The Bon-Ton Stores Q3 2007 Earnings Call Transcript

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 |  About: The Bon-Ton Stores, Inc. (BONT)
by: SA Transcripts

Operator

Good afternoon, ladies and gentlemen. Thank you for standingby. Welcome to today’s Bon-Ton Stores, Inc. third quarter 2007 earnings conferencecall. (Operator Instructions) I will now turn the conference over to Mr. JoeSeclich with ICR. Please go ahead, sir.

Joe Seclich

Thanks. Good morning. Welcome to Bon-Ton’s third quarter offiscal 2007 conference call. Mr. BudBergren, President and CEO; Mr. Tony Buccina, Vice Chairman and President-Merchandising;and Mr. Keith Plowman, Executive Vice President and Chief Financial Officerwill host today’s call. You may access a copy of the earnings release from thecompany’s Web site at www.Bon-Ton.com. Youmay also obtain a copy of the earnings release by calling 203-682-8200. Beforewe get started, I would like to remind you of the company’s safe harborlanguage, the statements contained in this conference calls which are nothistorical facts may constitute forward-looking statements within themeanings of the Private SecuritiesLitigation Reform Act of 1995. Actual future results might differ materials from those projected in suchstatements due to the number of risks and uncertainties, all of which are describedin the company’s filings with the SEC. As a reminder, this call is beingrecorded, Thursday, November 29, 2007.At this time, I’d like to turn the callover to Mr. Bud Bergren, President and CEO.

Byron (Bud) Bergren

Good morning and thank you for joining us this morning. Iwill begin with my comments on the third quarter and a perspective on where weare year-to-date. I will then comment on the outlook for the fourth quarter ofthe year. Keith will then provide details of the third quarter financialresults and will update financial guidance for 2007. Tony will review the thirdquarter merchandise results and discuss the merchandising initiatives. I will make closing remarks and then we’llbe available to address your questions.

Our August comparable store sales were positive with goodsales results from our semi-annual home sale and back-to-school promotions. Wewere also getting early indications of favorable customer response to our fallmerchandise assortment. Then, September and October began and became morechallenging as the deterioration of the macroeconomic environment and theunseasonably warm weather negatively impacted our comparable store sales inboth months. Consequently, our third quarter EBITDA and net income results werebelow our expectations. For the third quarter 2007, we reported a net loss of $19.4 million or $1.17 per diluted sharecompared to $0.66 loss per share or $10.9 million for the third quarter of2007, an $8.5 million different. Our gross margin rate in the third quarter of2007 was 34.8 reflecting increased markdowns and fuel costs during the quarter.EBITDA decreased $12.1 million in the third quarter to $31.4 million.

We are confident we are taking the right steps on themerchandise front. We delivered strong performance in furniture, home, better missysportswear, cosmetics, and children’s reflecting that our customers areresponding to our merchandise offerings. We are confident that, while our customers may be tightening theirwallets temporarily, we are providing the merchandise offerings that meetstheir needs. We will continue to manage our inventories in accordance with thesofter retail demand, but still flow fresh merchandise into our assortmentswhere appropriate.

We were also successful in controlling our expenses withoutsacrificing service levels in ourstores. We have strengthened our promotional calendar to attract our customersthroughout this important holiday season. As we mentioned in our earningsreleased, we are pleased with the results so far. At the Bon-Ton Store,specifically, we saw an increase in average price during the third quarter. Inaddition, the Bon-Ton Stores continued to achieve a penetration rate in excess of 50% to Carson’ssales. The number of credit card loyalty customers for the combined companygrew year-to-date. Furthermore, we increased the level of private brandpenetration at both Bon-Ton Legacy Stores and Carson’s.

In summary, we cannot control the economy or the weather,but we can position ourselves to operate efficiently in a challengingenvironment by carefully monitoring our inventory levels and controlling ourexpenses and continuing to provide our customers with a great merchandiseassortment at a value. Tony will provide you with more details on themerchandising, marketing, and store strategies.

We are encouraged by the improvement in our business sincethe beginning of November when the arrival of seasonable weather had a positiveimpact on our sales. Our two major promotions in November performed well.Community Day had our largest sales increase to any prior Community Day and theDay After Thanksgiving was a record-breaking day. We believe our reportedcomparable store sales for November will be in the positive high single to lowdouble digits. We will continue to plan and manage our business prudently totake into account the overall environment.

I would also like to mention that we kicked off oureCommerce Web site on October 15. We are six weeks into this initiative and arevery pleased with the results so far. I would like to invite all of you tovisit the site under any of our seven nameplates. In fact, buy something whileyou’re there. We see this as another exciting opportunity to increase top linegrowth in the future.

Looking ahead to the remainder of the year, we are managingour expenses carefully assuming a continuation of the current retail climate.At the same time, we are also moving forward with our initiatives by refiningour merchandise offerings by market andcontinuing to differentiate our merchandise mix with national and privatebrands and offering strong marketingand promotional events that appeal to our target customer. We will continue toimplement phase III of our systems integration which includes system enhancementin a three-year rollout of our POS systems in the Carson’sstores.

When we bought Carson’sin March of 2006, we had a two-year integration plan. Today, after twentymonths, we have the same plan with the same optimism and enthusiasm about thepotential of the combined companies. So while there has been a bump in the roadduring 2007, initial plans and the timing of the integration remains on track.

I would now like to turn the call over to Keith. Keith?

Keith E. Plowman

Thank you, Bud, and good morning everyone. The third quarterstarted with a positive August sales performance, but then was challenging as acombination of unseasonable weather and a difficult retail environment inSeptember and October fractured our comparable store sales and gross marginrate performance resulting in third quarter EBITDA and net income coming inbelow our expectations. I will review the income statement components, some keybalance sheet numbers, and then discuss the revised full year of fiscal 2007 guidance and the assumptions reflected inour updated guidance.

Before getting into the financial details, I want toemphasize we remain on track to achieve to exceed the incremental cost savingswe laid out in the beginning of the year. We believe we have an appropriatedebt structure in place. Our excess borrowing capacity was $254 million dollarsat the end of the third quarter which was $6 million above the prior yearcomparable quarter and $179 million dollars above our required covenant of $75million dollars. And we expect to pay down debt with the cash generated by thebusiness in the fourth quarter.

For the third quarter of fiscal 2007, total sales decreased 2.9% to $780.8million dollars. Bon-Ton and Carson’scombined comparable store sales for the 13 weeks ended November 3, 2007, decreased 3% compared to theprior year 13-week period. Totalyear-to-date sales increased 5.4% to $2,227.0 million compared to $2,112.7million for the same period last year. This year includes 13 weeks of Carson’s in the first quarter of fiscal 2007 compared to 8 weeks of Carson’soperations in the first quarter of fiscal 2006. For informational purposes,combined proforma year-to-date comparable store sales approximated a 3.2%decrease.

Other incomes increased $1.8 million to $24.6 million in thethird quarter of fiscal 2007 primarilyreflecting increased sales on our proprietary credit card and the programrevenue received under the program agreement with HSBC Bank. For the nine-monthperiod ended November 3, 2007,other income increased $11.8 million to $69.4 million.

Gross margin dollars in the third quarter decreased $22.2million compared to the prior year period. The third quarter gross margin ratedecreased 1.8 percentage points to 34.8% of net sales as compared to 36.6 % inthe prior year period. The decrease in the gross margin rate primarily reflectsincreased markdowns and delivery and fuels costs. The increased markdownsreflect some acceleration of markdowns for the last week of October of thethird quarter.

Year-to-date gross margin dollars increased $23.0 millioncompared to the prior year period. The year-to-date gross margin rate decreased0.8 percentage point to 35.4% of net sales as compared to 36.2% in the prioryear period. The year-to-date gross margin rate reflects the negative marginimpact of the sales for the first five weeks in the first quarter of fiscal 2007 in Carson’sstores which were not included in the first quarter results of fiscal 2006,increased markdowns, and higher delivery and fuel costs. We have adjusted thecarrying costs of the inventory to what we believe is a reliable value at theend of the quarter.

SG&A expenses in the third quarter of 2007 decreased$8.3 million to $265.3 million. The SG&A expense rate of 34% was even withthe prior year period. Cost savings in the quarter in approximately $7.0million. Year-to-date SG&A expenses increased $49.2 million. The increasein SG&A expenses are primarily attributable to the inclusion of the firstquarter of fiscal 2007 of 13 weeks of Carson’s operations as compared to only 8weeks of Carson’s operations in the prior year period. The SG&A expenserate was 35.1% as compared to 34.6% of sales in the prior year period.Year-to-date integration expenses approximated $4.7 million.

EBITDA earnings before interest, taxes, depreciation andamortization for the third quarter of fiscal 2007 decreased $12.1 million to $31.4 millioncompared to $43.5 million for the prior year period. EBITDA is a non-gap term.For reconciliation of EBITDA to net loss, please refer to our earnings pressrelease. Year-to-date EBITDA decreased $14.4 million to $76.9 million ascompared to $91.2 million for the prior year period.

Depreciation and amortization expense, includingamortization of lease-related interests, in the third quarter of fiscal 2007increased $1.8 million to $31.4 million as compared to $29.6 million in theprior year period. Year-to-date depreciation and amortization expense increased$14.5 million to $91.1 million compared to the prior year period. The increasein year-to-date depreciation and amortization expense are primarilyattributable to the inclusion in the first quarter of fiscal 2007 of 13 ofCarson’s operations as compared to 8 weeks of Carson’s operations in the prioryear period and the increased expense associated with prior year capitalexpenditures.

Interest expense, net, in the third quarter of fiscal 2007 decreased $500,000 to $27.4 millioncompared to the prior year period. Year-to-date interest expense, net,increased $3.2 million to $82.3 million as compared to the prior year. Theincrease in year-to-date interest expense is primarily attributable to theinclusion of the 13-week period of Carson’s operation as compared to 8 weeks inthe first quarter.

In the first quarter of fiscal 2006, the company recorded a charge of $6.8million reflecting the write-off of fees associated with a bridge facility andthe early payoff of the company’s previous debt.

The net loss in the third quarter of fiscal 2007 was $19.4million or $1.17 per diluted share as compared to a net loss of $10.9 millionor $0.66 per diluted share in the prior year period. For the first nine monthsended November 3, 2007, we reported a net loss of $63.6 million or $3.86 perdiluted share compared to a net loss of $41.5 million or $2.53 per dilutedshare for the comparable period last year.

Moving to some key ratios and balance sheet amounts. We havestrong balance sheets and we believe we will generate cash flow in the fourthquarter to pay down debt. Our working capital increased to approximately $550.1million compared to $442.2 million last year, an increase of 24.4% or $107.9million. The comparison is impacted by the calendar shift between the years.

Merchandise inventories at cost increased $92.4 million or9.8% compared to the last year primarily reflecting higher plans inventorybalances due to the shift in calendar and an increase in the accrual forin-transit and import merchandise reflecting elimination of the transitionservices agreement and, as previously noted, this proves up by year end.

Retail inventory for comparable stores on a shifted basisincreased 0.5%. This would be comparing our third quarter end inventory to theNovember 2006 week one inventory.

Total debt to total capitalization, including capitalleases, was 83% at quarter end compared to 84% in the prior year period. Totaldebt, including capital leases, was $1,368.6 million at November 3, 2007,compared to $1,334.0 million in the prior year period. We have $100 million ofslots and our fixed rate debt to funded debt was 67% at the end of the quarter.

Our outstanding letters of credit were $13 million atquarter end this year versus $21 million at quarter end in 2006. And our excessborrowing capacity was $254 million compared to $229 million at the end of thesecond quarter 2007 and $247.6 million for the third quarter of fiscal 2006. A covenant in our revolvingcredit facility carries a $75 million minimum requirement. As of yesterday, ourcurrent excess capacity continues to exceed the prior year.

Moving to guidance for fiscal 2007, this is a very difficultretail environment to provide economic guidance for the fourth quarter. Basedupon our performance to date through November and what we have experienced, ourupdate to guidance is as follows: We now expect fiscal 2007 earnings perdiluted share to be in the range of $1.50 to $1.80 per share and EBITDA to be in the rangeof $272 million to $280 million.

Assumptions reflected in our revised full year fiscal 2007 guidanceinclude:

– Reduced the total sales growth to an increase of 1.3%to 1.7%;

– Reduced comparable store sales to -1.9% to -2.2%; and

– Reduced the gross margin rate to a range of 36.4% to36.5%.

Our revised guidance includes the expectation that the retailenvironment will continue to bepromotional through the holidays and we will continue to manage our inventoriesand expenses accordingly. We believe we have implemented the right strategiesand are managing our business to deliver sustainable long-term sales andearnings growth.

Our Form 10-Q for the third quarter of fiscal 2007 will beavailable by December 13.

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

Anthony J. Buccina

Thanks, Keith. The third quarter started out terrific withboth our semi-annual sale and back-to-school promotions performing really wellin August. But unseasonably warm weather in September, duplicated in October,slowed down our sales momentum. This is usually when our cold weathercategories kick in as they did in the prior year, but this year they did not.Despite the disappointing results, we have the right strategy in place to drivelong-term sales growth and profitability for our company. We believe this isevidenced by some of the successes in the third quarter that I’d like tocomment about.

Franchise businesses outperformed total store sales andincreased as a percent of our totalstore sales. We’re thrilled with the performance of our key item strategypenetrating at slightly over 22% of our total store and our IVP (IncredibleValue Program), our most profitable key item program, penetrating at almost 6%of total store. We continue to advance the ball and growing our unique productpenetration, growing over 3 percentage point to total store. That came throughgrowing private brand penetration to 18.7%, an increase of over 2 percentagepoints over the prior year period and domestic unique brands and product grewto 15.4% of total store from 14.5% in the prior year, an increase of 0.9 of apercent.

Our best performing businesses in the third quarter werefurniture, hard home, better missy sportswear, cosmetics, and children’s. Ourpoor performing categories were missy and men’s outerwear, juniors,accessories, men’s furnishings and moderate sportswear. We advanced the ball on moving Bon-Ton Storesaverage price closer to that of the Carson’sstores. The average selling price went to 82% versus 76% in the third quarterversus the prior year period. I’m thrilled with our progress in growing theaverage price in the Bon-Ton Stores in coats, large-sized sportswear, intimateapparel, accessories, shoes, men’s, and home.

Our Northern Lodge strategy which are tailored assortmentsfor those stores with a more casualoutdoor lifestyle produced a better sales performance than the non-NorthernLodge Stores and at higher margins. When we looked at our business in sixteenmerchandise categories, our Northern Lodge Stores had better sales performancethan the non-Northern Lodge Stores in 15 out of 16 of those categories. Thecustomers in our Northern Lodge Stores responded favorably to the way we’retalking to her with our lifestyle merchandise.

Our retail inventory at the end of the third quarter on ashifted basis was up five-tenths over the prior year period. We continue ourstrong discipline inventory management to trend and maintain an assortmentfresher than the prior year going into the fourth quarter.

Here’s what’s happening most recently looking at Novembersales to date. I would say that the biggest change that we’ve seen is that coldweather merchandise was down double digit in the third quarter. And since theweather got colder at the beginning of November, there was a significantturnaround in cold weather categories and a few examples of that are: missy andmen’s coats, missy and men’s cold weather accessories, flannel sheets and home,just to mention a few categories that are improving in sales. You cannot underestimate the impact ofweather and the importance of cold weather merchandise on our business.

We had record-breaking days on our two larges days inNovember: Community Day and ourAfter-Thanksgiving Sale. Our merchandise marketing and store initiatives arefirmly in place for the remainder of the fourth quarter. We’re ready to competeand take our share of the holiday business. We’re focusing on what we cancontrol, telling our merchants to get the right goods at the right price andhaving over 33,000 associates in merchandise, marketing, and storesorganization focusing on execution. Our associates are focused on making ithappen to execution. People make it happen and that’s what our people arefocused on--execution. We have close-knit business relationships with the bestof class vendors throughout all merchandise categories that understand ourcompany strategy for the long term and support our strategy. They appreciatethe fact that we deal with them fairly and will respect.

The most important season of the year is the fourth quarterand I will say it again. We have the right strategy, the right goods, the rightprices, and the entire organization is focused on execution. This is along-term story not based on one month or one quarter and we’re in the earlychapters. We remain committed to executing our merchandise strategy to grow ourfranchise businesses, strengthen our key item strategy, continue to increaseour differentiation in merchandise from our competition by growing our privatebrands, our exclusive brands, and exclusive merchandise from competitivedomestic brands. We grow our market specific strategies, Northern Lodge andCity Stores, increase the Bon-Ton Stores average selling price to more closemirror the Carson’s Stores average selling price, and explode or eCommercebusiness. To date, we’ve had solid results in home, ready-to-wear, children’s,shoes, check items, and our gift cards.

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

Byron (Bud) Bergren

Thanks, Tony. While we recognize we are currently operatingin a difficult retail environment, Bon-Ton’s long-term plan is intact and weare confident in the long-term potential of the company. We remain on track toachieve our targets as the relate to the integration of Bon-Ton and Carson’swhich we believe will ultimately deliver significant shareholder value. At this time, we will open the floor forquestions.

Question-and-AnswerSession

Operator

Thank you. (Operator Instructions) We’ll take our firstquestion from Grant Jordan of Wachovia.

Grant Jordan -Wachovia

Good morning. Thanks for taking the question. I waswondering if you could give us a little more color on the gross margin declinein Q3. I think you said that there was some markdown. I just wanted to know howmuch that contributed to the decline.

Keith E. Plowman

Let me tell you what happened. The margin in the thirdquarter really came from two issues. One was that the reduction of the coldweather categories or winter merchandise really didn’t sell the way it did lastyear in the months of September-October. That was a big one. Those are highmargin categories for us. The second was to match the current calendar, weshifted markdowns from week one November to the last week of October this yearto match the calendar. Both of those contributed to the decrease in the marginrate. I would tell you that the margin dollars in the drop in October from theprior year, over 80% of that was really due to the drop in cold weather sales.

Grant Jordan -Wachovia

Great. That’s helpful. Looking at your updated guidance, Imean, I want to kind of back into the Q4 numbers. Despite the 13-week versus14-week comparison, it looks like you’re calling for EBITDA to be upyear-over-year. Obviously, you’ve got one month under your belt. Just give us alittle more color on why you’re confident you’re going to see the numbers playout that way.

Keith E. Plowman

Based upon what we have on the year-over-year comparisons,we’ve looked at what we’re doing to expenses in the environment that we have sales declining. We feel that the grossmargin will hold on a dollar basis fairly close to the prior year, you know,depending on where sales are at it could actually be at a lower rate and,dependent on where sales are at, it could be a slightly higher rate, but closeto the same rate. And this references back to what Tony was talking about wherethere is some shift in the calendar for markdowns taken on the merchandise.Then, as you look down to the expenses in this type environment, the company iscontinuing to realize what it has it integration reduction in the additionalcost savings that we have projected out there and we actually think that we’regoing to trend a little bit higher than what we had put out in our originalguidance on the cost savings. And then, finally, you go to the expenses thatwe’re eliminating in the business because it is a difficult retail environment.The combination of all those, as we didin this quarter, will drive the SG&A expenses down below the prior year. Asyou look at the third quarter, we’re down about $8 million from the prior yearin SG&A expenses and that’s after you take into account the inflation whichwould’ve increased our SG&A on a year-over-year basis by several milliondollars.

Grant Jordan -Wachovia

Right. That’s very helpful. And my final question. Maybe youcould just give us kind of the dollar magnitude in terms of the shift inmarkdown dollars?

Keith E. Plowman

We’re really not providing that piece.

Grant Jordan -Wachovia

Okay. All right. Well, thanks for taking the questions.

Keith E. Plowman

Thank you.

Operator

Okay. Next Dana Cohen with Banc of America Securities.

Kerrie McInerney -Banc of America Securities

This is Kerrie McInerney for Dana Cohen. I wanted to askedjust a couple of questions. One, on the gross margins, can you give us anysense of how the trends were between the two businesses, the core Bon-Ton andthe Carson’s business? And then, on the inventory, I think you had saidrecently those were planned flat in the quarter, so could you talk about maybehow you got from there to where you ended up? And, if you did mark it down,could you talk about what the increase was in unit setting into Q4?

Keith E. Plowman

Okay. Let me take your first two questions and then I’llturn it over to someone else to answer. Looking at what happened in the quarteras far as what we did in inventory, essentially, what we have, Kerrie, is we dohave a shift in the calendar. When you look at what we ended this year would’vebeen the first week of November of the prior year and when you look at that, wedo have a shifted inventory impact. We looked at what are purchases were, ourreceipt of the inventory in that week versus sales, and on a costed basis, thatwould’ve been in excess of $60 million of increase to our inventory on ashifted basis year-over-year.

Kerrie McInerney -Banc of America Securities

So that guidance is on a shifted basis? The guidance thatyou had given when you said slide at the end of the quarter, that was on ashifted basis? That incorporated the calendar shift?

Keith E. Plowman

Yes, it did.

Byron (Bud) Bergren

It was comparable. Yes.

Keith E. Plowman

Yes. I needed to look to Bud on that to be sure, but yes, itwas.

Byron (Bud) Bergren

It was comparable which is shifted.

Kerrie McInerney -Banc of America Securities

Okay. Okay. And then, on the gross margins, do you have anycolor by business?

Keith E. Plowman

Yeah. On the gross margins by business, Kerrie, because wecollect all our activity into a consolidation now. All purchases are donecombined and consolidated, we really can’t track anything but the top linesales and even that’s starting to lose color now because we’re moving companiesbetween the vision. So we’ll report the sales separately through the end ofthis year then that will be gone and everything will be reported as onecompany. I really can’t give you color.We deal with vendors for all the businesses on the same basis, so there’snothing that separates the two.

Kerrie McInerney -Banc of America Securities

Okay. And then one last question. Are you still looking at$106 million for cap ex for the year and can you tell me where you are to date?

Keith E. Plowman

On capital expenditures to date, we’ re sitting at about $82million and I would expect we’ll be a couple million dollars below that by theend of the year, but we’ll be close to it, a couple million down.

Kerrie McInerney -Banc of America Securities

Great. Thank you.

Keith E. Plowman

You’re welcome.

Operator

Next, we have David Glick from Buckingham Research.

David Glick -Buckingham Research

Yes. Good morning and congratulations on the great start toNovember. A couple of follow ups. A lot of my questions have been askedalready. But in terms of the gross margin, I think you walked through theimpact of the calendar shift, I’m wondering if you have any IMU benefit thatgives you a little bit of a cushion in your gross margin as your private labelpenetration goes up and you have more buying power as a bigger company?

Keith E. Plowman

We do, David, but we also have--you know, it’s still alittle over 18% of our total, so it does improve a little bit through thatamount of mix.

David Glick -Buckingham Research

So just you’re working on a slight IMU benefit versus last year?

Keith E. Plowman

Right. I think in the private brand, David, yes, we did getsome benefit on a net basis for the IMU for the private brand.

David Glick -Buckingham Research

Okay. And then, Keith, have you quantified or can youquantify the impact of the 53rd week from an SG&A cost savings?I mean, when looking at the SG&A dollar decrease in the fourth quarter andapply it to about a 10% decrease and I think we’re all just trying to get acomfort level that we can model it that way and to the extent that you canquantify part of it or all of it, obviously, that would be a big benefit.

Keith E. Plowman

We have not quantified that piece out, David. I will tellyou what the company is targeting itself for as we’re trying to maintain ourSG&A rate on an annual basis to comparable to last year even though we havelower sales. So that’s what we’re trying to push ourselves to and I think thatshould allow everyone to sort of work back the number.

David Glick -Buckingham Research

Got it. Okay. And can you give us your estimate for interestexpense for the year?

Keith E. Plowman

I really don’t have a lot of change. I think on interest, ifyou wanted to take where you were sitting at through the first three quartersand, essentially, average that out, you’re going to be close. And it would bethe same on depreciation. We don’t see a whole lot of change. The purchaseaccounting now is behind us, you know, the only thing that really impacts thoseitems is the operations within the fourth quarter and I don’t see a whole lotthat would change that significantly.

David Glick -Buckingham Research

And can you give us an estimated range of how much debt you(inaudible) down in the fourth quarter?

Keith E. Plowman

We would hope, if you take the low end range of our guidanceand run through what would happen. I’m just going to do it just on a realsimple, you know, looking at a couple of line items. If you ran down throughwhat we’re giving in guidance at the low end of the range, we would generatesomewhat a range I’m going to say of about $26.0 million of net income. Youwould have depreciation greater than capital expenditures, you know, somewherein the range of--use the $106.0 million we have and what we have out inappreciation of, say, $15.0 million and then adjust for other small itemswhether it be in working capital or other depreciation, so forth, you know, weshould be looking at a range of about $40.0 million again ready to pay downdebt.

David Glick -Buckingham Research

Okay. That’s on an annual basis, not just before…

Keith E. Plowman

Yes. That’s on an annual basis.

David Glick -Buckingham Research

Okay. Because, obviously, you’re paying your debt down asyou fund your seasonal working capital and meet your inventory.

Keith E. Plowman

Yeah. There’s no question. Right now, if you look at the endof the quarter, we are pretty close to our peak as far as our borrowings on arevolver sitting around $520.0 million. That’s fairly close to our peak. As wego forward here, because we do not own our credit card facility as this point,anything that we do in sales immediately transfers to cash within a day or twoso we get to realize the benefits. And at the end of the third quarter is oneof our high borrowing points. Now, as we move forward through November, we’regenerating additional cash for the business which is increasing our excesscapacity to your point and is reducing the debt levels.

David Glick -Buckingham Research

You could pay down around at least $200.0 millionpotentially in the fourth quarter?

Keith E. Plowman

We would expect. I mean, that’s where I was trying to gowith you, David. If you just take the $40.0 million, we would expect that that$40.0 million is going to be the reduction as compared to the prior year’s yearend.

David Glick -Buckingham Research

Got it. Okay. And just one last question in terms of thatyou’ve quantified your sales outlook. I’m just wondering what you’re seeing. Imean, clearly, it sounds like you had record day, the Day After Thanksgiving,could you give us a sense of the trend line after Thanksgiving. The weatherseems favorable for you guys. Are you still maintaining momentum? Can you giveus some color on sales?

Byron (Bud) Bergren

Sales, as I said, were strong the first three weeks. It hasslowed down a little bit starting Monday but that’s only three days and we feelvery strong about the weekend we’re going into.

David Glick -Buckingham Research

Okay. Great. Thanks a lot. Good luck, guys.

Keith E. Plowman

Thank you.

David Glick -Buckingham Research

Thanks.

Operator

We’ll go next to Michael Einstein with Credit Suisse

Michael Einstein -Credit Suisse

Good morning, everyone. A couple of questions for you.Number one, can you still talk about the level of promotions this year versuslast year of both yourself and some of your competitors that generated thebusiness in November? Number two, were there any accruals that helped thereported SG&A in the third quarter? And looking forward in terms ofSG&A, are there any initiatives that you’d like to share with us in termsof whether there’s another set of reductions that we can look forward to eitherin advertising or systems or logistics that could be a buffer for the difficulttimes right now? Thank you.

Byron (Bud) Bergren

I’ll take the sales things first, Michael. First thing is I don’tthink--we’re always promotional in the fourth quarter as well as ourcompetitors. I mean, we watch them weekly. We really didn’t add. We’ve got apretty full calendar right now, so it’s very difficult for us to add event. AsI said before, in two of the three weeks, you’ve got two of the weakest volume days. Actually, the twobiggest volume days of the year and we had record-breaking results on both ofthem. I would say that the biggest change that I see in November is really thechange in the cold weather categories which are highly profitable for us. Aswe’ve been running the businesses that are tough, we’ve been pulling back onthem. You’ve got the ready-to-wear inventory which was probably one of our more difficult businesses actuallyrunning down on a comp store basis and we’re actually trying to reorder men’sand women’s cold weather accessories right now as well as coats in both men’sand women’s.

Keith E. Plowman

Regarding your other question that you had, Michael, on theaccruals, you know, helping SG&A, I’m not sure I follow exactly. I mean, weaccrue for whatever liabilities we have. I think, overall, what I could say isthat we are cutting expenses. We had talked about, obviously, the cost savingsand we think we’re tracking better than what we had forecasted originally. Butalso just general expenses, we are looking in these times to cut out expensesthat we can that won’t harm the business as we go forward here long term. Sothat would all impact us, but that’s all reflected. As we go through eachquarter, we reflect whatever expenses we can eliminate. On the initiative side,there’s no question, we do haveinitiatives. Some are short term, some are long term. We continue to feelconfident in where we’re tracking for the cost savings, so we’ll haveadditional initiatives that will go into effect as we go into next year thatwill, again, benefit the company. We’re tracking towards the $33.0 million andactually believe that now we might have a little bit of upside potential to the$33.0 million of cost savings, but that’s the easiest way I could answer that.

Michael Einstein -Credit Suisse

Just to clarify, Keith, a couple of people in the segmentsreversed out some accruals for bonuses, incentive comp, and things like that inthe third quarter which helped the reported SG&A and I just wanted to get asense of whether you did anything like that.

Keith E. Plowman

I think all companies are looking the same way, Michael. Asyou look through what your expenses are and if it’s a cost that you don’t thinkyou’re going to incur, you certainly pull those costs out.

Michael Einstein -Credit Suisse

Okay. And I can tell you, being in Minneapolis,there is a run on cold weather accessories. There are very few scarves orgloves here.

Keith E. Plowman

Well, we’re happy to hear that.

Byron (Bud) Bergren

You could go to Herberger’s. You’ll find some there.

Michael Einstein -Credit Suisse

Yeah. I’ll be there this afternoon.

Operator

We’ll go next to Paula Kolavia with Broadway Capital.

Paula Kolavia -Broadway Capital

Good morning. Most of my questions have also been answered,but I just wanted to do a housekeepingissue. Can you tell us what you expect the share count for the fourth quarterand the full year? We’ve been using basics for the first three quarters and Ithink we’ll be using diluted.

Keith E. Plowman

That is correct. Off the top of my head, I don’t know thefourth quarter number, Paula. That’s something we certainly could provide out,but I think you could work through it if you go with about $17.35 million forthe full year and I think you can essentially back into the number.

Paula Kolavia -Broadway Capital

Okay. Thanks and good luck this holiday.

Keith E. Plowman

Thank you.

Operator

We’ll go next to James Food with the Food Corporation.

James Food - The FoodCorporation

Good morning. You’ve been talking about the strong furnitureperformance. I see you’ve been slowly expanding the furniture chain. Youhave 11 or 12. Can you give us a littledetail on the average sales per store, what you see as the market’s potential,and could you at some point in time, either sell or merge the furniturebusiness to provide some liquidity?

Byron (Bud) Bergren

Well, let me answer the first couple of that. We see a goodopportunity in furniture. It’s been a focus business. It’s actually been a realgood business for us in the past. We think there’s an opportunity right now toget some really attractive real estate deals in some of our key markets. Thefurniture business is significantly higher in sales and gross margin per squarefoot than the rest of the company in total. We actually made furniture a focusbusiness, particularly the gallery business, not the in-store business, but thefurniture gallery business is where we really see moving the business forward.

Keith E. Plowman

Jim, we have no plans to develop and sell the business.Actually, it’s not that expensive to open a furniture store compared to adepartment store and we plan on opening one or two a year based on, you know,where we get the right location.

James Food - The FoodCorporation

And what is the average sales per store?

Byron (Bud) Bergren

The gallery is over three hundred. Yeah, over three hundreddollars per square foot.

James Food - The FoodCorporation

Thank you very much.

Operator

We’ll go next to Emily Shanks from Lehman Brothers.

Emily Shanks - LehmanBrothers

Hi. Good morning. You did a very nice job in terms of thecost saves and SG&A. I just want to be crystal clear. I know that you’vegiven us a lot of (inaudible) around it. The $7.0 million of cost saves in thethird quarter, what exactly is that related to? And am I fair in saying that,from your comments, you expect to meet or exceed that dollar amount in thefourth quarter?

Keith E. Plowman

Yeah. Let me take all your questions. The $7.0 millionreally goes back to the original $33.0 million over the life of the costsavings that we felt we could realize from the acquisition and integration ofthe Saks Stores with the Bon-Ton Stores. We are tracking forward to that leveland, possibly again, above it. These would be initiatives in I’ll call itelimination of expenses that are not necessary in the business where we findbetter ways to run it. It deals with manpower operations, everything, withinthe business. And these are long term, permanent eliminations and cost savingsthat we will recognize. Based upon where we’re trending and looking at where wewere in the fourth quarter, I would expect that we’ll be somewhere close tothat $7.0 million or possibly above that number in the fourth quarter.

Emily Shanks - LehmanBrothers

Great. That’s very helpful. One more clarifying question. CapEx, you indicated was going to be a couple million less than prior guidance sothat we should be using a $106.0 number less a couple million, right?

Keith E. Plowman

That is correct. And, again, I just want to reemphasize that$106.0 is net of the contributions we get from landlords and such. You know,accounting doesn’t really allow you to report that way, but we look at the netcash impact and that number would be down a couple million.

Emily Shanks - LehmanBrothers

Okay. And then the final question I have is a bit of ahousekeeping one. Is it possible to give us what the balances are of the revolvermortgage loan facility and then mortgage notes that are outstanding? I know youtypically give it only in your case, but we are looking for it at the CNBS.

Keith E. Plowman

Okay. Well, I actually did--a little bit back I believe thequestion came up from David Glick and I was talking about $520 million in roundterms is what we have for the revolver facility. I know the senior notes aresitting at $510 million and the CNBS itself is somewhere around $250 million.Then, we have a couple million dollars sitting out in mortgages and others.

Emily Shanks - LehmanBrothers

Great. Thanks.

Keith E. Plowman

You’re welcome.

Operator

We’ll go next to Reid Ken from Merrill Lynch.

Reid Ken - MerrillLynch

Thanks. Great year. The November sales are getting off to agreat start. I was just wondering given the calendar shift--I know you justgave a rough range--but how much of that increase is from the shift in the weekof December into November? If we took that out, what do you think the comp’sgoing to be?

Keith E. Plowman

I’d have to say, Reid, I’m not sure we’ve look at it thatway. You’re saying you want to pull a week out of the sales to see what itlooks like on a comparable basis?

Reid Ken - MerrillLynch

Well, just because of the timing of Thanksgiving this yearand so on.

Keith E. Plowman

Oh, okay. I’m sorry. You’re talking just in November. Iwould say that would put you somewhere in the flat range. Yeah. Flat to off alittle bit.

Reid Ken - MerrillLynch

Okay. And then thanks for the liquidity comments. Just onelast one and that front was just as it relates to the STE entity, if EBITDA onthe stores were to fluctuate to a level where you might have a cash trap at theend of the year, the parent is not on the hook for writing that balance, right?It only applies to the stores in the entity?

Keith E. Plowman

That is correct, Reid.

Reid Ken - MerrillLynch

Okay. Great. And then, as you’re looking at you Cap Exbudget for next year, given the cautious consumer out there, are you maybelooking at dialing back on that a little bit, if you could help us understandwhat your early thoughts are?

Keith E. Plowman

I mean, as we’re looking at 2008, we are certainly lookingat the capital project that we think will benefit the company long term, but toyour point, we are also looking at what is necessary versus what is not. So,you know, we are ready to I’ll say react to what we see going forward. We wantto be careful that we don’t hurt the company’s long term performance and thebenefit that we can get for the shareholders over the next several years, butat the same time, we want to make sure that we don’t spend capital that wouldput us in a different light.

Reid Ken - MerrillLynch

Okay. Just two more small ones. I was wondering if you thinkgift card sales are kind of an indicator of the overall health of your consumerand, if so, how are those trending so far this holiday season?

Keith E. Plowman

We’re actually trending up over the prior year. I don’t knowthat that’s a great indicator for us really because we are company that did notsell a whole lot and we have put new collateral out there. We have some newgift cards that are very attractive to the consumer and we are selling moregift cards through the season. But I don’t know if that’s a good indication.

Reid Ken - MerrillLynch

Okay. And the last one is just on the competitive landscape.You know, you have one department store competitor especially in the upper Midwestwhich is trying to create some level with the customers after last year. Isthat creating any kind of a competitive headwind this year?

Keith E. Plowman

Our strongest market this year and continues to be Minneapolisand Chicago.

Reid Ken - MerrillLynch

Great. Thanks a lot.

Keith E. Plowman

Thank you, Reid.

Operator

Okay. Next we’ll go to (Inaudible) from Deutsch Bank

Analyst - DeutscheBank

Good morning. Not to harp on the SG&A, but are we seeingperhaps a tightening a bonuses in the fourth quarter here that would alsocontribute to the specific line that you’re talking about.

Keith E. Plowman

The question was asked earlier. You know, essentially, weare looking at all expenses. When you look at the reduction we have in SG&Aand I gave how much we estimate is the cost savings for the quarter, you know,what I’ll cost savings being what we felt we could realize from the integrationof the company, obviously, we are having a savings above that number. We wereable to maintain our SG&A rate as percent of sales comparable to the prioryear on a lower sales base. So there’s no question, there are some what I’llcall more temporary type expenses that have been eliminated in the business orhave been reduced that are helping us to keep our SG&A down as percent ofsales.

Analyst - DeutscheBank

Okay. And just in terms of the promotional environment, yousaid it was much harder to insert a new event, but I was wondering about thelevel of discounts. I mean, do you feel that your customers are focused on agreater discount here as we go forward though the number of events might be thesame.

Byron (Bud) Bergren

I would tell you, we’re making it easy for her in that waybecause when we’re not selling merchandise, we are pricing it aggressively aswe always do. And you’ll see, based on the third quarter, the read-to-wearareas--we did not have a good ready-to-wear performance and that’s probablywhere we have our deepest discounts. On the other hand, you’ve got things liketech that we can’t seem to get enough of it as well as coats and cold weatheraccessories right now which, let’s put it this way, we’re not giving away ourbest sellers.

Analyst - DeutscheBank

Okay. And then just on the year-over-year basis, last year,November, December, the first two weeks of January were very warm months, so weshould see positive comps in outerwear on that side of the business, correct?

Byron (Bud) Bergren

Yeah. That’s what we’re seeing actually in November and weexpect that to continue in December. Last year in December, it got much warmerand actually those categories slowed down in December.

Analyst - DeutscheBank

Okay. And then in terms of your loyalty card, have youseen…you said that you were seeing an increase. Has it been more of a steadyincrease or has there been a shift as the consumer has felt more pressurerecently on that?

Keith E. Plowman

I think it’s been a steady shift. We have put somepromotions out there to draw new customers into our loyalty program. We areseeing an increase. We’re up about 7% in applications this year on ayear-over-year basis through October. And really we’re pretty pleased with whatwe’re seeing on our loyalty program.

Analyst - DeutscheBank

Okay. And just lastly, you mentioned getting the vendorsupport. I was wondering, in terms of the level of allowances there, are theycomparable to what you were seeing last year or are you seeing an uptake ofthat on your vendor base?

Keith E. Plowman

We don’t really comment on that.

Byron (Bud) Bergren

The only thing I would tell you is that our vendorsunderstand our strategy and they support our long term strategy.

Analyst - DeutscheBank

Thank you very much, guys.

Byron (Bud) Bergren

Thank you.

Operator

We’ll go next to Gretchen Haley with J.P. Morgan.

Gretchen Haley - J.P.Morgan

Good morning. Thanks for taking my call. I just wanted toask your comment on furniture doing well. Can you talk about just how that’splaying out in the weak housing market?

Anthony J. Buccina

Well, you know, some of the furniture--this came up beforewhen the housing market was tough. Our furniture business was actually goodlast year also. The same question came up. There is a lot of newness happeningin furniture right now. If you look at the mattress business which is a prettysizable percent of the gallery business, there’s a lot of newness that’s goingon there in the way of sleep studio and foam and expensive mattresses and thefoam business in there as well as the more luxury sleepwear is really fuelingthat mattress business which is highly profitable and a big piece of the furniturebusiness.

Gretchen Haley - J.P.Morgan

Okay. Thanks. One more question. Can you comment on justwhat exclusive implies when you’re talking about private label and exclusiveand how the percentage breaks down?

Anthony J. Buccina

As I said, I think the private brand penetrated at $18.7 forthe third quarter, that’s up a couple points over the prior year. And what wecall exclusive vendors, to us, those are vendors are that not carried by ourcompetitors or it’s domestic product from competitive vendors that is differentfrom our competitors and where we have them make special merchandise for us.And all that penetrates. The penetration on both sides is up for the thirdquarters and is on track for where we’re saying we want to be.

Gretchen Haley - J.P.Morgan

Okay. Thank you.

Operator

We’ll go next to Colleen Burns from CIBC World Markets

Colleen Burns - CIBCWorld Markets

Hi. Good morning. On the inventory front, where do you standon clearance inventory?

Byron (Bud) Bergren

We entered the third quarter up 5% in inventory, onclearance inventory, and we ended up half a point in total on our total compstore inventory.

Colleen Burns - CIBCWorld Markets

Okay. And then when do you expect your next major inventoryreset or full reset and when do those inventories ship in? Is it earlyDecember?

Anthony J. Buccina

Yeah. You’re starting to see our transition merchandise comein now. We start having crews and spring setups now.

Colleen Burns - CIBCWorld Markets

Okay. Did any of that ship in the third quarter or is thatreally all shipping in the fourth quarter?

Anthony J. Buccina

No. That’s starting to ship in now.

Colleen Burns - CIBCWorld Markets

That’s starting to ship in now. So the inventory that’s inthe third quarter is still just the fall/winter inventory?

Anthony J. Buccina

Yes.

Colleen Burns - CIBCWorld Markets

Okay. Great. And then with respect to working capital, areyou still looking at that to be flat year-over-year?

Anthony J. Buccina

Yes.

Colleen Burns - CIBCWorld Markets

And then, I know you talked a little bit about Minneapolisand Chicago being some of your stronger market areas, I mean, can you talkabout any of your weaker areas that you’ve seen, especially recently?

Anthony J. Buccina

Some of the weaker areas--actually, one thing that didchange in the third quarter was where we were involved with the auto industry.In the first half of the year, they were running about--which is Indiana, Ohio,and Michigan--they were running about even with the rest of the company, but inthe third quarter, they were off about 1% versus the rest of the company andmore so in parts of Ohio and in Michigan. That’s where it’s really slowed downa little bit, even though Detroit, where we have three Parisian stores, ourDetroit market has been very good. It’s more outside of Detroit that’s been alittle weaker.

Colleen Burns - CIBCWorld Markets

Okay. Great. That’s very helpful. And then just lastly, onyour credit card program, have you heard anything from HSBC on an increase indelinquencies or any changes being made there?

Keith E. Plowman

No. We actually checked with them. That’s very important tous. And we continue to have conversations. We partner with them very strongly.And, actually, they said as of the end of the third quarter they were verycomparable to the prior year.

Colleen Burns - CIBCWorld Markets

Okay. Great. That’s it for me. Thanks a lot.

Keith E. Plowman

Thank you.

Operator

We’ll go back to the lineup. Dana Cohen from Banc of AmericaSecurities.

Kerrie McInerney -Banc of America Securities

Hi, guys. It’s Kerrie again for Dana. Just a couple of quickfollow up questions. I was wondering if you could give us the impact of the 53rdweek in SG&A. And then, also, on the inventories, I don’t mean to beat adead horse here, but when I take that $60.0 million out, I’m still getting a 3%increase or so, about 3-3.5%, so is there something else in there that you’retaking out to get to the flat comp inventory?

Keith E. Plowman

Again, when Tony talks to the flat inventory, he’s lookingat the retail stock ledger of what inventory has come in. He’s not looking atwhat we accrue for in-transit, Kerrie. And we have the same issue that we hadthe second quarter, it will be out by year end, where last year we would’ve hadin-transit, recorded through or worked through the TSA agreement which means we would not havebeen recording in exactly the same wayin a year-over-year basis. This is something that does correct itself by yearend because, at that point, we were recording all inventory ourselves. Andwe’re not going to a TSA agreement, butwe don’t have that comparable year-over-year yet. And that’s around $40.0million.

Kerrie McInerney -Banc of America Securities

Okay. Thanks.

Operator

Okay. Next is Bill Reuter at Banc of America Securities.

Bill Reuter, Banc of America Securities

Good morning, guys. You guys commented that cold weathermerchandise was down double digits, I think that was over September andOctober. I’m wondering if you comment on how much this category might have beenup in November?

Keith E. Plowman

Well, there’s a sizable swing and it’s up by a double digit.

Bill Reuter, Banc of America Securities

Okay. So, I mean, given the fact that November is a biggermonth, is it possible that the changes in November would more than offset thedecreases in September and October in that category?

Byron (Bud) Bergren

I think in the fourth quarter you will see that. I can’treally say that it will happen in November.

Bill Reuter, Banc of America Securities

Okay. And then with regard to--I mean, you guys do most ofyour purchasing for the holiday period in the pretty early spring, were youguys able to tweak your orders based upon, you know, expectations from theconsumer that might have been a little more negative at that point?

Byron (Bud) Bergren

Yes.

Bill Reuter, Banc of America Securities

Okay. And then my last one is with regard to your privatelabel, do you guys have any sort of a different markdown strategy there in theevent that those products aren’t able to sell? And, I guess, do you worryabout--I mean, there’s a great margin attached to these products, but do youworry about these inventory levels at all?

Byron (Bud) Bergren

No. We treat the private brand the same way we treat theselling of our domestic products. If it’s selling, the markdowns are taken on anormal basis. If it’s not selling, then it’s a more aggressive basis. We reallydon’t separate that from the domestic market.

Bill Reuter, Banc of America Securities

So the markdowns don’t get any more aggressive more quicklyor anything like that?

Byron (Bud) Bergren

No.

Bill Reuter, Banc of America Securities

Okay. That’s all for me. Thanks.

Operator

Okay. Next to David Glick with Buckingham Research.

David Glick -Buckingham Research

Keith, just a quick follow up. The tax rate we should beusing for the fourth quarter and the year, could you help us with thisarrangement?

Keith E. Plowman

Yeah. I think overall for the year I would estimate between36.5 to 37.5. We really can’t finalize it and put it any closer than that atthis point, David. I would’ve been down. It reflected a much lower rate in thethird quarter because of the lost position and the interest accruals that youhave to do under 1040(a), but for the year we’d expect it to be somewherearound 36.5 to 37.5.

David Glick -Buckingham Research

Okay. Thanks a lot.

Keith E. Plowman

Thank you.

Operator

We have time for one more question. We’ll go to RobertWright with Centurion.

Robert Wright -Centurion

Hi. I had one question in listening to the credit line andso forth. When I think back to the Saks transaction, I think, I’m not sure,with the stock at 11.5 and the bond sitting at 78, that the enterprise value isnow less than you paid for the position of Saks? And the bonds , they say about15.5 yields worst and you talk about using your paying down debt and usingexcess liquidity. Have you looked into or thought about taking advantage of themarket, you know, of having the shareholders and the bonds because the interestrates you’re paying are so much less on your lines than you’re paying in themarket, more or less, and I would assume that it would be dramatically additiveto earnings? Is that prohibited in some way because of some agreement that youhave or covenants? It just would make obvious sense to be buying those bonds ifyou can?

Keith E. Plowman

Good morning, Robert. This is Keith. We don’t comment on anyspecific items like that whether it be with stock, bonds, or anything else. Butas far as are we prohibited from doing either? No, for the term of our debtagreement.

Robert Wright -Centurion

Okay. Great.

Operator

That is all the time we have for questions. I’d like to turnthe conference back over to our speakers for any closing remarks.

Byron (Bud) Bergren

Thank you. In summary, we are encouraged by the improvementwe saw in our business since thebeginning of November. We have twenty-five more shopping days until Christmas.We’re ready and we know we will continue to do well in our markets. We lookforward to speaking with you about the fourth quarter and full-year resultsat our conference call in March. Andthank you for your time in joining us today.

Operator

This concludes today’s conference. We thank everyone foryour participation.

You may now disconnect your lines.

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