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bebe stores Inc. (NASDAQ:BEBE)

F3Q12 Earnings Call

May 03, 2012, 16:30 ET

Executives

Walter Park – COO and CFO

Emilia Fabricant – President

Analysts

Adrienne Tennant – Janney Capital Markets

Betty Chen – Wedbush Securities

Sam Panella – Raymond James

Jeff Van Sinderen – B. Riley

Jennifer Black – Jennifer Black & Associates

Janet Kloppenburg – JJK Research

Harry Ikenson – Ikenson Research

Operator

Good afternoon and welcome to the bebe stores, Third Quarter Fiscal 2012 Earnings Release Conference Call. As a reminder this call is been recorded. Now I would like to introduce bebe COO, Mr. Walter Parks. Sir, you may begin your conference.

Walter Parks

Thank you and good afternoon and welcome to bebe’s fiscal third quarter 2012 earnings call. On the call with me today is Emilia Fabricant, President of bebe stores. I will begin with the details of the fiscal third quarter results, Emilia will then review the business highlights during the quarter as well as our expectations for the current quarter. Our call will be limited in time to one hour after we have completed our prepared remarks we will take your questions, before I get started I would like to remind you that company safe harbor language.

During the course of this call we will make projections and/or other forward-looking statement regarding future events and the future financial performance of the company. We use to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to the Company’s Form 10K, 10Q and other filings made with the SEC for the additional information on risk factors that could actual results to differ materially from our current expectations.

As previously disclosed we close the remaining 49 PH8 stores in the first half of fiscal 2011. Therefore the PH8 division results were presented discontinued operations for all periods herein.

Also starting in fiscal 2012, the company is reporting comparable store sales results inclusive of our online stores, net sales from continued operations for the third quarter of fiscal 2012, were 121 million up 10.5% from 109.5 million in reported for the third quarter a year ago. As previously reported comparable store sales for the quarter ended March 31, 2012 increased 7.2% compared to a decrease 0.8% in the prior year.

Gross margin from continuing operations as a percentage of net sales increased at 38.7% in the third quarter of fiscal 2012 compared to the 36.8% in the third quarter of fiscal 2011. The increase in gross margin as a percentage of net sales in the prior year of 1.97% was primarily due to positive occupancy leverage and an increase in merchandize margin.

SG&A expenses from continued operations for the third quarter of fiscal 2012 were 47.2 million or 39% of net sales compared to 45 million or 41.1% of net sales for the same period of the prior year. The $1 increase over the prior year was primarily due to higher compensation expenses.

Income tax expense for the third quarter fiscal 2012 was $65,000 the tax expense in the current year was unfavorably affected by discreet items incurred during the third quarter. Net loss from continuing operations for the third quarter of fiscal 2012, 2012 was 214,000 or breakeven per share, an 84.3 million diluted shares outstanding compared to a net loss of 2.6 million or $0.03 per share on 84.1 million diluted shares outstanding for the same period of prior year.

Net sales from continuing operations for the year-to-date period in March 31, 2012 were 399.3 million up 10.6% from 361 million for the year-to-date period ended April 2, 2011. Comparable store sales for the year-to-date period and in March 31, 2012 increased to 8.1% compared to a decrease of 1.7% in the prior year.

Net earnings from continuing operations for the year-to-date period ended of March 31, 2012 were 8.7 million compared to a net loss of 681,000 in the prior year. The increased in earnings was result of sales growth and expansion in gross margin partially offset by increases in compensation and advertising expenses as we continue to fuel our future growth.

Earnings per share from continued operation for the year-to-date period end of March 31, 2012 was $0.10 per share and 84.3 million diluted shares outstanding compared to net loss per share of $0.01 on 84.5 million diluted shares outstanding in the prior year. Net loss from discontinued operations for the prior year-to-date period ended April 2nd, 2011was 5.8 million or $0.07 per share and 84.5 million shares outstanding.

Our total cash and investments at March 31, 2012 were 257 million first 248 million at April 2, 2011.

Even during as of March 31, 2012 were 34.2 million compared to 34.1 million last year. At the end of third quarter finished goods per square foot was 2% lower than the prior year. Capital expenditures for the fiscal year day period were approximately 17.5 million and depreciation expense was approximately 15.1 million of which approximately 6 million was spent on remodeling and refreshing the store.

For the quarter we opened 2 bebe stores into a 2b store and close 8 bebe stores the end of the quarter with approximately 1 million square feet. And now I will turn the call over Emilia.

Emilia Fabricant

Thank you Walter and hello everyone, we continue to build on the momentum of improved sales and margins which is consistent with the incoming trend. As you know this quarter includes both January and February which are lower volume periods. We have revised the trend from the prior year loss of $0.03 and broke even for the quarter with positive results from all business units namely BB, 2b and international.

And now on to the select business highlights from the fiscal third quarter, for bb we continue to position the business on a trajectory of improved topline growth, with margin rate and inventory productivity improvement.

Against this objective we delivered our fourth consecutive quarter of improved comp sales, tax returns and higher margins. We experienced continued improvement across our dresses, jackets, bottoms and top businesses. With strong performance in several categories including denim, day and evening and dresses and accessories. In addition, we continue to make progress elevating the brand position to affordable luxury while expanding our store remodel program to ensure that our stores provide an exciting shopping experience for our clients.

This is critical as we evolved BB brand and grow our 2b concepts. Our spring product offerings which were fueled by bright color, elegant prints, and feminine detailing designs have been well received by the customers. For BB.com our comp growth continues to trend positively reflecting the enhancements made to the online shopping experience broadening product offerings the integration of our loyalty program and the continued evolution of our marketing messages to our clients.

We continue to tailor our merchandize assortments and we are pleased with the strong performance in our apparel business. For 2b we delivered another quarter of positive comp growth fueled by increased full price selling. Our inventory our inventory investments in apparel and non-apparel were all well received, in addition we continue to expand our presentations in jewelry, shoes and accessories and we are pleased with the results driven by these lifestyle layer categories.

Both the valentine mailer and spring break mailer were well received by the customers and the event during which time delivered product productive results. For BB international our revenue improved by 63% and our licensees delivered a 9% U.S. dollar based compensation. Our international stores realized similar product success as a domestic fleet.

We currently operate a 110 point across 19 countries including 7 points of sale open in the third quarter of this year which compares to 57 points of sale across 15 markets in the prior year. For marketing our multi-channel approach to in-store direct, online social and affiliate continues to evolve with a goal of engaging our clients this brand experiences that link the product we sell with the need we fulfill.

From a client acquisition perspective we continue to grow our bebe loyalty program and reached our 2.5 million fan on Facebook during the quarter. While the monetization of these channels is very different, our messaging approach constantly reinforces the attributes which differentiates the BB brand from competition. We realize that in today’s competitive environment translating eye balls and impressions in stuffs and clicks and ultimately sale is evolving. And we believe our Omnichannel approach to marketing is working and driving brand enthusiasm, engagement and most importantly higher sales.

Finally in each campaign we have layered a new media component that reflect a conversational and advertorial voice rather than a one way transactional perspective as we believe this 360 degree approach will drive long term brand loyalty. We are spending more money in marketing and at least this will drive the company’s growth in the long run.

Our focus in not only on transaction acquisition but overall brand messaging and an effort to increase traffic. That said there is more we need to do in order to further accelerate our growth.

As we look ahead to the fourth quarter we continue to be cautiously optimistic, as we anniversary improved and positive business in the prior year we believe we are well positioned with our inventory investments and those categories which will continue to drive the business while also testing new trends in those categories where our deliveries have been inconsistent.

We have been discussing our where to work, accessories and shoot strategies with you and are focusing on continued improvement in our assortment. As we continue to navigate the business through a difficult but stable macro-economic environment, our guidance assumes some moderation in the comp store sales for the remainder of the year.

We are excited not only in the continued improvement of our core assortment but identification of new concepts that will elevate the brand. Our BB Bridal was launched successfully in March both online in select stores.

The BB Sport product offerings continue to experience acceptance from our customers, we continue to evaluate other opportunities which can have a combined impact of expanding the BB lifestyle to other wardrobe occasions and also providing a positive halo effective across our existing assortments.

We are also focusing on speed to market and are offering a higher price point product assortment as we discussed with you during our investor day last month. In addition, we continue to improve our store shopping experience and will continue to update select stores throughout the quarter. Furthermore we continue to focus on our digital flagships in both shopping experiences and product offering. During the last quarter of this fiscal year and the beginning of fiscal 2013 we will be transitioning BB.com from our third party hosted and supported platform on to our own company supported platform.

This transition will further support future growth in the digital marketplace; finally we will continue our aggressive international expansion. In closing we obviously recognize that the current environment is still uncertain and remain focus on what we can control. That said the c continued improvement we experienced in the fiscal year as it relates to positive comps improved margins and turnover serves as a single biggest validate that our assortments and our message across all business units is resonating with our client.

With that I will return the call to Walter.

Walter Parks

Thank you Emilia. I will review the current quarter expectation and items that relate to the rest of the fiscal year. For the fourth quarter of fiscal 2012, the company currently anticipates comparable store sales in the low single digit range as we are comparing to the strong performance of last year’s fiscal fourth quarter.

Depending on actual sales of mark downs the net income from continued operations is expected to be in the range of $0.02 to $0.04 per share compared to $0.06 per share in the prior year. The prior year is positively affected by improved comparable store sales, improvement in merchandized margin and leverage on SG&A.

Given the growth strategies the company has put in place our SG&A for the current year assumes higher compensation and other expenses now including certain onetime cost relating to the plan transition of BB.com to a company management platform.

As Emilia mentioned earlier the company in BB.com third party service provider have ventured into a termination agreement. We anticipate migrating to a company managed platform in the first quarter of fiscal 2013.

In addition, as part of the company’s long term strategy to manage store distribution as well as direct consumer fulfillment for both BB.com and 2bstores.com. The company has purchased its existing distribution facility in Benicia, California for $80 million.

The company leaves both of these decisions will support its long term growth objectives across its multi-channel platform. The company is currently anticipating effective tax rate of approximately 41% for fiscal 2012.

Inventories for the first quarter at the end of fourth quarter are anticipated to increase in the mid-single digit range compared to our 1% increase in the fourth quarter of fiscal 2011. For the remainder of the year we anticipated opening the three 2b stores and closing 2 BB stores which resulted in no change for our overall square footage. In addition, our international licensees are anticipated to add up to 5 points of sale.

Depreciation expense for the year will be approximately 21 million; total capital expenditures for the year excluding the purchase of the DC are anticipated to be 27 million which will include capital expenditures for new storage, remodel store expansions, information technology systems and office improvements. Thank you and I would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Adrienne Tennant from Janney Capital Markets.

Adrienne Tennant – Janney Capital Markets

Emilia for you my question is in the stores like they had very, very solid sell through for the end of the quarter and more recently we have been seeing stock outs and some of the items wondering in part of kind of mini-packages building up the inventory for certain categories and where do you think you are most likely in terms of categories and the balance sort of going out in casual. And then Walter I have a couple of you please afterwards.

Emilia Fabricant

So we are comfortable with our inventory positions but we are happy to share that we are chasing into our woven tops category. We are pleased with the current reads and frantically chasing into more inventory.

Adrienne Tennant – Janney Capital Markets

Okay, are you happy with this (inaudible) going out and some or the more casual chances of them happening on colored skinny wagon, that type of trend it's a little bit more casual.

Emilia Fabricant

Well currently we are happy with the balance; we are going to be building up our jackets and bottom categories as again we have seen improvement in that. So bouncing more of a day assortment as well.

Adrienne Tennant – Janney Capital Markets

Okay great. Thank you. Walter can you give us some color on the January, February comp trend, obviously you told the January was running kind of a plus 10, can we assume that March was the strongest second to that I assume and then you then when you gave your positive (inaudible) to Digicom, are you copying in April or quarter-to-date, how should we think about that, services isn’t coming from.

Walter Parks

April was a little bit disappointing for the I don’t know 28 – 31 days it's basically flat, we anticipate seeing improvement through the remainder of the quarter. It's always difficult to judge the effect of a holiday move. We were generally pleased with March as we had said previously April was a little bit soft, we put in play what we think are the appropriate steps across all the businesses to change the run rate but to change from the current guidance there would need to be a change in the run rate.

Adrienne Tennant – Janney Capital Markets

Okay do the comp and care and May or June, are they easier?

Walter Parks

I don’t think it's necessarily easier but we won't account for any shifts in the holidays.

Adrienne Tennant – Janney Capital Markets

Okay and the magnitude of the shift between March and April, I mean some people have been anywhere between 600 and a 1000 basis points. Are you sort of in the middle?

Walter Parks

I don’t think we benefit that much in March because I don’t think we are generally known. Historically March has performed well because we are a destination for spring break if you will or at least a holiday not necessarily Easter. So, I don’t know that we get to perceive benefit of moving earlier. I think we struggle with traffic in April because of traffic in general.

Adrienne Tennant – Janney Capital Markets

Okay all right and then moving on to the SG&A I mean it seems like the reduction in from where the street is currently to kind of where you are guiding it seems like a lot of that is coming from this parts of this one time SG&A sales. Just a couple of questions there, for the move of BB.com in-house, can you give us a quantification of the dollar amount will hit you for.

Walter Parks

Across store payroll, LA payroll predominantly, some San Francisco and the settlement of the termination agreement it's about $0.03 after tax.

Adrienne Tennant – Janney Capital Markets

$0.03 after tax to the fourth quarter, is there any residual rollover impact on the first quarter?

Walter Parks

Well again I am not prepared to talk to the first quarter today. Obviously with the moves we are making, we think long term we will be more efficient managing both dot com businesses or just a much smaller to 2bsource.com.

Adrienne Tennant – Janney Capital Markets

Okay but my question was is all the onetime expense in-capital in the fourth quarter.

Walter Parks

The cost associated, we believe the cost associated with the termination of the agreement is all in the fourth quarter.

Adrienne Tennant – Janney Capital Markets

Okay and then with regard to the incentive compensation, is there any like of catch approval in your fiscal fourth quarter meaning obviously June ending quarter for, do you pay out your bonuses on the fiscal year or calendar year?

Walter Parks

We pay it out on a fiscal year and we have approved for it across all four quarters randomly.

Adrienne Tennant – Janney Capital Markets

Okay all right, I am assuming we should expect it to go back down to the low single digit range for 2013.

Walter Parks

Again I am not prepared to talk to ’13 today, but when we next speak in August we will have a better point of view.

Adrienne Tennant – Janney Capital Markets

Okay is it fair to characterize the difference between consensus and your guidance as this BB.com initiative?

Walter Parks

I couldn’t tell you what consensus is, because I don’t look so I can’t answer that.

Adrienne Tennant – Janney Capital Markets

It's nine times. All right, thanks a lot and good luck.

Operator

Your next question comes from the line of Betty Chen from Wedbush Securities.

Betty Chen – Wedbush Securities

I was wondering if we can maybe begin with the third quarter gross margin, you mentioned that it was driven by a combination of occupancy leverage and I think increased merchandize margin as well. Is there any way you can give use a sense of how much of it was driven by occupancy versus March margin?

Walter Parks

The majority was occupancy.

Betty Chen – Wedbush Securities

And then I think in the past you had mentioned that I think going forward the opportunity would likely be levering occupancy on a positive comp, can you remind us what is the comp you need to get occupancy leverage.

Walter Parks

About 20%, I think low to mid.

Betty Chen – Wedbush Securities

Okay so low to mid, so is it possible if we were to hit the low single digit comp target for the fourth quarter that we could see occupancy leverage or would it more flattish?

Walter Parks

Again it will ultimately depend on sales and sell through, certainly the challenge here for us is one the last year fiscal fourth quarter was the best quarter we had in three or four years and everything went right, we had very good sell through, good comp sales. Great comp sales and relationships to the prior three or four years and we had low expenses because we were managing to a different business.

I think when you look at the current quarter that we are in always difficult to predict I love to sit here and being able to say that margins would be flat slightly up, slightly down. I think we have to see how we move to move into June to be that precise but certainly we earn the less margins would be total margin external would be flat to down and we know the SG&A dollars will be up because of the investments that we spoke with.

Betty Chen – Wedbush Securities

Okay now after we lap (ph) the investments for the ecom migration how should we think about SG&A going forward.

Walter Parks

So again I am not prepared to talk to 13 at this juncture and I will have a better point of view when we finalize our budget in the next month and then talk in August. You know we are making these investments because we believe it will make us more efficient and ultimately more profitable overall. As Emilia said in her prepared remarks, we have invested in merchandising talent and design talent in LA. We have invested in production talent to improve this piece of market that Emiliar reviewed and you know all of the systems don’t come without a cost.

So my guess is we will grow SG&A, the extent I am not prepared to talk to today.

Betty Chen – Wedbush Securities

Okay but SG&A could go a little up after it's been taken and how.

Walter Parks

Well again, yes but obviously we are looking to get paid for that as well on the sales there.

Betty Chen – Wedbush Securities

Okay in terms of the product Emilia I know you mentioned that you were chasing maybe some of the woven tops, how do you feel in terms of the way to work section. I know the teams have been working on refining it and so how do you feel about some of those areas, do you feel like we are nearing sort of a point in time where the momentum is starting to pick up in some of the categories and business areas.

Emilia Fabricant

We do again woven tops has been an area that’s been part of a turn around and we are pleased with a reason chasing into. Sportswear we continue to see strength in this business, especially in jackets, skirts and Jumpsuits. I mean we have been talking about a separate story, mix and match and she is definitely responding to it and we are definitely chasing into that business as well.

Betty Chen – Wedbush Securities

And how quickly, can you back into position in some of those better selling areas.

Emilia Fabricant

It depends on the category, but we are probably one of the facts that I have worked with. So we are leveraging that capability and pushing up goods and cashing into it. It's actually not a bad position to be in.

Betty Chen – Wedbush Securities

Okay great and then just lastly in terms of some of the remodel stores, certainly you want to maintain a certain shopping environment and product presentation for the customer and keep it very aspirational. I was just curious is there any sort of detail or metrics you can give us in regard to the model stores on how they are performing versus the rest of the chain.

Walter Park

In total they have probably outperformed the chain I would quantify that by saying a number of the location have been in the Southeast which has outperformed the chain regardless of whether they had a remodel or not but I would say to you in general for those that we have had an opportunity to review we have been very happy with the results.

Betty Chen – Wedbush Securities

So they are really outperforming on sort on constant sales productivity and all that?

Walter Park

Well there are comp performance year-over-year growth has since the inception of the remodel has outperformed yes.

Operator

Question comes from Sam Panella from Raymond James.

Sam Panella – Raymond James

Can you just talk about how maybe your 2b business did relative to core BB in the quarter?

Walter Park

When you take into accounts the dot com and both for the most recent quarters, 2b was a little bit better. This quarter last year the 2b business was very good so we anticipate currently that they will perform similarly.

Sam Panella – Raymond James

Okay and then in the fourth quarter are you expecting any incremental events perhaps to drive traffic and drive sales in the fourth quarter relative to the prior year period?

Emilia Fabricant

Actually we do not foresee any incremental events, so very similar to what you say last year is our client event.

Sam Panella – Raymond James

Okay and then lastly anything you can share with us about the new club BB member’s data that you are adding your list. Are they age wise giving older or younger anything that you can share with us.

Emilia Fabricant

Well what I can tell is we are pleased with the (inaudible) segment strong and right now we are focused on the retention.

Operator

The next question comes from Jeff Van Sinderen from B. Riley.

Jeff Van Sinderen – B. Riley

If you can just mention how you are responding to the April softness that you saw, I know you are not doing any different major events for the quarter but anything that you are doing there that’s different after seeing that?

Emilia Fabricant

We are comfortable with the guidance based on our current run rate but I have to tell you that this teams continues to work very hard as they have been all year to change that run rate in May – June Woven Tops and Sports Wear, Jackets and Woven Bottoms, you know we are continue to focus on the categories and drive those categories that and invest in those categories that are driving our business today.

Walter Park

I think for the first time in a long time what we are seeing is we are playing offense again and I think the business historically has performed better when it's playing offense. I am actually very happy that we are now seeing departments that hadn’t performed in a while start to perform that we are chasing into and obviously we sit here today and hope the efforts bear fruit if you will but it is a good place to put yield (ph) in it, it's been a long time to be able to chase into this woven business.

Jeff Van Sinderen – B. Riley

Okay and then Walter did you give traffic and transaction count numbers for the quarter?

Walter Park

We did on when we spoke at the end but I will repeat them again. The traffic for the quarter was down 7, conversion was up 10 and AUR was down two.

Jeff Van Sinderen – B. Riley

AUR down two, okay, good. And then the other question I was really just a follow-up to the discussion, on SG&A and I am just wondering I know you are not giving guidance, you are not prepared for 2013 but would you expect sales to grow faster than SG&A next year I mean is that how you will plan your business or you control SG&A to that level so that sales will be going faster.

Walter Park

Well again I think that I can say that we always try to not delever the business. This current quarter we are in is a unique set of circumstances given the success in the prior year but there hasn’t been one time in my almost 9 years where we have gone into a fiscal year thinking we would delever the business.

Jeff Van Sinderen – B. Riley

Okay fair enough and then just one other follow-up 2b, I know you mentioned 2b overall was better and I think you gave a comp there been solidly positive. We are just wondering how was contribution margin running at 2b versus the BB the core BB business is that been running higher or lower contribution margin and I guess hasn’t been improving or worsening over the last couple of quarters, anything you can share on 2b margins.

Walter Park

Actually the BB e-retail business over the last six months has when you combine both the dot com and BB retail is very good, substantially better than it had been the combination of we close some bad source, we have had much improved in margin and the dot com is incredibly profitable. So right now the 2b in total isn’t as good as the BB business when you take into account the dot coms but again when we open new stores as we have grown this business we don’t look to delever the business.

Jeff Van Sinderen – B. Riley

Okay so the dot com is the negative part of the 2b that’s what’s the drag at this point.

Walter Park

No, it's just that we are opening stores that we are not looking at because the BB business has both been so much better than it has the prior three years and combined with dot com both business the 2bs are not performing as well as the combined BBs.

Operator

Your next question comes from Jennifer Black from Jennifer Black & Associates.

Jennifer Black – Jennifer Black & Associates

My first question you talked about bringing in leather handbags for fall, the investor meeting and I wondered how many stores you were going, the handbags look much better, the once that aren’t leather. How many stores you will bring those into and then I wondered if there were any categories that you were going to do in real leather and then I have follow-up.

Emilia Fabricant

As we mentioned in the investor meeting, we are looking at leather apparel as well. So elevating both handbags and apparel in the leather category. As far as the store count, it actually depends on the item and we do have an entry level price point in both hands bags and leather jackets that we would be able to expand across larger base versus than the aspirational high end merchandise so it varies.

Jennifer Black – Jennifer Black & Associates

Okay and then I have a few more questions; I wondered if lingerie is a category you would ever consider licensing?

Emilia Fabricant

We actually have six tier to license in lingerie that we are working very closely with and I mean they are excited about the future growth in that category, we think it's a natural progression in that lifestyle.

Jennifer Black – Jennifer Black & Associates

Yes I think so too. Congrats on that and then I wondered about your thoughts on international how you feel your position this far as a brand and I am speaking primarily to Europe where a lot of companies are struggling, it just seems like your price points. You have got great price points in that tight (ph) economy but I just wondered what your take is.

Walter Park

Well today we have only been in Eastern Europe and we have been very happy with the performance. We think there is opportunity certainly in Germany, the U.K, Spain possibly France and are looking to see if there is a partner that we can move forward with. In Asia, we continue to negotiate with a partner in China, Korea as a business has been softer than we would like but South-East Asia has been very good. And the middle-east has just been crazy good.

So yes we look at those opportunities and we do think there is business in Western Europe but we haven’t secured a partner to move forward with.

Operator

Your next question comes from the line of Janet Kloppenburg from JJK Research.

Janet Kloppenburg – JJK Research

Congratulations on a good quarter. I have a couple of questions, first I just want to start with what are the incremental SG&A spend for the fourth quarter, I think you said $0.03 of it had to do with taking the direct channel in house, is that right?

Walter Park

No we said the cost of the payroll both in LA, in store bonus and the cost of the contract termination is $0.03 after tax.

Janet Kloppenburg – JJK Research

And the payroll, what does that have to do with the higher payroll?

Walter Park

Well we have made a number of investments in LA both in merchandising design and production as we position ourselves for the future.

Janet Kloppenburg – JJK Research

Okay but those cost will carry through, so we can’t really consider them as one time.

Walter Park

No the only cost I would consider, the only I would consider, the only cost I hope is one time, because I would like to pay a bonus this year and next would be the termination cost of the contract.

Janet Kloppenburg – JJK Research

Okay and can you define that for us please.

Walter Park

Define which?

Janet Kloppenburg – JJK Research

How much it is?

Walter Park

No I don’t think I am prepared to say that today.

Janet Kloppenburg – JJK Research

Okay, But would it be half of I mean we need to get a magnitude of what the ongoing bump up in SG&A is related to the higher compensation.

Walter Park

Again in total it was about $0.03 the majority was payroll.

Janet Kloppenburg – JJK Research

Okay and then Walter, the change in direct management that is coming in-house that generally is something that companies talk to us well in advance that are incurring and there are some adjustments and actually some disruption sometimes expected when these things happen. So it's a surprise to me that you are taking it in house and I am wondering have you beefed your in house management to manage these process and will you have a parallel process of going when the transition is made?

Walter Park

Well again, we couldn’t speak of it further because there was a negotiation taking place that wasn’t executed with the third party provider and fully executed until this week. So there were some extenuating circumstances. We weren’t coming out of the contract that was expiring. We have been working on this beginning over a year ago when we went live with 2bsource last November, we don’t believe we are recreating the wheel if you will. We have been operating under the platform that we are going to be BBs since last November as 2b.

Now there will be a few more bells and whistles but obviously we believe we have given this the appropriate level of investment both advantage and run the DC and the software as well as testing because we have been using it since last November to run 2bsource.com and while we certainly don’t have a Ouija board to predict the future we believe at the time we cut over we won't experience any short comings in sales as a result of the conversion.

Janet Kloppenburg – JJK Research

But the conversion will happen and you will cut off the existing relationship so you will be operating as an in house.

Walter Park

Well we have been operating the 2bsource.com in our distribution facility in Benicia since last November.

Janet Kloppenburg – JJK Research

Well that I understand but BBs which is a bigger business, don’t make a transition without a parallel operator is that correct?

Walter Park

Well again we are going to hopefully one Friday morning we are going to wake up and we are going to say this is a current provider. Tomorrow we are switching over and on that day we will switch over and because we have been running the system for almost a year at the time we do that we don’t believe there is going to be a need to run parallel to the existing system.

Janet Kloppenburg – JJK Research

Okay but you have only been running for a year for 2b on your own not for BB am I correct?

Walter Park

That’s correct.

Emilia Fabricant

Correct.

Janet Kloppenburg – JJK Research

I just want to stand a new you don’t feel like; you didn’t make additional hires to…

Walter Park

We hire a ton of people.

Emilia Fabricant

Yes absolutely, there is an extensive plan in connection with this transition.

Janet Kloppenburg – JJK Research

Right so, when you say you made all these hires and merchant buying et cetera, that has to do with this direct platform transition, is that correct?

Walter Park

It's a comment, we have hired IS staff, we have hired distribution center staff, we have hired merchants as well as managed men across both businesses, but it is how we historically had booked that for it, most of the cost ran through gross margin.

Janet Kloppenburg – JJK Research

Right, so but these cost will carry on for the next year. Couldn’t they versus the prior year?

Walter Park

Which cost?

Janet Kloppenburg – JJK Research

The cost associated with this direct platform transition that is all the hiring that you have taken…

Walter Park

Well there is two things, what we are incurring in the fourth quarter is a buyout of the contract and then there is the ongoing management on both dot com sites and we don’t anticipate that we actually they will ultimately be less expensive than what we were paying to the third party provider.

Janet Kloppenburg – JJK Research

Did you hear what I said Walter, you expect to get a lift in your e-commerce business because you are managing it yourself?

Walter Park

Well that was the reason why we switch because we believe there are opportunities to take advantage of that we are not today.

Emilia Fabricant

Well Janet the best way of looking at it is we are investing in the growth of the company.

Janet Kloppenburg – JJK Research

Right, okay. Then I also wanted to clarify something Emilia that I am confused about, it seems that people that a conception here that the reason why your business slowdown in April is because you are running short of inventory and I think I am hearing you say that you are not running short of inventory there, it's a tough environment there and you have a cost comparison. Is that analysis?

Emilia Fabricant

There is departments that were running short in inventory and that we are chasing into and denim continues to be very strong. Our skirt category is extremely strong today and we talked about woven tops and sportswear and then the same old subjects which were day and evening dresses.

So we are chasing into inventory or I should say we were.

Janet Kloppenburg – JJK Research

And so do you think that as the quarter goes along that there will be some benefit from building, rebuilding these categories and there that’s one factor that may influence comps in a positive way.

Emilia Fabricant

You would hope that’s what we are striving for it.

Janet Kloppenburg – JJK Research

I am little confused about the tough environment because in general the first quarter what is a traditional first quarter for most players was a pretty good quarter driven by a lot of the trends that you had first, the color, the skinny denim, the printed dresses et cetera that ways.

I am just wondering if you really, what do you mean by the environment being so tough?

Walter Park

Well again I think Emilia was right, it continues to be a difficult but stable macro-economic environment. I think that we have done a very good job taking advantage of the trends that are out there. I think that we are against much better business in the fourth quarter than we were in the third quarter last year and we need to chase the better business to drive better results than our referring guidance.

Janet Kloppenburg – JJK Research

Okay good and but your marketing is up and that should help, also your marketing spend is higher.

Walter Park

It was higher last quarter and it will be slightly higher this quarter. But again I don’t know that that’s the driver, we are not viewing anything different if you will.

Janet Kloppenburg – JJK Research

Would you say that the environment might be tougher for 2b than it is for BB?

Walter Park

No I don’t know that.

Janet Kloppenburg – JJK Research

Okay I think in general mall promotional levels have been lower this quarter than they have been last year. So, is that observation something you would agree with?

Walter Park

I have been seeing that in my mall but I don’t shop any of the juniors.

Janet Kloppenburg – JJK Research

Okay and just lastly the woven top business I think has a very nice margin associated with it and I think it was weaker last year at this time. So I thought that would be a factor that would help the fourth quarter margin.

Walter Park

We don’t look; we look for similar margins across all of our investments. The woven top has been weak for four years.

Emilia Fabricant

And we are very excited that we are chasing into Janet, can’t tell you how excited I am.

Janet Kloppenburg – JJK Research

Right aren’t you happy, I mean you have been waiting for this tune for a while Walter.

Emilia Fabricant

Thrilled.

Janet Kloppenburg – JJK Research

Okay and just lastly would you say that the April flat comp performance, would that have anything to do with these two shift, I mean we did see a slowdown in April but most of it was associated with these list of shift into earlier into the season.

Walter Park

Again always difficult to judge.

Operator

Our last question comes from Harry Ikenson from Ikenson Research.

Harry Ikenson – Ikenson Research

Couple of questions, first of all obviously the merchandize is a most broader analysis over the last several quarters and it's impressive that your conversion rate is up 10%, what can you do about your AURs, can you talk about that a little bit because that’s been the problem.

Walter Park

It's not, the AURs and the BB are actually are up. It's the higher penetration of 2b to the total that’s put pressure on BB Inc.

Harry Ikenson – Ikenson Research

Okay.

Walter Park

Because it's a much lower price point.

Harry Ikenson – Ikenson Research

Okay all right, that answers that I am looking for other areas just as Janet was to see where that could be some opportunity, what about profitable underperforming stores, how many more of those you have left closed?

Walter Park

I believe in the current quarter we will close two and for the year we will end up net closing 10 but a couple we actually closed and converted or reload but the net closure is about 10.

Harry Ikenson – Ikenson Research

And how many left would you have after that, that are underperforming that might be closing…

Walter Park

We are evaluating that and we will be better prepared to talk in August.

Harry Ikenson – Ikenson Research

Okay and then finally could you I know you have talked about this a lot but just one of the loyalty customers. How much more do they spend typically versus your regular customer?

Walter Park

If they are in the loyalty program Harry, we don’t know who isn’t in the loyalty program where they spend right.

Operator

At this time we have no further questions. This conclude our third quarter earnings call for BB. Thanks for joining us.

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