Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The Neiman Marcus Group, Inc.

F1Q08 Earnings Call

December 5, 2007 11:00 am ET

Executives

Stacie Shirley - Vice President, Finance

Burton M. Tansky - President and Chief Executive Officer

James E. Skinner - Executive Vice President, Chief Financial Officer

Analysts

Karru Martinson - Deutsche Bank

Emily Shanks - Lehman Brothers

Carla Casella - J.P. Morgan

Grant Jordan - Wachovia

Dana Cohen - Banc of America Securities

Jeff Kobylarz - Stone Harbor Investments

Ryan Blume - Hartford

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Neiman Marcus Inc. conference call. (Operator Instructions) I would like to turn the presentation over to your host for today’s call, Ms. Stacie Shirley, Vice President, Finance. Please proceed.

Stacie Shirley

Thank you. Good morning, everyone and thank you for joining us. Joining me on the call today is Jim Skinner, our CFO; and Burt Tansky, President and CEO of Neiman Marcus.

Before I pass the call to Burt, we have our normal housekeeping items to review. The call today involves our view of the future for the businesses that make up Neiman Marcus. Any statements referring to the expected future plans and performance of Neiman Marcus are forward-looking statements and actual future results may differ materially from such statements.

Please refer to our SEC filings where we include a description of the factors and risks that might cause our future results to differ from what we will be discussing today. Unless noted otherwise, all references to operating earnings exclude the impact of purchase accounting adjustments related to the acquisition of the company in October 2005.

In addition, unless noted otherwise, all statements reflect the sale of Kate Spade and the financial statements have been restated and treated as discontinued operations. For more details, please refer to our 10-Q, which we filed this morning.

And with that, I will turn the call over to Burt.

Burton M. Tansky

Good morning and thank you for joining us today to review our first quarter results. This was another good quarter for us as we once again achieved record sales and operating earnings. Let me begin by highlighting a few of our achievements.

Sales continue to be strong with an increase in total sales of almost 9% and comparable revenues increased 6.5% for the quarter. This is on top of a 6.8% comp sales increase last year.

Our sales per square foot reached a new high of $647 for the last 12 months compared to $613 a year ago. This is an increase of almost 6%. We continue to hold an industry-leading position in terms of productivity.

We’ve achieved this improvement in productivity while still opening new stores which can be less productive in the first few years of operation and therefore a drag on overall sales per square foot.

Having said that, the environment has proven to be somewhat challenging this season and we have experienced a year-over-year decline in our gross margin rate for the quarter. Last spring we made a decision to buy the fall season at a higher rate of increase than we have in the past few seasons.

As the season progressed and sales did not materialize commensurate with the inventory levels we had planned, our merchants reacted quickly, working with our vendor partners to find a solution to our overstock position. Additionally, in an effort to bring our inventory levels in line with demand, we incurred higher markdowns.

However, despite these challenges, we still achieved an adjusted operating margin of 15.5% for the quarter and we achieved a first quarter record operating income of $175 million, which is a 4% increase over last year.

Now let’s review our specialty retail stores division, which includes Neiman Marcus stores and Bergdorf Goodman. Sales at Neiman Marcus stores increased 5.4% on a comparable basis and sales at New York City at Bergdorf Goodman were a very robust 11.6%. That’s over a strong 10.3% increase last year.

Supporting these results were favorable sales trends in the following categories: designer handbags, shoes, couture, beauty, jewelry, primarily our higher end precious jewelry, and men’s furnishings.

We continue to work diligently on a number of initiatives at our specialty stores division that we discussed last quarter. These initiatives are centered around merchandise assortment, customer interaction, and logistics planning for our ongoing growth. Although the initiatives have not changed, we continue to take active steps in implementing these initiatives into our overall strategy. I will update you in the future as we progress.

And now an update on our real estate activities; as you know may know, our most recent store opening was a 100,000 square foot store in Natick, Massachusetts, a suburb of Boston. The store is beautiful with a very unique exterior finish that has received very positive reviews.

As to future openings, our plans remain unchanged from what we discussed last quarter. We have publicly announced five additional locations that will open in the next four fiscal years. In addition to full line stores, we opened a last call clearance center in Philadelphia, Pennsylvania this past November.

As for remodels, we continue with a major renovation at our Atlanta store, where we have completely redone the store and added approximately 50,000 square feet. Even with the disruption caused by the remodel, business has remained strong. We expect to finish construction by early fiscal 2009.

Obviously, the store environment is critical to that experience so that we are highly motivated to invest continuously in our stores to ensure that we are adding excitement to the store environment and always exceeding our customers’ expectations.

To that end, we have also focused on several minor remodels this year. Often a major remodel includes adding square footage and touching almost all areas of the store. A minor remodel is more focused on certain aspects of the store. While the investment is significantly less than a major remodel, the impact can be very meaningful.

In addition, we have many selling projects that will further enhance our stores, resulting in higher sales volume and greater productivity. As an example, selling projects include vendor shops, merchandise reallocation, and a repositioning of a department.

Lastly, at Bergdorf Goodman, we continue our capital investment. In fiscal 2008, we have planned several projects, including remodeling part of the main floor in the jewelry area, redoing part of the men’s store, and building several vendor shops.

Now a few comments on our direct marketing segment, which includes the Neiman Marcus, Bergdorf Goodman, and Horchow brands. Sales for the quarter were $171 million, an increase of approximately 7.1%, over a strong 14.7% increase last year. Leveraging this sales increase, we achieved a record operating margin for the quarter of 13.6%, a 50 basis point improvement over last year.

Overall, our fashion business was very strong this quarter. More specifically, the strongest categories in the direct division included Jewelry, women’s apparel, designer shoes, handbags, and men’s furnishings.

Our Internet sales continued to grow at a much faster pace than overall company growth. Internet sales for the quarter were $124 million, an increase of almost 23% over last year. All of our Internet businesses contributed to this growth.

As expected, catalog sales declined. We continue to reduce our circulation to recognize the shifting of revenues to online and we expect this trend to be ongoing. In addition, the home area, primarily under the Horchow brand, continues to be challenging. It is apparent from the results of businesses in the home improvement and home building sectors that the home area is difficult right now and our business is no exception.

In order to continue our strong growth at direct, we have many initiatives in place. Today I’ll provide a high level update of these initiatives.

We continue to explore new and innovative marketing techniques, including virtual trunk shows and enhanced tools on the site to increase the interaction with our customers. Our goal is to reach our customers in unique ways, to keep them excited about visiting and more importantly, shopping on our site.

In addition, in fiscal 2008 we will continue to invest a significant amount of capital and technology to support this business. These initiatives will enhance our systems to allow us to more efficiently and proactively manage our various businesses.

The projects include the continual rollout of merchandise reports, which will enable our merchants to better understand the nuances of their business; completing deployment of an item workflow management system that will reduce the labor hours involved in setting up new products and will allow for greater flexibility in our buying decisions; and lastly, upgrading our systems platform to increase customer personalization and enhance navigation and search capabilities.

On a final note, I am pleased to announce some recent internal promotions. Karen Katz, President and Chief Executive Officer of the Neiman Marcus stores, has been promoted to an Executive Officer of the Neiman Marcus Group, with additional responsibilities for strategy, business development, and marketing.

Also, Jim Skinner, Senior Vice President and Chief Financial Officer of The Neiman Marcus Group, has been promoted to Executive Vice President and Chief Financial Officer of The Neiman Marcus Group and assumes the additional responsibility for information systems.

Jim and Karen will continue to report to me and will become part of the Office of the Chairman. The Office of the Chairman will be responsible for leading the overall strategic direction of the company and setting policy. Karen and Jim have demonstrated outstanding leadership capabilities, exceptional performance, and an unrelenting focus on performance and these promotions will provide them with development opportunities that will help them prepare for broader responsibilities as we grow.

In closing, let me reiterate -- we are pleased with our results. This was a quarter of great reflection for our company as we celebrated our 100th anniversary. We realize not many retailers reach this milestone and we don’t take it lightly. We achieved this accomplishment through the strength of our associates, our vendor partners, and our customers and we look forward to the next hundred years.

But right now, we are focused on the holiday season. We announced our November sales results this morning. Total comparable revenues increased 5.8% for the month of November. Comparable revenues in the specialty retail segment increased 6.1% while Neiman Direct comparable revenues were up 4.3%. We believe this is a good start to the season and as always, we will strive to successfully balance our long-term strategy of customer service, merchandise and fashion leadership with continuing to improve the productivity and profitability of our operating model.

Thank you, and now Jim will review the financials.

James E. Skinner

Thanks, Burt. First, I will begin with our consolidated results. Let’s begin with sales. As Burt mentioned, we experienced strong trends reaching $1.13 billion in the first quarter of ’08, an increase of almost 9% from last year. Comparable revenue for the first quarter increased 6.4% for the specialty retail store segment and 7.1% for our direct marketing segment.

For the quarter, gross margin decreased approximately 50 basis points compared to last year. This decrease was primarily due to higher markdowns and a lower level of full price sales at our specialty retail stores during the quarter, partially offset by the leveraging of our buying occupancy costs.

As Burt mentioned, we conducted additional promotions in the first quarter to reduce inventory levels. In the second quarter, we also expect to incur a year-over-year increase in markdowns in our specialty retail stores as we will continue additional promotional efforts to complete the sell-through of the fall season’s inventory.

We also experienced decreased margin at our direct marketing segment, primarily due to the higher usage of free shipping promotions compared to last year. We do expect our usage of free shipping and other promotional activities will continue through the second quarter.

Based on the additional markdowns and the continued usage of free shipping, we currently expect our second quarter gross margin rate will be lower than last year.

For the first quarter, our SG&A rate increased about 20 basis points. This increase was primarily due to a higher level of advertising and promotional cost of approximately 50 basis points incurred by our specialty retail store segment in connection with first, the celebration of our 100th anniversary in October, 2007, and also promotional events and activities conducted to facilitate the sell-through of inventory.

Partially offsetting this increase was a decrease in marketing and advertising costs incurred by our direct marketing segment of approximately 20 basis points, primarily due to the continued planned shift from catalog to web-based marketing. Web marketing costs are generally lower as a percent of revenue than print catalog.

In addition, we leverage the fixed component of SG&A expenses over a higher revenue base.

In total, adjusted operating earnings, which excludes certain non-recurring items as detailed in our earnings release, increased approximately 4% in the first quarter compared to last year.

On a rate basis, adjusted operating earnings declined to 15.5% of revenue, compared to 16.2% a year ago, primarily the result of the factors I mentioned earlier, including higher markdowns and a decrease in full price selling at our specialty retail stores, along with an increased advertising and promotional cost incurred by our specialty retail stores.

Now a brief for you of our segments; specialty retail sales increased 9.3% for the quarter and on a comparable basis, sales increased 6.4%. Sales at the specialty retail stores division benefit from the success of our new stores and major remodels and ongoing positive impact of the initiatives that Burt discussed.

Operating earnings at the specialty retail division were $166 million this quarter compared to $157 million in the prior year, an almost 6% increase. On a rate basis, specialty retail stores operating margin was 17.2% compared to 17.8% for the prior year fiscal period.

This decrease is due to the factors mentioned earlier, including higher markdowns on lower level of full-price selling, along with a higher SG&A expense as a percentage of revenue driven by higher advertising and promotion expenses.

At Neiman Marcus Direct, the Internet again drove the sales of the division with Internet sales growing approximately 23%. We again had improvement in several key e-commerce metrics, including total number of customers, average order value, gross demand, and number of orders, and we increased our conversion rate, which as many of you know is an extremely important direct-to-consumer business.

We also did an excellent job of leveraging our operations. Quarterly operating earnings at Neiman Marcus Direct increased almost 12% to $23 million, which represents a record operating margin for the first quarter of 13.6%, an increase of over 50 basis points from last year.

The increase in operating margin is primarily the result of a decrease in marketing and advertising costs, as we discussed, as a percent of sales, as business continues to shift to the Internet, that was partially offset by a decrease in margin realized on delivery and processing revenues.

In September 2007, our board of directors approved certain changes to our long-term benefit program. In connection with the redesign of this program, we recorded a one-time, non-cash pension curtailment gain of $32 million in the first quarter of fiscal 2008 to reflect the impact of freezing benefits to be provided by our pension retirement plan as of December 31, 2007.

We made this change after a careful review of our current program and analysis of benchmarking data for retirement programs in our industry. The new plan continues our longstanding commitment to provide competitive retirement benefits but also reflects changes in the way our associates work and plan for retirement.

Also for the first quarter, we incurred approximately $61 million of net interest expense compared to $69 million last year. The decrease is primarily due to the repricing of our term loan as well as the pay down of $250 million of debt during fiscal 2007.

Our effective interest tax rate for the quarter was 38.7% and we expect our rate going forward will be approximately 39.1% -- income tax rate, right.

Now just a few comments on the balance sheet; inventory increased about 11.8% to $1.09 billion, which is above our sales improvement. We eliminate the -- if we eliminate the inventory for the two new stores we opened and the new clearance centers, inventory increases are approximately 8.1%, which is slightly below our sales improvements.

As Burt mentioned, we reported a 5.8% comp for November. Keep in mind most retailers had a 53rd week in their last fiscal year, which creates a timing shift in the current year. We will not have our 53rd week year until the end of this fiscal year; therefore, we don’t have the comparable issues that most retailers are experiencing this year.

With that, I’ll thank you and turn it over to Stacie.

Stacie Shirley

Thank you. We ended the first quarter with cash of $81 million, compared to $159 million a year ago. The $159 million included the proceeds from the sale of Laura Mercier of approximately $41 million. We held back cash until the second quarter of fiscal 2007 when we made a payment on the term loan.

Capital expenditures for the quarter on a gross basis were $46 million and we received developer contributions of $12 million, resulting in net CapEx of $34 million. The majority of the CapEx this quarter was spent on new stores and major remodels.

For fiscal 2008, we expect capital expenditures on a gross basis to be in the range of $200 million to $210 million and on a net basis, approximately $165 million to $175 million. As in the past, the majority of our planned capital spend will be investments in new stores, remodeling of our existing stores, and in technology.

Our adjusted EBITDA for the first quarter of 2008 was $210 million, which represents an improvement of 2.4% from last year. Excluded from the Q108 adjusted EBITDA result is the $32 million non-cash pension curtailment gain that Jim mentioned and as detailed in our earnings release.

The combination of utilizing our excess cash flow to pay down the term loan and the continued strong EBITDA performance has resulted in a leverage ratio of approximately 4.3 as of the end of the first quarter. When we adjust the calculation to reflect the definition per the debt documents, our leverage ratio is lower at about 4.1. This compares to a leverage ratio of in excess of 6 times at the time of the acquisition.

And lastly, we estimate the general basket for restricted payments to be in the range of $360 million to $380 million as of the end of first quarter and as we’ve discussed in the past, it’s a very detailed calculation so until the point in time when we anticipate using the basket, we’ll continue to just estimate the size of it.

And with that, we’d like to turn the call over to the operator and we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Karru Martinson from Deutsche Bank. Please proceed.

Karru Martinson - Deutsche Bank

Good morning. If we could drill down a little bit more on some of the outlook for gross margins; with inventory up, a much more promotional environment, should we expect a similar or greater contraction in gross margins here as we go forward?

James E. Skinner

Well, as you may know, we don’t provide forward-looking guidance so other than to say that our gross margins will be down compared to last year, that will be the only guidance that we’ll provide.

Karru Martinson - Deutsche Bank

Okay. In terms of your aspirational customers, what are you seeing there on that side of the market?

Burton M. Tansky

Well, we’re seeing a continual interest in the quality merchandise that we sell and we’re still selling it -- the best of our merchandise continues to sell very well. It’s hard for us to focus in on the aspirational customer because we don’t know them nearly as well as we do our full-time loyal customer.

However, I will tell you this, that we’re getting good selling across most categories and at a variety of price ranges, starting from what we call opening price to the top, so my assumption is that the aspirational customer is still very much in the stores and shopping.

Karru Martinson - Deutsche Bank

Okay, and I guess in that same vein, what are you seeing at your more experimental, the custom stores?

Burton M. Tansky

Well, as you know, the Cusp stores, we have four of them, one of which in Northbrook, which is a suburb of Chicago, opened quite recently. And all four of them are doing quite well. We are constantly trying to understand more and more about the business, fine-tuning the assortments and we’re very pleased with the results that we’ve gotten so far.

Karru Martinson - Deutsche Bank

And just lastly, in terms of the home category, perhaps could you drill down a little bit more in terms of the plans to improve that side of the business? Some other retailers have talked about some early signs of traction on that and I was wondering what your outlook was there.

Burton M. Tansky

Well, our outlook is probably very similar to what the industry is going through. Our sense is that home remodeling has subsided somewhat. New house building we know is down substantially and I think generally, the customer is waiting it out to make the kind of home improvements that would include purchases of our kind of product, which includes furniture, which is a big part of our business.

We continue to sell furniture and we continue to sell across all the accessory lines. It’s just that we’re not selling at the levels that we have been. We’re not going to change our strategy. We’re not going to get more promotional than we are. We’re not going to start discounting.

What we’re going to do is continue to offer the customer a fine product, an assortment of products as we always have and get through this period.

Karru Martinson - Deutsche Bank

Thank you very much.

Operator

The next question comes from the line of Emily Shanks from Lehman Brothers. Please proceed.

Emily Shanks - Lehman Brothers

Good morning. I wanted to see if you could help us understand what the ad spend was specific just to the 100th anniversary -- can you break that out for us?

Stacie Shirley

What the spend was for the 100?

James E. Skinner

You were breaking up. We had a little trouble hearing your question.

Burton M. Tansky

Yeah, say it again, would you, please?

Emily Shanks - Lehman Brothers

Apologies. Can you hear me okay? Okay, thank you. We know that you noted that SG&A deteriorated as a result of spend on both the 100th year anniversary as well as just overall potentially increased promotional spend. But I wanted to see, could you let us know what the actual breakout was just for the 100th year anniversary?

James E. Skinner

In round terms, if you look at the 50 basis points decrease in SG&A, probably half of it relates to the 100th anniversary.

Emily Shanks - Lehman Brothers

Okay, perfect. Thank you. And then on the question around Cusp, thank you for the details on it. I just wanted to see -- would you categorize that customer, and I recognize it’s early on in its life, but would you categorize that customer as more aspirational than the customer visiting the Neiman Marcus stores?

Burton M. Tansky

Well, I think if you looked at overall, generally I would say yes; however, what we are finding is that we are finding some customers, probably more than we anticipated, that could straddle both Neiman’s and Cusp and are far from aspirational, or are affluent and are coming in and buying at the Cusp store because they like the assortments and they like what they see and that, of course, has resulted in our selling at the top of the price range.

But I would say that in a broad sense, that the customer is probably more aspirational certainly than the Neiman Marcus stores experienced.

James E. Skinner

In some ways, you’d almost view that [cyclographical] versus demographical though, because it tends to be a younger age group, that tends to be less wealth.

Emily Shanks - Lehman Brothers

Okay, that’s very helpful. And then just one last question; in terms of the new store openings for ’08, are we still on track to see L.A. in the fall and then Seattle in the fall of ’09?

Burton M. Tansky

Yes, we’re on track. No change.

Emily Shanks - Lehman Brothers

Okay. Thank you.

Operator

The next question comes from the line of Gretchen [Halye] from J.P. Morgan. Please proceed.

Carla Casella - J.P. Morgan

It’s actually Carla Casella from J.P. Morgan. I’m wondering if on the cost side, are you still seeing -- I’m sure you’re still seeing inflation on the cost of your goods. Are you passing -- how much of that would you say you are passing on through your pricing?

Burton M. Tansky

Yes, we’re seeing inflation, of course, with the dollar continuing to weaken. We pass it on 100%.

Carla Casella - J.P. Morgan

Okay, and there’s no problem there?

Burton M. Tansky

We pass along the inflation to our customer.

Carla Casella - J.P. Morgan

Okay.

James E. Skinner

That doesn’t mean that the vendors aren’t working to mute that inflation.

Burton M. Tansky

Yeah, the vendors are doing what they can and have probably buffered some of it. It is hard to tell because we don’t know what their cost basis is. However, whatever declines in the dollar, we pass along.

Carla Casella - J.P. Morgan

Okay. And is there any way to know approximately how much of your revenues are tourist driven?

Burton M. Tansky

It’s very difficult. We don’t do surveys or exit surveys. We don’t do counts and the credit card doesn’t tell us enough information because many of them work off of -- at Bergdorf especially off the Visa, MasterCard or American Express, so it’s hard to track that.

We just have a sense -- you know, this is all kind of intuitive -- a sense that a chunk of the traffic in New York clearly is from throughout the world and especially from Europe, where it’s quite advantageous to fly over here to shop if you’re a citizen of Britain or anywhere in Europe, actually.

If you walk the streets of New York, which I know you must do, you hear every language conceivable and we think a lot of those people find their way into Bergdorf.

Carla Casella - J.P. Morgan

Yes, we’re very busy with tourists here.

Burton M. Tansky

We see some of them we think in Las Vegas. We see some of them in our Beverly Hills store. We see some down in Bal Harbor. From South and Central America and Mexico, we continue to get very good business in our San Antonio, Coral Gables, Bal Harbor stores.

Carla Casella - J.P. Morgan

Okay. And then you talked a bit about taking higher markdowns and lower full price selling. Can you distinguish whether you are seeing any change in shopping pattern from the in-circle customer or is this purely the aspirational that you think is the one that’s been most effective?

Burton M. Tansky

Actually, our in-circle customer is continuing to do well. It’s probably to some degree the aspirational customer.

Carla Casella - J.P. Morgan

Okay, and then in terms of new -- do you track or has the trend changed at all in new in-circle customers? Are you seeing fewer people being added to that new in-circle list?

Burton M. Tansky

We don’t have the information sitting here but we’re adding people all the time. Actually, it’s a greater body than it was a year ago.

James E. Skinner

In general, if you look over the time which [is in some of our] presentations, in-circle has grown faster than our average so again, we’re not comping negative, so if we’re comping positive, you’d expect to see more in-circle customers.

Carla Casella - J.P. Morgan

Okay. And then just one last question; on the ending inventory being up about 8%, does that mean that you did more markdowns in November to clear some of that or should we just expect it to stay up in the high single digits each quarter, excluding the unusual swings?

James E. Skinner

On the -- okay, I see. I didn’t follow quite your question. We think in more seasons, which is no big surprise to you guys, more than -- so we’re obviously sitting here at a point in time in October. So you look at the inventory, I think you’ll see our inventories come more in line but you’ve got to look at in total, even though you can look at it on a comp basis also.

The fact is we bought a little more aggressively this year and we need to get back in line. We’ll probably buy more conservatively in the spring.

Burton M. Tansky

We were coming off a very strong -- as you know and if you’ve been tracking us, which you have been, you know that we’ve had many years of great success and ongoing success both on the top and bottom line. And our trend was very strong when we started to buy this merchandise, so we were a little more aggressive than we normally were. It didn’t come together so we are going to get back into balance and we’re moving quickly to do so.

Carla Casella - J.P. Morgan

Okay, great. Yep, I trust you. I’ve always successfully done it in the past. Best of luck. Thanks.

Operator

The next question comes from the line of Grant Jordan from Wachovia. Please proceed.

Grant Jordan - Wachovia

Great. Thanks for taking the questions. Just a couple more; can you give us a little more color on if there were any categories that got marked down heavier than others?

Burton M. Tansky

Yeah, the one area that we’ve been a little bit disappointed in because it’s really unusual for us would be the women’s designer apparel. Some of the European collections, and I won’t name them for fear of reprisal, some of them have been very disappointing. There have been a few that continue to do very, very well but generally that area has been weak.

Grant Jordan - Wachovia

So it sounds like from some of your earlier comments the problem in the slower sales and the resulting markdowns is more that your customers had slowed down. Do you feel like product selection had anything to do with that or was is strictly that customers pulled back?

Burton M. Tansky

Well, you know, it’s hard to tell. You just don’t know. Those collections that apparently were well-received, the customers have bought very aggressively and price was not an issue and because they sensed that the collections were right on target in terms of fashion, style and trend.

Those that didn’t seem to hit dead center for the customer, meaning they were correct on fashion and trend, have languished, and I think it’s just the customer making a more thoughtful assessment of what she sees.

James E. Skinner

I was going to say one thing; you talk about slowdown and you look at our comp in the first quarter. It was 6.5. A year ago it was 6.8.

Grant Jordan - Wachovia

Yeah, not really a slowdown.

James E. Skinner

The issue is not the demand side -- it’s the choice we made to be more aggressive in the buy. If you buy more than demand, you have to get rid of it.

Burton M. Tansky

You know, the customer continues to demand from us quality and we’re delivering it and none of that has changed and the best of our merchandise continues to sell very well.

Grant Jordan - Wachovia

And then just kind of going along with that, so you bought this fall last spring. Do you think you’ll see some more -- did you buy winter as aggressively as you bought fall?

Burton M. Tansky

Well, there is no winter for us. It’s fall and then it becomes cruise/resort, the new cruise/resort merchandise is in the stores and more is on its way, so we’re now shifting gears and cruise/resort is what you might call either early spring or -- you know, it’s the cruise/resort season, which our customers buy into. And that merchandise has already started to sell.

So what we are doing is we are in the process of liquidating fall and we’ve readjusted the buys where we could for cruise/resort and we’ll be, and as the spring merchandise comes in, we’ll be on -- we’ll get that inventory managed the way it should be and the way we want it to be.

Grant Jordan - Wachovia

Okay, great. Thanks for the color.

Operator

(Operator Instructions) The next question comes from the line of Dana Cohen from Banc of America Securities. Please proceed.

Dana Cohen - Banc of America Securities

I just wanted to go back on this -- coming into this quarter, inventories were up 16 and sales were up 9. Coming out of this quarter, inventories are up 12, so they’ve moved in the right direction, sales were up 9 in the last month. So would it be fair to think that the liability spread is better going into the fourth quarter than it was -- I’m sorry, going into the holiday season than it was going into fall?

James E. Skinner

Well, here’s what -- I think the answer -- the answer is yes, except it’s probably not for the reasons you stated. If you go back to the earnings call in September, one of the things we talked about that the inventory levels at July was a choice to bring in our goods earlier. So if you think about it, the issue we have is not the earliness. Say that we had bought at a lower rate but chose to bring a lot more early, in July you could have still seen the exact same issue in July with having no impact on the fall.

So one is how much you bought and one is when you chose to bring it in. You kind of separate those issues.

That being said, if you sit there with the exposure we had at that point in time would have been our total buy. Also, we’ve been taking a lot of actions September, October, November to decrease that exposure.

Dana Cohen - Banc of America Securities

But it still would be fair to think that your fall liquidation inventory is up year over year as a component of this inventory. There’s more that needs to be marked down than there would have LY.

James E. Skinner

Yes, obviously there’s bigger markdowns in the second quarter than the first quarter.

Burton M. Tansky

Yeah, the answer is yes but in the first quarter, for the most part through October, we don’t mark down because that’s all full-priced selling. September is our second-biggest month and it’s the beginning of the fall season. And then as we saw that the sales were not coming commensurate to the inventory levels, we took some very aggressive action. We started, as I said in my prepared remarks, we started to work with our vendors and we took markdowns.

We will continue to do what is necessary to bring the inventory into line.

Dana Cohen - Banc of America Securities

Okay. And again, I apologize. I was -- I came on a few minutes late but I think you said to a previous question that it really is some of the women’s designer. Interested in that because some others have complained about bridge being an issue and particularly competitive markdowns in bridge. Can you comment on some of the other categories in the store?

Burton M. Tansky

Which -- those that have not done well or those that are doing well?

Dana Cohen - Banc of America Securities

You know, think places where you’ve seen -- one, bridge as a separate issue because other people have commented on it, but could you just talk about other categories that either --

Burton M. Tansky

The bridge business has been okay. You know, there’s a shifting in the bridge business now. You know, the dress business was very, very strong there and seems to have calmed down a little bit so that on a comparative year-to-year basis, there is some reduction in the increases. But they seem to be hanging in.

We have some very good collections in there, in that area. The contemporary area is holding its own and with denim not nearly as vibrant as it has been for the last seven years, we’re working to overcome that category and classification and we are doing so.

So we are recognizing the issues and the changing style and trends that the customers are demanding from us and we are making those changes and shifting. The buyers are on top of it and we believe we’ve got our arms around most of those businesses.

Dana Cohen - Banc of America Securities

And the traditional bridge business?

Burton M. Tansky

It’s been okay. It’s got its ups and downs. I think it’s being impacted by the dress business.

Dana Cohen - Banc of America Securities

Okay, and then last question, just any -- and again, I apologize if you said -- any commentary on accessory trends -- handbags, shoes, jewelry?

Burton M. Tansky

It will be very strong. Main floor is very strong.

Dana Cohen - Banc of America Securities

Okay, great. Thanks so much.

Burton M. Tansky

Handbags, jewelry, all of that is strong.

Dana Cohen - Banc of America Securities

Great. Thanks so much.

Operator

The next question comes from the line of Jeff Kobylarz from Stone Harbor Investments. Please proceed.

Jeff Kobylarz - Stone Harbor Investments

Burt, you mentioned earlier about how some of the initiatives you have are improving merchandise assortment, customer interaction and better systems. And if you can talk about maybe customer interaction, whatever you can say how you are trying to improve that without talking to the competition, what can you say about what you are doing there?

James E. Skinner

As you know, our sales force is primarily a 100% commission sales force, so if you think about owning a relationship sales force of thousands of people, just as you have a lot of initiatives going on in the merchandise, you’ve got initiatives to go and be no different than any other sales organization, whether it’s in life insurance, private banking or commercial, of what can I do to improve the productivity and get better tools.

A lot of the things we’re working on is from the marketing side is you look at the time that a sales associate spends either interacting in person or on the phone, and both of those communication in general is important to us. How do I get that person to be more efficient and more effective in that interaction? So a lot of time is spent on what tools do we give them, what kind of reports do we give them to let them be more efficient in those interactions and some of the initiatives today are working on those.

Jeff Kobylarz - Stone Harbor Investments

Okay, fine. And then about the women’s designer product, you said it was not working out that well this past fall. Were these new designers can you say?

Burton M. Tansky

First of all, it’s not a matter of working out well. They all did a lot of business but it’s an area of whether they increased their business or not. And it’s a mixed bag, a variety of both some established people and some new people.

Overall, it’s a very, very big business for us and I don’t want you to -- I don’t want to overstate the case and I don’t want you to overreact. I think that customers are just a little more selective this year and those designers that they felt more comfortable with and felt that those ones that had hit the fashion target right on the head. That doesn’t mean we didn’t business in the others; it’s just that we didn’t get the increases we expected.

Jeff Kobylarz - Stone Harbor Investments

I see. Thanks very much.

Operator

The next question comes from the line of Ryan [Blume] from Hartford. Please proceed.

Ryan Blume - Hartford

I was hoping to get an update on things that you’ve learned from your prior discussion in the California markets. You had cited that as being softer in the prior quarter and so I just wanted to see what your studies, what you’ve learned from your studies, if anything, at this juncture.

Burton M. Tansky

Well, the California market continues to be difficult. We understand it’s an industry-wide problem and it’s hard to get our hands around it. We hear a lot of hearsay and we have to depend on a great deal of what our store managers tell us. They can’t exactly put their arms around it.

We talk about the real estate market, the sub-prime market, which is not our customer. However, the selling and building of houses by developers and brokers could very well be our customers and they may be having a difficult time.

It just seems to be a kind of state-wide issue and we don’t think we’re the only ones going through all this, from what we can tell.

Ryan Blume - Hartford

And the other question, can you put numbers around as far as your demo -- you know, characterizing the demographic from a gross income basis, if you will, for your in-circle customer versus your aspirational customer, if you can put numbers around it?

James E. Skinner

In-circle, we can. Aspirational, you’re kind of talking about the unknown. In-circle, I think that the average is roughly -- the median is $300,000, the mean is roughly twice that, $600,000. And they represent about 50% of the sales at Neiman Marcus stores, which I’ve got a better view on than I do at BG.

Ryan Blume - Hartford

Okay. Thank you very much. Actually, one last thing, just to get a general sense; you sound pretty bullish as far as finding product that sells. I know you cited some weakness on your women’s designer apparel but overall, are your merchandise buyers thinking that there is good product out there and does that -- I guess it seems to go contrary to what the general market has said as far as the lack of innovation. So I wanted to get your sense -- are you finding that you have specific niches that you are able to find pockets in?

Burton M. Tansky

In our category, in our price range, the resources that we use, there’s plenty of product and our buyers have found that product and we’re delivering the new cruise/resort merchandise right now and we’re getting very, very positive comments from the stores about that merchandise.

In fact, our buyers right now are in what we call the pre-fall buy and they are starting to buy fall merchandise and there’s plenty of goods around. That is not the problem. We just have to be more selective. We have to be more very, very highly focused on what we buy and continue to keep sight of the customer and see if she’s changing, slightly changing her buying trends.

We have experience with this. We’ve gone through it before. This customer does not trade down. She does not change venues. She does not leave us. What she does, if in fact this continues to be challenging -- we’re not sure it will be, we’re not sure at all it will be -- she’ll buy a little less and we continue to buy the products that we know are very much what our customer wants and there’s plenty of goods out there for us.

Ryan Blume - Hartford

Thank you.

Operator

The next question comes from the line of Carla Casella from J.P. Morgan. Please proceed.

Carla Casella - J.P. Morgan

Just one follow-up; on the pension change you made, is that going to have any impact on your SG&A expenses going forward?

James E. Skinner

It might be -- the goal of this was not to go cut costs. It was really changing the way we fund it. This is probably going to be a minor but not really significant enough to put in the model, if you will.

Carla Casella - J.P. Morgan

Okay, great. Thanks.

Operator

And there’s no further questions.

Stacie Shirley

Okay. Thank you. Thank you all for participating in our call today. You may access the replay of this call at 888-286-8010 through December 19th, and the passcode is 62512458. Thank you.

Operator

This concludes your presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful week.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Neiman Marcus Group F1Q08 (Qtr End 10/27/07) Earnings Call Transcript
This Transcript
All Transcripts