Eddie Bauer F3Q07 (Qtr End 9/29/07) Earnings Call Transcript

Eddie Bauer Holdings, Inc. (EBHI)

F3Q07 Earnings Call

November 13, 2007 4:30 pm ET

Executives

Neil S. Fiske - President, Chief Executive Officer, Director

David Taylor - Interim Chief Financial Officer, Interim Treasurer

Analysts

Andrew Berg - Post Advisory Group

Nicholas Capuano - Imperial Capital

Doug Parden - Brigade Capital

Ernie Atawalla - Outpoint Capital

J.T. King - Cape Investments

Presentation

Operator

Good afternoon, ladies and gentlemen and welcome to the Eddie Bauer Holdings Incorporated third quarter conference call. (Operator Instructions) Now at this time, I would like to turn the call over to Mr. Neil Fiske, President and CEO of Eddie Bauer. Please go ahead, sir.

Neil S. Fiske

Thank you for joining us today to review Eddie Bauer's third quarter results. Joining me is David Taylor, our interim Chief Financial Officer. We will begin with some prepared remarks, after which we will open the lines for your questions for as long as time permits.

Let me also remind you that during this call, we may make forward-looking statements relating to the company’s expectations and beliefs concerning our future business and financial performance. These forward-looking statements are based on various assumptions and projections and are subject to risks and uncertainty and actual results may differ substantially.

These forward-looking statements speak only as of the date stated and, as except where required by law, we do not undertake any obligation to update these forward-looking statements.

For further details, please refer to the risk factors and cautionary statements in our 10-Q on file with the Securities and Exchange Commission.

We have two objectives for today’s call. First, to report on the third quarter, breaking down our results in a meaningful level of detail; and second, to lay out more specifics on our turnaround program.

Many of you have asked for a sense of timing on when we expect the changes that we are making to take effect, so I will do my best to provide some color on that. I would reiterate that we are at the beginning of a multi-year turnaround program and that restoring Eddie Bauer to its position as a premium, active outdoor brand is going to take time.

With that said, there are a number of important announcements and specifics that we are prepared to address today, and I feel good about the progress that we are making.

Overall, this was a difficult quarter for Eddie Bauer, with a few important bright spots. Sales were roughly flat to last year, while gross margin dollars were down slightly by $1.5 million, or 2.3%.

Results for the quarter were also dramatically impacted by a number of large, transitional costs, including executive recruitment, corporate office relocation, and higher professional services costs.

In total, our SG&A costs were up $8.7 million, underscoring the need to reduce our operating costs substantially and put a number of large, one-time costs behind us. I will have more to say on our cost reduction targets in a moment.

Operating loss improved by $107.6 million, with this quarter’s loss at $26.5 million compared to last year’s third quarter loss of $134.1 million. This difference was largely driven by last year’s good will impairment charge of $117.6 million.

EBITDA excluding certain non-recurring and non-operational items was a loss of $15.2 million, down $12.1 million from last year’s EBITDA loss of $3.1 million. David Taylor will go into more detail on the financials later.

On the sales side, the quarter got off to a slow start for the reasons we discussed on our last call. The weakness we saw in June carried over into July as our summer and transitional merchandise missed the mark with our customers.

Comparable store sales in July rose slightly at our retail stores but fell in outlets, continuing a trend of several months.

In our retail stores, business picked up somewhat in August as the new fall merchandise arrived.

In September, we had good success with our semi-annual pant event in retail stores, posting an 8.6 increase in comp store sales in a month when many retailers were down.

For the quarter, retail store comps rose 8% while outlets fell 2.8%. The women’s business has been stronger then the men’s business, reflecting an underlying need to reposition and reenergize the image and the offering for the Eddie Bauer guy.

Direct sales for the quarter were down 0.7% on roughly flat circulation with mixed results across the catalogs.

Total revenues for the quarter were $211 million, compared with $211.3 million we reported in the third quarter last year. Merchandise margins were down 20 basis points. Gross margin for the third quarter of 2007 was $59.4 million, a decrease of $1.4 million from $60.8 million in the third quarter last year.

The gross margin percentage for the quarter declined to 29.9%, from 30.5% in the year-ago period, reflecting a 0.4% negative impact from costs associated with the customer loyalty program and a 0.2% decrease in merchandising margins.

Our low gross margin compared to others in our sector is substantially driven by the impact of relatively fixed store occupancies and low levels of sales productivity, roughly $250 per square foot, again underscoring the opportunity to improve profitability with better store productivity.

The bright spot for the quarter was in our retail stores, where the early response to some of the changes we have been making has been positive. One of our top priorities is driving store productivity to leverage our fixed costs, drive profitability, and flow more merchandise margin to the bottom line.

We set a long range target of $450 per square foot, which would put us just north of where we were before the brand went off track in the mid 1990s.

Key to this strategy is improving in-store merchandising and the in-store experience for our customers. I think we made progress in this regard in September with our semi-annual pant event, as I noted earlier, and we are very pleased with the results of our down event just concluded in our stores.

We have also revamped our marketing and our merchandising approach in our outlet stores and are beginning to see some traction there as well.

Let me spend the next few minutes updating you on the strategic priorities going forward and to the extent I can, a sense of timing.

As I mentioned on our last call, we are focusing on the following five key areas: brand identify, merchandising strategy and execution, marketing, cost, and finally talent and organization.

The first step is to get everyone in the organization to understand the brand we are trying to rebuild, getting back to our success, our roots and our heritage as an authentic, active, outdoor lifestyle brand. For the last 10 years or so, the Eddie Bauer brand has drifted off its natural path in varying and remarkably inconsistent attempts to go more dressy, more casual, more urban, more women’s oriented, more work week, more work weekend.

The starting point of this turnaround therefore is a focused, consistent brand direction centered on the active outdoor lifestyle with a clearly defined positioning and target customer.

We are confident that we can regain our reputation as the premium outdoor brand that Eddie Bauer created back in 1920 and for which we were famous up until the mid 1990s.

In merchandising, we have focused the team on reclaiming our authority in outerwear, rebuilding the men’s business and the dual gender appeal of the brand, getting back the attractive segments of gear and non-apparel that add brand dimension and volume, and building a pipeline of new, innovative products that are consistent with our brand direction.

Given the lead times in apparel, however, we are able to make only relatively modest changes until late fall, holiday floor sets of next year. We are simplifying our assortments, cutting the number of styles and SKUs substantially. We are also committed to and excited about building a world-class sourcing organization that can improve our product margins while raising quality and augmenting our development capability. More on that in a minute.

In marketing, we have already made significant improvements to our in-store signage, imagery, displays and messaging. Two good examples were our 67th anniversary down event and our semi-annual pant event, where we focused on bigger stories with more energy and impact. New signage and displays have also been rolled out to the outlet stores.

Our biggest opportunity in marketing is to exploit our advantage as a multi-channel retailer, leveraging our 80 million catalogs as profit generating advertising for the revamped Eddie Bauer brand.

We know that the multi-channel customer is worth two to three times the value of a customer who shops only in stores or online or in catalogs, and that these customers will drive a large part of our growth.

The synergy across channels is powerful if fully exploited. Retail stores can generate traffic and new customers to the file, while direct can market the brand, stimulate purchase, and develop segmented offerings and businesses.

We believe this is a major potential source of competitive advantage for Eddie Bauer. We are currently working to segment our customers based on a full 360 degree view of their activity and restructure our marketing efforts in 2008 to exploit more fully our multi-channel synergy.

We also plan a major relaunch of our website in early ’08, which we believe will be a dramatic improvement from our current site.

As we move ahead, you should expect to see stronger, more consistent marketing across the brand, starting with retail and outlets in the current floor sets, then moving to upgrades in web and catalog in late spring and summer of next year.

Let’s now turn to cost. We know our cost structure is too high for our current revenue base and we are committed to reducing our cost in a major way. We have been looking at every area of the business to develop a substantial, far-reaching cost reduction program to be implemented in early 2008. The goal of this effort is to cut $25 million to $30 million annually out of the operating cost structure of the business during 2008.

While we touched on some specific cost initiatives in the last call, this program is much more encompassing and will include the following areas: the distribution center, our product sourcing, freight and logistics, marketing rationalization, overhead restructuring and realignment, professional services, store costs, non-merchandise procurement.

As you are aware, we are actively looking at solutions for our under-utilized distribution center in Groveport, Ohio. We are at this point in active discussions with potential buyers and as a result, not in a position to comment on specifics. We do, however, want to be clear that this function is critical, absolutely vital to delivering our high standards of customer service and brand experience and we will not enter into an agreement that may be attractive in the short run if it could undermine or limit our brand longer term.

And to be clear -- we are committed to cutting out $25 million to $30 million from the operating cost structure of this business with or without a transaction on the distribution center.

In the areas of sourcing and supply chain, we have encouraging results from a number of pilot tests underway. First, we have tested a new direct sourcing model on our products sourced out of Latin America. From just our very initial efforts, we were able to save approximately 4% on product costs. We’ve also tested a new costing model for goods, again with encouraging results.

We believe these are just the beginning of an approach to sourcing that can yield major benefits in cost, quality, and speed.

Most importantly, as announced yesterday, we have hired a world-class executive, Ron Hall, to lead our sourcing and supply chain initiative. Ron brings 22 years of experience in sourcing, design, product development, manufacturing, technical design and quality assurance.

Ron was recently the Vice President of sourcing and production for Coldwater Creek, where he drove major improvements and substantially changed the economics of sourcing for that $1.1 billion company. Under Ron’s tenure, gross margin improved dramatically, with sizable gains in initial markups. Prior to Coldwater Creek, Ron was Vice President Production and Sourcing for Limited Brands and held positions with Pacific Alliance, J.Crew and Kellwood Company.

I am excited about what Ron will bring to Eddie Bauer. He will help us drive major improvements in sourcing costs, but his expertise will also translate into better, more innovative product and a more responsive supply chain. We will be much more agile and much more cost competitive, with an ability to develop product categories that we lack today. This is a major hire for Eddie Bauer.

Now, on to talent and organization; I am pleased to report that we have some great new additions to our team, in addition to Ron Hall. Yesterday we announced that Marv Toland will join as Chief Financial Officer. Marv brings over 20 years of financial leadership experience, has a strong operational background, and knows the retail industry.

Most recently, Marv served as Executive Vice President and Chief Financial Officer of London Fog, with responsibility for the finance accounting systems, legal and customer service function. Prior to joining London Fog in 1999, Marv was Chief Financial Officer of Brooks Sport Inc., and previously held a variety of finance related positions with [Exxon] Corporation.

At both London Fog and Brooks Sport, Marv helped lead both organizations through some difficult times. Marv is a high energy, high impact, get-it-done kind of executive. He will be a huge help in building a healthier financial model for the business and in leading a number of important operational initiatives.

In addition, Freya Brier has joined Eddie Bauer as Senior Vice President General Counsel and Secretary. Freya is an experienced General Counsel with 24 years of experience, including deep public company experience, 11 years in the retailing industry, and broad operating experience. She most recently served as Senior Vice President General Counsel and Secretary of Wild Oats Markets Incorporate, where she oversaw all legal, real estate, and construction, food safety and regulatory and ethics matters.

Prior to joining Wild Oats in 1996, Freya served as corporate counsel at Synergen Incorporated, a biotechnology company, and as a partner with the Colorado law firm of Holme, Roberts & Owen.

While at Wild Oats, Freya played a significant role in the company’s growth and turnaround, in addition to overseeing all legal, public reporting, and governance requirements.

With these appointments, we have filled a number of critical roles in our senior management team. Each of these executives brings deep, operating expertise to the business, which will have an immediate benefit and will fill a large void in our executive team. In addition, as a team, their backgrounds are highly complementary and will underpin the initiatives we are implementing to turn around the business.

Since a number of shareholders have asked for timing on the various initiatives underway, I would like to share today my own sense of the timing. In the near-term, you should expect to see better marketing and presentation in our stores with more focused statements. As mentioned, we’ve seen some of these benefits already in our semi-annual pant event and our 67th anniversary down event.

Knowing that one of our biggest financial levers is store productivity, we are focused on making the most of the product we’ve got to raise our retail comp store sales. Similarly, we’ve installed new marketing and merchandising disciplines in our outlet stores. If successful, these in-store initiatives should provide us with a modest but important gain in comp store sales growth this season.

In the medium term, defined as the first half of 2008, you should expect to see the specifics behind our cost-cutting program and its initial impact. You should also start to see steady gradual improvements in the look and feel of the direct business as we carefully realign our marketing to our brand positioning.

During the second half of 2008, look for more impact to the cost initiative. We also expect to be much tighter and more disciplined on our capital expenditures in 2008 in order to bolster our cash flow and liquidity.

Finally, while you will see some modest changes to the assortment for summer, those changes will accelerate substantially in late fall and holiday of next year, with some new launches and a more exciting merchandise lineup.

With our merchandise strategy now in place, we are getting farther out in time and have even planned our key launches out into spring of 2009. Our goal for 2008, simply put, will be to cut costs substantially and boost cash flow, laying the groundwork for an acceleration driven by better product and revamped marketing.

Lastly, a number of you have asked about term loan covenants for the fourth quarter. Looking forward is tricky at this point, given that the majority of the season is still ahead of us and the retail environment is highly uncertain. The room for error in those covenant measures is lower than it has been, given our year-to-date performance.

Nonetheless, based on our recent forecasts and what we know today, we are currently on track to meet those loan covenants.

Let me now turn it over to David for the financial review.

David Taylor

Thanks, Neil. I’ll spend the next few minutes reviewing the financial results in more detail and then we’ll open the line for questions.

As Neil addressed, total revenues for the quarter ended September 29, 2007, were $211 million, roughly flat to the $211.3 million reported in the third quarter of 2006. Comparable store sales for the quarter increased 3.4% while sales in our direct channel decreased 0.7%.

Total revenues for the third quarter of 2007 included net merchandise sales of $198.8 million, shipping revenues of $7.3 million, licensing royalty revenues of $3.4 million, and royalty revenues from our foreign joint ventures of $1.3 million.

This compares to total revenues in the third quarter 2006 that included net merchandise sales of $199.3 million, shipping revenues of 7.3, licensing royalty revenues of $3.2 million, and royalties from foreign joint ventures of $1.4 million.

Net merchandise sales for the third quarter of 2007 included sales from the company’s retail and outlet stores of $149.4 million, roughly in line with $149.5 million in last year’s third quarter. Sales from the direct channel, which include sales from catalogs and websites in the third quarter, totaled $49.4 million, down $0.4 million or 0.7% from $49.8 million in the third quarter of 2006.

Gross margin for the third quarter of $59.4 million was down by $1.4 million from the $60.8 million in last year’s third quarter, while the gross margin percentage for the quarter declined to 29.9% from 30.5% in the year-ago period. This reflects costs from the customer loyalty program and lower merchandising margins.

We include buying and occupancy expense in cost of sales and gross margin, so our gross margin reflects the relatively low productivity, as you’ve heard. We would expect to see these margins improve in the future as we more effectively leverage our store base.

The net loss for the third quarter was $16.4 million, or $0.54 per diluted share, compared to a net loss of $197.6 million, or $6.58 per diluted share in the year-ago third quarter, which quarter included $117.6 million of a good will impairment charge in last year’s quarter.

The 2007 quarter includes SG&A expenses of $98 million, or an increase of $8.7 million over the prior year period. This includes $3.2 million of increased advertising expenses, primarily related to brand advertising and promotions; $3.4 million of increased payroll and incentive costs, which includes both stores and administrative functions; and $1.1 million in executive sign-on bonuses and incentive guarantees, primarily related to the hiring of our CEO. It also includes $2.4 million of increased professional services fees and $2.2 million of higher building rent and moving expenses as a result of the move of our corporate headquarters.

We had to carry over some of the costs of our old campus during that transition and moving period. We also incurred about $800,000 in moving costs during that quarter.

In addition, the increases in professional services fees during the quarter compared to last year were for things like outside legal fees incurred in the absence of a general counsel, operations consulting work to help identify and execute certain of the operating initiatives that Neil has already mentioned; Sarbanes-Oxley compliance and remediation and the like.

We expect to make reductions in the level of such professional services going forward and such reductions are a portion of the net cost reduction plan and targets for 2008.

Income tax benefit for the third quarter of fiscal 2007 was $4.2 million, compared to income tax expense of $55.6 million in the third quarter a year ago. Last year’s income tax provision included $52.7 million of expense associated with the increase in our valuation allowances related to our net operating loss carry-forwards.

So income or loss from continuing operations before income taxes, interest expense, and depreciation, or EBITDA, which is also exclusive of certain other non-recurring and non-operating items for the third quarter of ’07, was a loss of $15.2 million compared to a comparable measure in the third quarter of ’06 of a loss of $3.1 million.

As you know, EBITDA is a non-GAAP financial measure that management believes is an important metric because it’s a key factor of how we measure operating performance. We refer you to the reconciliation of non-GAAP financial measures in our press release and posted on our website, which shows a reconciliation of EBITDA to its most comparable GAAP measure, which is income or loss from continuing operations before income taxes.

On the balance sheet as of September 29, we had cash balances of $3.7 million. Our primary source of cash is the cash generated from our operations and borrowings under our $150 million revolving credit facility.

Inventories as of the end of the third quarter were significantly greater than our December year-end balance, and also greater than last year’s third quarter as a result of planned, earlier receipt for our holiday floor set.

We are comfortable with the overall inventory levels and quality at this point. In addition, we are currently evaluating alternatives related to the outstanding financing receivables, including the possibility of monetizing the residual receivable through a potential sale. That sale could be closed during fiscal 2007.

As of September 29, 2007, the company operated 381 stores, including 260 retail stores and 121 outlet stores. This compares to 389 stores a year ago, which included 275 retail stores and 114 outlet stores. We currently as of today operate approximately 390 stores.

That concludes my remarks, Neil.

Neil S. Fiske

Thanks, David. I hope our comments today have given you a better sense of our strategic priorities and how we expect these initiatives to play out in terms of timing. While we are clearly in the early stages of a multi-year program, let me emphasize that we are moving forward with a sense of urgency and a commitment to enhancing the value of the Eddie Bauer franchise. We appreciate your interest and look forward to updating you on our progress.

Operator, we would now like to open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Andrew Berg of Post Advisory Group.

Andrew Berg - Post Advisory Group

Can we go back into the SG&A number? There’s the $8.7 million increase -- I just want to walk through that again and go through which of those would be considered more typical ongoing versus obviously some of them, the building costs, the executive sign-on, are clearly one-time items.

David Taylor

There’s a number of items in there that we would consider transitional or non-recurring items -- things like the executive sign-on, some of the other recruitment costs and professional services associated with recruiting, the move costs, and the double rent that we incurred during that move period.

I would characterize roughly half of that $8.7 million as these transitional type items and the other part, including increased advertising and other increased wages and payrolls would be the rest.

Andrew Berg - Post Advisory Group

Okay, and so I guess the way to think about that, where you show the EBITDA excluding certain non-recurring as 15.2, I need to adjust that a little bit for the additional four and change.

David Taylor

Yeah.

Andrew Berg - Post Advisory Group

Okay. Can you tell me what your revolver balance -- or what was available in the revolver at the end of the quarter?

David Taylor

Yeah, I’ll tell you in just a second. Let me -- we had $54.6 million drawn under that revolving credit facility as of September 29.

Andrew Berg - Post Advisory Group

Okay, and are there any other LCs that offset the amount that would be available?

David Taylor

Yeah, there is roughly $13 million of other LCs outstanding as of that date.

Andrew Berg - Post Advisory Group

Okay. Thank you.

Operator

We’ll take our next question from Nicholas Capuano of Imperial Capital.

Nicholas Capuano - Imperial Capital

Good afternoon. A question on the expenses, just to get a sense of a level set going into next year in your goals, even taking aside the one-time charges you had this year. I mean, this was clearly an unusual year. As you go into next year, from an SG&A standpoint, do you see -- what do you see as kind of a normalized level? I mean, when you talk about your $25 million to $30 million in savings, and I know some of it will come in the gross margin or the COGS relative to sourcing, but how do you see -- do you see that your entering 2008 on a normal level? Is that what your savings goals are based on? Can you just give us some clarity on what your expenses trends should be?

Neil S. Fiske

Let me take a cut at this. So the $25 million to $30 million target that we have to take out of the operating cost structure of the business, and I would just reemphasize the operating cost structure of the business, because clearly there were a number of one-time things that hit us this year that I don’t count in the operating cost structure of the business. And also, there may be some things as we go through the restructuring next year that will be transitory in nature as we get to a leaner cost position.

The way I would think about it, Nick, is $25 million to $30 million largely out of the SG&A expense of the business on an ongoing basis.

David Taylor

And that will be exclusive of the one-time type items that are already added back at the bottom of the EBITDA table -- things like the merger termination fee and other items, but will include some of the items that I just outlined in the third quarter explanation of the SG&A increase.

Nicholas Capuano - Imperial Capital

Okay.

David Taylor

And by the way, that $25 million to $30 million operating cost reduction target is not sourcing.

Nicholas Capuano - Imperial Capital

Okay, perfect. So that’s exclusive of any benefits you get on sourcing. Okay. And in looking at the revenue trends from last quarter, obviously a nice rebound in the comps but if you just go into the direct business, anything unusual in the direct, or any trends with that revenue line down? Also, if you could just elaborate a little bit more on the programs for the outlets and how they are faring -- just a little more detail on that, that’d be great.

Neil S. Fiske

I think two things on the direct side; one is clearly that business in the last quarter was softer than we had wanted it to be, or than it had been in the first part of the year. And so we have some concern about the softness in direct. The second thing is, as you know, the production cycles, the print cycles are quite long in catalog, so our ability to turn around the direct channel on short notice is a good bit more constrained than making changes in store or in retail stores or in outlet.

I know we’ve got a lot of work to do in the direct business. We think we know what to do but we are also pragmatic about the fact that a lot of those changes really won’t start to impact the business in a dramatic way until spring -- late spring and early summer of next year.

I’m sorry, Nick, what was the question about outlet?

Nicholas Capuano - Imperial Capital

Just more color on the outlet. Again, you had the stronger retail comps. You mentioned some details of it, but on the outlet, to what extent -- do you have any special programs or anything -- you know, some of the ongoing things there?

Neil S. Fiske

We have revamped fairly extensively our approach to merchandising and marketing in the outlet stores, and that was one of the first orders of business on the agenda when I got here, and it takes a couple of months for those things to get developed and put in place. They are now in place and we are seeing some positive traction from the new signs, the new marketing, and the new merchandising. We have new fixtures in those stores. We have a signage package that’s more consistent with our brand and that communicates value more strongly. And we are trying to be much more clear about our merchandising statements and simplify the shopping experience in outlets. And again, I’m pleased with the progress that we are seeing there. We are getting some traction and believe that we are on the right path.

Nicholas Capuano - Imperial Capital

All right. Thanks a lot.

Operator

(Operator Instructions) We’ll go next to Doug [Parden] of Brigade Capital.

Doug Parden - Brigade Capital

Good afternoon. Just a couple of questions, more nitpicky type stuff. D&A in the quarter was down to $10.2 million -- just trying to understand. It had been higher in the first couple of quarters and last year. I’m just trying to understand what’s going on there.

David Taylor

We’ve got lower amortization of leasehold improvements in our stores that as some of those leasehold improvements rolled off their useful life, remember we had to -- in fresh start accounting that was applied in June of 2005, you essentially start a bunch of depreciation and amortization schedules over again. That’s the way those paradigms work.

So the amortization of leasehold improvements in the store base declined quarter on quarter, and also some of the -- we had to capitalize and amortize some customer lists and licensing arrangements in our fresh start accounting exercise and a couple of those have rolled off their, or are nearing the end of their useful life, so that’s where the lower D&A comes from.

Doug Parden - Brigade Capital

Okay, and then, so is $10 million kind of a good run-rate or is -- should we think about it as kind of similar to levels of CapEx going forward? Or is it more complicated than that?

David Taylor

I think it’s probably a little more complicated than that. As older stores roll off, we’ll -- the leasehold improvements associated with those older stores will decline. Some of it will depend on the level of new stores opened during the period, and to the extent that we are opening fewer stores going forward, the level of D&A will go down.

Doug Parden - Brigade Capital

Okay, that makes sense. And then just on your debt levels, they were a little higher than what I was modeling for the quarter. Inventory was probably $10 million of that, so I’m just trying to understand -- it looks like debt’s up year -- on a last 12-months basis from the third quarter last year about a little over $30 million. Inventories of 20. I know we don’t have a cash flow statement yet because of the Q, but I’m just trying to figure out if there was any other one-time or -- you know, cash issues, why maybe debt was a little bit higher than some of us would have thought?

David Taylor

Well, the Q is on file and there will be a cash flow statement in there, but you can do a quick cash flow on a year-to-date basis and see that we’re cash flow negative, particularly with some of the big items that were incurred in the first quarter and have been paid during this year, some of those $13 million worth of one-time type items.

You are right that inventory is up and that is a component of the increased revolver draw in the third quarter.

Doug Parden - Brigade Capital

Okay, and then just on a -- a question -- you guys mentioned covenants a little bit. Are there any major differences between the EBITDA numbers that you guys report in your press release versus what the banks can calculate for EBITDA? A lot of times there’s one-time things you can add back. You mentioned the $4 million of things that could be considered one-time. I’m just trying to figure out the way they look at the covenants, what that EBITDA number is, just so I can look at how much breathing room you guys have, because I think it’s a little different than what you report.

David Taylor

It is a little different than what we report and unfortunately, the components of that calculation are complicated and include numbers that are not reported to the public, so trying to recreate the covenant calculation based on the publicly reported numbers is virtually an impossibility because we include some non-cash type of expenses that aren’t separately publicly reported.

But I can tell you that the one-time type items are not really add-backs unless they are non-cash.

Doug Parden - Brigade Capital

Okay. All right. That’s it for me. Thanks.

Operator

(Operator Instructions) We’ll go next to [Ernie Atawalla] of Outpoint Capital.

Ernie Atawalla - Outpoint Capital

Just on the inventory side of things, I see inventory is up about $10 million. Could you just walk us through your inventory picture and if you have any excess inventory maybe that’s there? Why is it so high?

David Taylor

Sure. In general, we are pretty comfortable with both the inventory levels and the quality of inventory that we have on the books as of September 29. The increase, the primary reason for the increase between third quarter this year and third quarter last year was a planned increase. We planned some earlier receipts of holiday floor set that hit our ownership position earlier this year than it did last year. That’s the primary reason for the increase, and we are pretty comfortable with the levels as of September, given our outlook for the fourth quarter.

Ernie Atawalla - Outpoint Capital

All right. Thank you.

Operator

We’ll go next to J.T. King of Cape Investments.

J.T. King - Cape Investments

It sounded like you were pleased with your recent down sale that concluded just recently, so that would include October sales, I guess you could imply. I just wanted to see what you all sense of the consumer environment was and I guess in particular, there’s been a lot of talk on how warm the weather was and how that impacted sales and the question of whether people will be coming back in November, so I would love to just hear your take on general consumer environment.

Neil S. Fiske

Just a point of clarity, it was a down event, not a down sale. Important words to us.

J.T. King - Cape Investments

I bought one. A burnt orange one.

Neil S. Fiske

Thank you. Guaranteed for life. And really that’s important because it wasn’t a sale. As you know, we are very focused. We chose top pick one item and put it at a sharp price point, but we didn’t put a lot of the down collection on sale. And we really chose to emphasize our history and our heritage in that event -- the fact that Eddie Bauer invented the down jacket, had the first patent on it, the fact that Eddie Bauer was the outfitter that outfitted the first American team to [climb] Everest, and really bring back some of that great Eddie Bauer history.

And I think what was encouraging for us is to see the customers respond to that in a very favorable way. I was in stores during the event and the qualitative comments coming back were very positive. One customer said to me it’s nice to see Eddie Bauer is back, and I think we are just at the beginning of trying to bring back some of those strong brand stories that we used to have and make them modern and current and powerful.

With respect to October and the consumer outlook for the season, there is no question that weather is playing a factor. And the way that I look at it is if it’s really a factor, you would expect to see large differences in comps where there is cold weather and where there is warm weather, and at least in our business, as October played out, we saw huge swings in some of the regional comps where the weather had gotten colder and where the weather hadn’t yet turned.

So I know it’s definitely a factor. Having said all of that, at the end of the day we look at our business and think that the upside that we have from our relatively low levels of productivity today is bigger than the down side that’s implied in all of the consumer sentiment reports that are coming out. And an awful lot of this is still within our control.

I think it’s fair to say that November and December are highly uncertain. I think -- again, I am pleased with the results we had in the down event. It’s validation for me that the steps that we are taking will make a difference, are making a difference, and that we’re on the right track.

Did that answer your question?

J.T. King - Cape Investments

It did. Thanks.

Operator

Mr. Fiske, at this time, I would like to turn the call back over to you, sir, for any additional or closing remarks.

Neil S. Fiske

I think unless there are other questions from the phones, we’re done.

Operator

That will conclude today’s conference call. Thank you for your participation. You may disconnect at this time.

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