit in our position. Interest cost down about $5 million in the second quarter. You can extrapolate that forward, so that's about a $20 million run rate decrease as we go forward. That will be additional cash that will be generated for the company. So we're really looking to continue to invest in opportunities. We want to grow sales. We want to grow gross margin. You heard Bud talk about the 17 locations that we've made some renovations to. We have strategic initiatives out there we're going to continue to focus on. We feel we have a good capital structure that supports that. And we're pretty excited. Taking out the noise in the macroeconomy, we're pretty excited about our opportunities.

Grant Jordan - Wells Fargo Securities, LLC

So not to -- just to try to paraphrase what you said, would you say that you would value the liquidity over maybe taking advantage of the short-term -- or the fall in the bond prices in the short term?

Keith Plowman

Grant, I'd have to say we consider everything. It's a fair question, but we consider everything. We know our bonds are trading in the high 80s and low 90s. They've been fluctuating that range, somewhere in the lower 90s. We'll continue to watch what's out there. Right now, the key part of our business is driving sales and focusing on the very important holiday seasons that are coming up here. Again, we're excited about our initiatives, and that's really where our focus is, but we will continue to watch the other opportunities that might come to us.

Operator

And next, we'll move on to William Reuter with Bank of America Merrill Lynch.

William Reuter - BofA Merrill Lynch

How much did inflation impact your second quarter comps?

Byron Bergren

I don't know if we can answer that directly. I don't know if we have an answer to that for you.

Keith Plowman

Bill, I would say that's very difficult. As Tony mentioned, we have places where inflation definitely benefit us. We have places where we have pulled back on it. But overall, with what we had in weather, what we think what we did is misses in some of the assortment mix. When you put all those components together, I really would say it's very difficult to try and isolate what one factor had as far as an influence in all of our performance.

William Reuter - BofA Merrill Lynch

Okay. I guess looking towards the back half of the year when you guys talk about cost increases in the 15% plus range, can you talk about how that was instituted? You guys have talked a little bit about better performance of some fashion stuff relative to your basics. Can you talk about, I guess, in light of that performance, how you guys have increased these prices?

Keith Plowman

Bill, just one correction real quickly. As we went through this, the increases for the fall season are 8% to 15%. It wasn't 18% to 15%. So we just wanted to clarify that. Sorry, Tony, go ahead.

Anthony Buccina

Okay. Let me tell you how it got there. Cost in crisis came from -- the cost increases really came from on our own private brand, particularly from the increase in the cotton prices, okay? Everything we buy is not cotton based. There's a lot of other materials that we buy that are not cotton based, where we really didn't have the increase in those prices. But what we have done is an example that I said earlier, we kept the prices on the basic commodities similar or equal to last year, and we felt on where we got -- where we have fashion goods that we feel there's a value there, we did increase the price on that. And so we expect to get the sell-through on that. That, by the way, that's exactly what has happened to us in the second quarter. They are not spending more for basic commodities, but wherever it's novelty and where it's fashion, it’s holding the price. And we expect that to continue for fall on our own brands as well as the domestic brands. We felt that the domestic market also had done a very good job of trying to hold the price on the really core key items that are more basic in nature in their assortments and get higher price on the fashion goods.

William Reuter - BofA Merrill Lynch

Okay. And then one last one for me. In terms of the 17 store renovations, I guess, when were these completed? And were they -- have you been able to see how these stores have been performing relative to the rest of the chain that wasn't touched?

Byron Bergren

Yes. All of them are completed now. We basically did them all in the spring season in different degrees, and we are seeing positive trends in the actions that we've taken. That's why we're optimistic about what's going to happen with those in the third and fourth quarter.

Operator

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

Karru Martinson - Deutsche Bank AG

When we look at CapEx guidance, looks like we brought it down about $10 million. I mean, what exactly is being deferred or put off there?

Keith Plowman

This is Keith. The capital that's been brought down really isn't a deferral. Some of it is -- well, it's actually a multitude of items. One, we are getting stronger support from third parties in some of the initiatives we've taken as far as touching the stores in visual. We've been able to get good partnership out there. So we're getting additional dollars coming in, which is bringing down the total amount. Some of it was a matter of being prudent in our dollars in the environment we're in. Some of it has to do with projects and changes and just the fact that we talked about touching 17 stores. We have some other initiatives going and trying to make sure we're efficient in how we're managing the process. We're jumping from about the mid-40s in capital last year up to the 70s this year, quite a jump, and making sure we do those efficient. Where I do think that you’ll see these touching on is more in the store-visual-type area. As far as the dollars, we were being a little more aggressive on what we wanted to try and do this year and decided that it was prudent to pull back on that little bit. Nothing will touch into the IT or maintenance, nothing will touch the expansions we are looking at. And nothing will touch into the strategic initiatives we had in place.

Karru Martinson - Deutsche Bank AG

Okay. When we look at the overall market and for holiday, certainly, the sense there that some of the orders may have been placed a little bit more -- in more optimistic times. What is your view in terms of how you guys stack up against your competitors and the view and the potential for discounting this holiday season?

Byron Bergren

Well, I think this holiday season, it is going to be highly discounted, but there hasn't been one that hasn't been discounted in a long time. So I don't know if it can be more discounted. We are a promotional department store. Our competitors are very promotional, so we definitely will play in the arena with them on promotions, and we feel we can be very competitive. But it's going to be promotional. It has been for quite a few years, and I don't see any change in it at all.

Karru Martinson - Deutsche Bank AG

Okay. And then as we look at back-to-school, kind of the trends have been to ordering closer and closer to actual need. Is that something that's going to weigh on your August comps here?

Byron Bergren

No. I don't think it'll be that much different. Last year at this time, 2 years ago at this time, they were talking about the customers buying closer to their needs, and they're waiting to see what the person buys in school and so forth. And I think that's the same trend it is now.

Karru Martinson - Deutsche Bank AG

Okay. And just to kind of follow up on I believe it was Grant's question. What is your RP capacity for buying back bonds? Are there any restrictions there?

Keith Plowman

No. I mean, there are restrictions. We have to make sure we're at a certain performance level, which we’re certainly above. So at this point, I would say the easiest way to answer that is right now, we have the option to make whatever decisions we decide are prudent.

Operator

And our final question today, we will hear from Leah Hartman with CRT Capital.

Leah Hartman - CRT Capital Group LLC

I have several questions, please. I would just like to go through the Letters of Credit outstanding and the direct borrowings under the revolver at the end of the quarter.

Keith Plowman

Yes, Leah. The direct borrowings under the revolver are $124 million, and the Letters of Credit outstanding are just shy of $4 million.

Leah Hartman - CRT Capital Group LLC

Okay. That's pretty much your city rate. Could you remind us of where the 2 new stores are opening? And are they in freestanding, strip mall?

Byron Bergren

Both of them are in closed mall. One is Kokomo, Indiana, which is a smaller store. And then also in Southdale Center in Edina, Minnesota, which is a very large mall.

Leah Hartman - CRT Capital Group LLC

Okay. I'd like to focus on little bit on this transaction account trend being down and your expectation for it being down. Do you have a sense of has this customer just stopped spending? Or is it less frequency, or have you lost her to a competitor? I know you're saying you’re not losing market share, but do you have a sense of what's happening with that transaction count number?

Anthony Buccina

Well, here's what I would -- I can't exactly explain the transaction number because we do have a higher average price right now, okay? And we do buy to dollars, not really to units, okay? The biggest impact on our business in the spring was really the moderate traditional customer. That, to be very candid with you, I think if you were to go into the market and ask our competitors or the suppliers that make that merchandise, they will tell you that, that's kind of a trend that's happening around. That customer is impacted by the economy. She is not spending as much as she did. And basically, it's costing us more to get rid of that merchandise or to sell that merchandise. And that's why we're shifting to more updated styling and more updated vendors.

Leah Hartman - CRT Capital Group LLC

Yes, you're right. We heard that from competitors, that the segment has been pressured over this last 6 months for sure. So...

Anthony Buccina

And it's not just in apparel. It's really -- it’s across the board. It's men's apparel, women's apparel. It's shoes. It's handbags. It's that moderate traditional merchandise has really been probably the toughest performing merchandise we've had, in domestic brands as well as our own private brands.

Leah Hartman - CRT Capital Group LLC

And is she switching to the more fashionable merchandise? Like if I have a choice, I'm not going to buy kind of my investment piece or my more traditional, I'm going go for the fashion? Or is it a different customer?

Anthony Buccina

I think it's a combination of both. I do think that the customer is tired of -- that traditional customer is not just buying basics anymore. She is looking for a reason to buy new things, okay? And so you've got that. And I also think that you are attracting another customer in there with the more updated merchandise. I mean, one of our questions was on are there any other guys, fashion guys, in the pipeline? I mean, our business with the Calvin Klein is one of the fastest-growing brands that we have in our company. And that's across all categories of business, whether it's ladies, men's, shoes, handbags, underwear. I mean, it doesn't grow like that unless they're really looking for that type of merchandise.

Leah Hartman - CRT Capital Group LLC

Good. Well, that sounds like you're taking advantage this fall of a healthy mix changeover to that better sportswear, so happy to hear that. So any call-outs, geography that you're seeing now that back-to-school is really getting started? Any notable -- you mentioned Buffalo and Des Moines and Detroit in your prepared comments. Any changes to that?

Byron Bergren

No. No really changes in the trend. When you look across our entire markets, we have unemployment rates that are as low as 3.2% in North Dakota and as high as 10.5% or so in Michigan. So it varies a little bit by unemployment rate in particular markets, but otherwise, we haven't seen any other major trends.

Operator

And that will conclude the question-and-answer session. At this time, I would like to turn the call back over to Mr. Bud Bergren for any additional or closing remarks.

Byron Bergren

Thank you for your interest in Bon-Ton. And we look forward to speaking with you about our financial results for the third quarter on our conference call in November. And thanks again for being with us.

Operator

And that will conclude today's call. We thank you for your participation.

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