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Executives

Jean Fontana - Senior Vice President

Brendan L. Hoffman - Chief Executive Officer, President and Director

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

Anthony J. Buccina - Vice Chairman and President of Merchandising

Analysts

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Grant Jordan - Wells Fargo Securities, LLC, Research Division

William M. Reuter - BofA Merrill Lynch, Research Division

Jordan Hughes - Goldman Sachs Group Inc., Research Division

Emily E. Shanks - Barclays Capital, Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

Karru Martinson - Deutsche Bank AG, Research Division

Rishi Parekh - Sterne Agee & Leach Inc., Research Division

Elie Radinsky - Cantor Fitzgerald & Co.

Colleen Burns

Bon-Ton Stores (BONT) Q1 2012 Earnings Call May 17, 2012 10:00 AM ET

Operator

Good day, ladies and gentlemen. Welcome to the Bon-Ton Stores Fiscal First Quarter 2012 Results Conference. Today's conference is being recorded. And now, I'd like to turn the call over to Ms. Jean Fontana with ICR. Please go ahead, ma'am.

Jean Fontana

Good morning, and welcome to Bon-Ton's first quarter fiscal 2012 conference call. Mr. Brendan Hoffman, President and CEO and Mr. Keith Plowman, Executive Vice President and CFO, will host today's call.

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

The statements contained in this conference call which are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those projected in such statements due to a number of risks and uncertainties, including those set forth in the cautionary note in the earnings release, and all of which are described in the company's filings with the SEC.

I would now like to turn the call over to Mr. Brendan Hoffman.

Brendan L. Hoffman

Good morning, and thank you for joining us. I will share my observations of some actions taken or that we are beginning to take during my initial 90 days with the company. But first, let me quickly review our merchandising performance in the first quarter.

We were a little fooled in the beginning of the first quarter based on February results doing better than expected, especially because we had shifted a very big promotion, Community Day, out of February to the end of April. We believe the stronger-than-expected February sales results were due in large part to the warmer-than-normal temperatures we were experiencing in our markets. In retrospect, while the event was successful, it had a negative impact on April in total, as it suppressed April sales prior to the event. We will move this event back to February, where it will help that month and not impact the entire month of April, which is more important to the quarter than February.

We continued to see some customer resistance to price increases, especially in our private brand merchandise. Private brand penetration was 19% compared to 19.7% in the first quarter of 2011. We have seen slight cost reductions on our current second quarter deliveries and will benefit from additional reductions going forward, which will enable us to reduce price points on most categories going forward. This should favorably impact the private brand business in the fall.

Our best performing businesses for the quarter were lady shoes, hard home and cosmetics. Franchise businesses had positive comp sales for the quarter and performed better than the company -- total company average.

Our Incredible Value Program or IVP was slightly below last year, and the toughest businesses were moderate traditional ladies sportswear, ladies outerwear and juniors.

Some of my observations. I've visited about 80 stores across all banners since I began. As I previously stated, I believe there are numerous opportunities to improve the performance in our stores.

Merchandising. We continue to evaluate and make adjustments to our assortment. We recognize that we were too aggressive in shifting our assortment mix towards updated from traditional. We believe this is the primary reason for the sales shortfall in this category in ready-to-wear, including missed business in the opening price points. We have aggressively corrected this with receipts near the end of April, including opening price points of traditional merchandise.

We will continue to identify ways to enhance our merchandise assortment as we review other categories. We have increased the communication between the stores and our planning and allocation teams. We are also taking into account input from the stores to a much greater degree, giving them the opportunity to make adjustments to better align with what they observed from their customers' response.

We are building upon what we learned from last fall and this spring's rollout of our strategic initiatives, the good and the bad, and are applying what we learned to our stores. We will add an additional 31 stores that reflect these strategic initiatives in the fall, which will support our growth strategy.

I continue to meet with our vendors to discuss ways in which we can grow the business together. They have been very supportive and have given us the opportunity to expand certain key brands such as Michael Kors, Coach, Calvin Klein and Ralph Lauren, into additional doors and online.

We recently announced Tony's plan to retire. I'm pleased that Tony is staying until February of 2013 to assist me in my transition here at Bon-Ton.

As far as marketing is concerned, Luis Fernandez has joined the company as our Chief Marketing Officer, a new position for us. We believe our marketing messaging will benefit greatly from Luis' expertise. We anticipate these benefits will impact our stores and eCommerce operations, both in driving sales and doing so more efficiently. We plan to deliver a more simplified, clear and concise message, resulting in an improved overall shopping experience for our customers.

We have improved the marketing calendar by extending select sale events, while reducing the number of total events, in addition to simplifying our promotional offering. We believe this more simplified approach will create a clearer value message to our customers. We will incrementally utilize new media, including digital, with less usage of traditional media, which is more expensive and getting less and less productive.

With our stores, we have been -- we have begun reallocating space in our stores to accommodate and highlight growth areas. It's all about shoes. We will expand our Shoes department and assortment in 51 doors for fall in addition to the 32 we already touched for spring.

In our small doors, under $10 million, we will expand best-selling categories and eliminate less productive ones. We expect to get more impact from national brands in these markets. As a continuation of our Customer First program, our associates will now be able to gauge their own performance and productivity on a daily basis as we seek to reinforce our results-driven culture.

E-Commerce is a huge opportunity. We need it to work harder for us. We will take more of a multichannel approach using eCommerce to drive store traffic among other initiatives. We have a solid foundation and are looking to new ways to partner with the merchants and other parts of the business to grow the importance of this as we become a multichannel retailer, not just a retailer with multichannels.

In real estate, we continue to optimize our portfolio of stores and improve the overall economic performance of this asset, including examining underperforming stores and strategically opening new ones. We are renegotiating leases as opportunities arise. We are taking appropriate action to reduce our cost structure and improve efficiency as we implement initiatives to drive top line growth, control inventory levels in response to sales trends, correct ineffective marketing programs and simplify promotions to improve the overall shopping experience for our customers.

While we previously discussed approximately $10 million of cost reductions in our fiscal 2012 guidance, we continue to identify and make targeted reductions in administrative and support functions. These additional initiatives are expected to reduce costs on a full-year basis in excess of $30 million with an estimated benefit to 2012 of approximately $20 million. The onetime costs associated with these initiatives, including severance, are estimated to be approximately $3 million, which does not include the $2.8 million recorded in the first quarter.

As we look forward, top line growth is critical to our ongoing success. We will incorporate fresh ideas and develop new ways of looking at things to achieve the sales growth needed for improved performance. We have already identified several areas for improvement in our merchandising assortment and are taking action to make the right changes, but this will be an evolving process. And with that, I'd like to turn the call over to Keith to review the financials.

Keith E. Plowman

Thank you, Brendan, and good morning, everyone. In the first quarter, EBITDA, defined as earnings before interest, taxes, depreciation and amortization, including amortization of lease related interest and loss upon extinguishment of debt, decreased $4.8 million as compared with $23.2 million in last year's first quarter. As a reminder for our reconciliation of EBITDA to net loss, please refer to our earnings press release.

Our net loss totaled $40.8 million compared with a net loss of $36 million in the prior year period, and at the end of the first quarter, our excess borrowing capacity under our revolving credit facility was approximately $400 million.

Details of the first quarter are as follows. Comparable store sales decreased 1.3%, and total sales decreased 1.4% to $640.8 million. Other income was $13.5 million compared with $14.6 million in the prior year period. Gross margin dollars decreased $11.1 million to $219.6 million, reflecting the current year decrease in sales volume and margin rate. Our gross margin rate decreased 120 basis points to 34.3% of net sales compared with 35.5% in the prior year period. The decline in the gross margin net rate largely reflects an increased net markdown rate resulting from the slow sales as well as liquidation of more transitional and carryover merchandise.

SG&A expenses increased $6.2 million to $228.2 million compared with $222 million in the prior year period. The increase in SG&A expenses primarily reflects the recorded severance cost and associated payroll taxes, increased store expenses, marketing expenditures, insurance costs, retirement benefits, and all of these were partially offset by the gain on the sale of certain Rochester, New York locations. The SG&A expense increased to 35.6% of sales compared with 34.2% of sales in the prior year period.

Depreciation and amortization expense, including amortization of lease-related interest, decreased $2.3 million to $23.4 million compared with $25.7 million in the first quarter of fiscal 2011. Net interest expense decreased $2.7 million to $20.6 million compared with $23.3 million in the prior year period. This decrease primarily reflects reduced borrowings and interest rates.

In fiscal 2012, the company recorded a $1.2 million prepayment penalty as a result of the extinguishment of the mortgage debt related to the sale of certain of its Rochester, New York locations. In fiscal 2011, the company recorded a $9.5 million loss on extinguishment of debt for fees associated with the voluntary prepayment of the second lien term loan and the amendment and restatement of the revolving credit facility agreement.

An income tax provision of $509,000 was recorded in the current period compared with an income tax provision of $700,000 in the prior year period. Our net loss was $40.8 million or $2.23 per diluted share compared with a net loss of $36 million or $2.01 per diluted share in the prior year period. Fiscal 2012 includes the net gain of $0.10 per diluted share related to the sale of the Rochester, New York locations and the subsequent prepayment penalty on the extinguishment of the company's related mortgage debt and also reflects the charge of $0.15 per diluted share for severance costs related to the targeted reductions to reduce the company's cost structure. Fiscal 2011 includes a charge of $0.53 per diluted share associated with the prepayment of the second lien term loan and refinancing of the revolving credit facility.

Moving to the balance sheet. Our total balance sheet inventory at the end of the first quarter increased 2.1% as compared with the prior year, and our Accounts Payable support was comparable with that of the fourth quarter of fiscal 2011. Total debt, including capital leases, was $939.6 million at April 28, 2012 compared with $964.3 million at April 30, 2011, a reduction of approximately $24.7 million or 2.6%.

First quarter of fiscal 2012 capital expenditures, before netting third-party contributions, were $14.3 million as compared with $7.8 million for the prior year period. Components of our debt at the end of the first quarter of fiscal 2012 are: senior notes, $464 million; revolving credit facility, $184 million; CMBS mortgage facility, $230 million; and mortgage notes and other, capital leases included, $62 million. Our letters of credit outstanding at the end the quarter were $3.1 million.

Our fiscal 2012 guidance is as follows: EBITDA in the range of $160 million to $190 million and earnings or loss per diluted share in a range of a loss of $0.95 to earnings of $0.50 per share. Additionally, our estimate for cash flow as defined in Note 2 of our press release is expected to be in the range of $35 million to $60 million. Underlying assumptions reflected in our full-year guidance are comparable store sales in the range of a negative 1.5% to a positive 1%, gross margin rate in the range of 36% to 36.5%, SG&A expense increase of approximately $7 million to $12 million from fiscal 2011 and this reflects the discussed expense reduction initiative net of the onetime costs, tax rate of 39% and capital expenditures not to exceed $70 million, net of external contributions.

Note our earnings per share guidance does not reflect any noncash income tax benefit of reducing or removing the valuation allowance recorded for deferred tax assets. The amount of such adjustments, if any, cannot be determined until our 2012 results are final.

Our Form 10-Q for the first quarter of fiscal 2012 will be available by June 7 of 2012. And at this time, I would like to turn the call back to Brendan.

Brendan L. Hoffman

Thank you, Keith. We are in the initial stages of identifying and implementing a number of initiatives that we will continue to learn from and refine. With that, we will be happy take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Edward Yruma with KeyBanc Capital Markets.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Brendan, I think you mentioned in your prepared remarks that you were seeing a lower product cost beginning with the receipts in 2Q but you also mentioned that you were expecting a lower cost-to-consumer in 3Q. So I'm trying to understand, is your intention to take that lower product cost and deliver sharper value to the consumer?

Brendan L. Hoffman

Yes. I mean, I think, Ed, what happens is as the pricing come down from where it's climbed over the last few years, it gives us more markup and more flexibility when we run our promotions, whether it's the, be more aggressive with the coupon, the savings passes or just the intermediary markdowns that we take. We'll have more room to be able to do that, so the out the door value for the customer will continue to improve.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Got you. And now that you've have time to visit some of your locations, I guess, how do you feel overarchingly about your real estate portfolio? Do you see further opportunities to exit markets and if so, what would the timing be?

Brendan L. Hoffman

Well, I think we're going to look at everything on an individual basis. Clearly, as I'm getting out there, there's some malls that have kind of deserted us and have left us kind of as last man standing. Having said that, my goal is to really figure out how we can make these boxes more productive, and in some cases, rather than closing them, which isn't always an option, we might just shrink them artificially, maybe just put up some construction barriers or drop a curtain, which allows us to artificially shrink the floor, have to provide less sales coverage, have to provide less inventory. And for these boxes that are really underproductive, I don't think there's any sales risk, but we might actually be able to make the store look more robust by doing things like that. So I think as we look at the smaller stores or the unproductive stores, we'll look at it from a variety of angles and assess all our options.

Operator

And we'll take our next question from Grant Jordan with Wells Fargo.

Grant Jordan - Wells Fargo Securities, LLC, Research Division

If you could drill down a little bit more on the additional expense savings that you expect to realize. I believe you said a lot of that was related to administrative but maybe just give us some more detail on where that's coming from.

Keith E. Plowman

Sure. Grant, this is Keith. Well, we see the cost savings going across all categories of the company. We're looking at all operations, trying to look at things, Grant, as we have discussed before that unnecessary functions are going to be eliminated. We're looking for those items that touch our consumer that will drive business and give us better performance. If you look at the guidance that we provided, you can see that we're saying in round terms we've got about $20 million of savings. About $18 million of that we're estimating right now will be in the SG&A area and there's about $2 million from some of the support functions, whether it be distribution or private brand that will actually benefit our gross margin rate as we go forward. We are touching upon expenses. We're touching upon operations, administrative functions, personnel. I mean, nothing is being overlooked here as we go through those, and that includes advertising, the media, everything. We're looking at it, and we really do see that we have some opportunity here to improve the efficiency of the company and drive the performance and the contribution for all the incremental sales as we go forward.

Grant Jordan - Wells Fargo Securities, LLC, Research Division

Okay. And then, next question. Given the disruption that J.C. Penney had in the quarter, do you feel like you were able to capitalize on that and bring additional traffic into your stores?

Brendan L. Hoffman

I think that's tough to measure right now. Our stores that were up against Penney's were -- trended slightly higher than our overall chain, but it was very -- you know, we have so many stores that have Penney's in malls, it's hard to really read anything into that. When I read Penney's traffic being down 10%, that actually can have a negative effect on us in the short term because it brings less traffic to the malls. I do think longer-term, as these customers start shopping again, they're going to go somewhere and I hope that we're ready to take advantage of that, but I'm not sure Q1 was the best barometer of that.

Operator

We'll go on to William Reuter with Bank of America Merrill Lynch.

William M. Reuter - BofA Merrill Lynch, Research Division

In your calculation of EBITDA, did the gain on sale of assets show up in that number?

Keith E. Plowman

There is a small number in there for the gain on sale of the assets, and you would also have the severance number that was put in as a onetime bill, so they essentially are somewhat offsetting.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. So they were pretty similar in size?

Keith E. Plowman

Yes.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. And then in terms of the pilot stores that we had, had. I think ultimately you guys were going to have 67 stores. Can you talk about the performance of those stores? I think we were seeing 700 and 400 basis points of improvement depending on size.

Brendan L. Hoffman

It's really mixed. I mean we've had some, particularly in Pennsylvania, where we've shown great improvement. We've had others in the Midwest where the initiatives have been less clear, which is why I said in my remarks, we're going to cherry pick as we go forward some of the things that have worked and some that haven't. I think that what's clear is where we can add back some national brands or intensify national brands. That seems to really be working. So shoes seems to be working in all of the -- all the pilot doors. So I think that as would be -- is to be expected, this is kind of a living, breathing process and we're getting smarter with each rollout. And so we're pleased with what we've seen. But we're also learning from some of the results on how we can improve this going forward.

William M. Reuter - BofA Merrill Lynch, Research Division

Okay. And then just lastly in terms of bond repurchases, I guess how you're thinking about that with them being down a little bit and the opportunity to buy some back over the next quarter or 2?

Keith E. Plowman

Certainly as we saw, Bill, there is some opportunity out there to do that. What we're doing is we are combining that with our total strategy on the debt. We recognize that there are now a little bit under 2 years in the senior notes to their maturity and while we've talked in the past that we have strong focus on our initiatives, we're adjusting performance looking at opportunities and being positioned to launch a refinancing here when the time's appropriate, we're also baking that in as part of that strategy, making sure that we're looking all facets to strengthen the company.

Operator

Jordan Hughes with Goldman Sachs, your line is open.

Jordan Hughes - Goldman Sachs Group Inc., Research Division

I was wondering how many store, pilot stores did you open during the quarter and are you still on track for the previous guidance of above 60?

Keith E. Plowman

There was about a little over 30 stores that were opened in the first quarter, and we have another 30 or so that are scheduled. And they are on track for the second half of the year.

Jordan Hughes - Goldman Sachs Group Inc., Research Division

Okay, great. And then regarding the margin outlook for the remainder of the year, are you starting to see some improvements in margin in the second quarter?

Keith E. Plowman

I think as you look at margin -- and obviously, we don't give out quarterly guidance but I'll try and give you a directional. Yes, where we see substantial benefit -- and we've given you a margin range of 36% to 36.5%. If you look back to 2011, our margin rate that we achieved was 36% and it was impacted pretty substantially by cold weather. We had talked about that in the last conference call that, that could be easily 70 basis points or more of benefit. What we did is we analyzed where we were at in the first quarter and looking at the margin rate decline of about 120 basis point, it looks to us like we have some issues that we caused within the quarter beyond the transitional carryover type merchandise of about 50 basis points. So seeing what we can benefit from the standpoint of cold weather, looking at where we performed in the first quarter, we really are saying that if some of that performance continues through the rest of the year, we would be at the lower end of our guidance range. If some of the things, whether it be cost-reduction, some of the initiatives we put in place, some of the marketing, the eCommerce benefit, then we think we can push towards the upper end of our guidance range. But certainly, there will be back-end loading to quite a bit of the improvement because of the cold weather.

Jordan Hughes - Goldman Sachs Group Inc., Research Division

Okay. And then just lastly, do you still anticipate receiving the $50 million signing bonus from the new credit card agreement in the summer? And any update on the use of proceeds, I guess, with that.

Keith E. Plowman

Yes. Everything is moving forward on that. We look very much forward to working with ABS as our new partner. They've been very exciting in the background as we've been getting ourselves positioned to have this all launched, and as you know, that's coming up here in the very near future that we're going to have everything put together. As far as the use of proceeds, we think we have a lot of different options here. We talked about excess capacity to be very close to last year. We will generate cash flow within the year. We do anticipate utilizing the proceeds to pay down debt and will determine what's the most efficient way to do that is.

Operator

And we'll continue on to Emily Shanks of Barclays.

Emily E. Shanks - Barclays Capital, Research Division

I have just, first just a housekeeping item, around the gain on sale for Rochester, New York, backing to a number of plus $3.1 million that will be flowing through SG&A. I wanted to confirm that, that in fact was the amount?

Keith E. Plowman

I'm sorry, you were breaking up a little bit. I think I heard you say you were asking about Rochester -- was there about a $3 million gain that ran through SG&A?

Emily E. Shanks - Barclays Capital, Research Division

Sorry, let me repeat. I said, on backing into a $3.1 million gain in SG&A; is that correct?

Keith E. Plowman

Yes, you would have had -- that's correct. You would had approximate a $3 million gain. There was a prepayment penalty of about $1.2 million and that was reported down as a loss on extinguishment of debt.

Emily E. Shanks - Barclays Capital, Research Division

Right, and then in terms of the $2.8 million of severance, how much of that is cash versus noncash?

Keith E. Plowman

The severance will be cash.

Emily E. Shanks - Barclays Capital, Research Division

Okay. And then just around your top line results, can you give us some color around what traffic versus ticket did for you during the quarter?

Brendan L. Hoffman

Let me let Tony answer that.

Anthony J. Buccina

Our ticket price for the total transaction was up over last year in the mid-single digits.

Brendan L. Hoffman

And traffic.

Anthony J. Buccina

And traffic -- I mean, it says that when they came into the store, they spent a little more. Okay, the amount of transactions we had were slightly down.

Emily E. Shanks - Barclays Capital, Research Division

Okay. And I recall back from when you originally raised the new -- raised the bonds upon the acquisition, the numbers in terms of what your overlap with your competitors were, were up around 90% of your footprint overlapped with J.C. Penney, 74%, with Kohl's and 59% with Federated at the time. Are those still pretty much the same? Have you seen any significant changes in that?

Keith E. Plowman

I don't think there's been significant changes in the numbers. We still feel that with J.C. Penney and Kohl's, we're up, I would say that we think we're in 80s to 90s percent range with those 2 companies. I think on the Macy's, we look at it from the standpoint of what's in and outside of malls and that could change that number around depending on which way you look at it, but I think you're still in the relative ballpark.

Brendan L. Hoffman

Although only about 20% of the malls that we're in actually have a Macy's in them.

Operator

We'll take our next question from Carla Casella with JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

I have a couple of business questions and a couple of financial housekeeping. But on the business side, you mentioned that the Women's moderate and traditional was weak in the quarter. Can you talk about what your mix is between the moderate traditional versus -- I guess the other portion of that would be fashion and how that could vary from small market to large market?

Brendan L. Hoffman

Well, I think that the big takeaway there is, we recognized the last couple of years that the business was moving away from traditional into more updated, and so we knew that we needed to go in that direction. What we have realize now, having lived through this quarter is that we made that change far too dramatically overnight. I mean, we have our inventories down in the traditional by as much as 30% and that was just too far off a -- too hard of a right turn to make overnight. And so while we are getting the additional business in updated, it's not making up for the loss in traditional. So by the back end of the quarter, we were starting to chase that business. Obviously, Q2 will chase it a little bit more until we can really correct it in the back half of the year. So it does sound a little inconsistent with what I'm saying and that we have an opportunity that we gave up in the moderate business -- the traditional business. Having said that, over the long term, we need to become more important in updated.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay, but -- so you won't -- you don't expect to leave some of the OPP [ph] business, but I guess you're thinking just the balance was off?

Brendan L. Hoffman

Yes. We just tried to get the -- instead of doing this over 3 or 4 years, we tried to do this in a quarter.

Carla Casella - JP Morgan Chase & Co, Research Division

Right. I'm surprised you were able to change that much inventory in a quarter. What's your lead time currently with -- to change assortment?

Brendan L. Hoffman

Well, a lot of this was done in private brands, which -- and that's where we really got hurt. So we had made this decision 6, 8, 9 months ago, as we went into spring, we wanted to change the penetration and obviously, that was far too dramatic. So now we -- Tony and the team are out there chasing in the domestic market, and as we get into the later quarters, we'll have a better chance to self-correct that with the private brand area based on the lead times that we have in each different category.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay, great. And then on the -- it looks like your inventory -- actually, can you just quantify how much of the inventory is up on the average unit cost and when do we see that abating?

Keith E. Plowman

If you're talking about the purchase costs of materials and such -- and we're talking about on the private brand, I can give you some color there that essentially, we saw our sales still being up. In the spring of this year, we still had a cost increase, as we had talked previously, which says if you compare back to 2010, we're probably up in the 10% to 15% range, cumulative since that time. When you look at in the fall, we expect that to drop down to low single digits and start moving towards flat. So we would expect if there's no real changes out there that we'll start moving to a closer cost to 2010 as we move into 2013 and beyond.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay, great. And then the $79 million CapEx, is that targeted -- I guess, what's that targeted towards, how much of it is maintenance versus some of the store -- major store renovations you're doing?

Keith E. Plowman

I would say in round terms about $30 million to $35 million of that would be maintenance. And in maintenance, I always include IT programs, updates, things we need to do, POS registers, whatever, things we need to do to drive the business, support the business, I would see that as a required maintenance. The other remaining piece would be for touching the pilot stores, it would be the shoes expansions, it would be for the remodels, everything that we're doing, the visual, the fixtures, all that we're doing to touch the consumer.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay. And given these closed several stores, are you sitting on any dark store rents at this point?

Brendan L. Hoffman

No.

Operator

We'll take our next question from Karru Martinson with Deutsche Bank.

Karru Martinson - Deutsche Bank AG, Research Division

As you guys look at bringing the inventory back a little bit more towards traditional, do you feel that you'll be able to affect that change by the back-to-school season?

Keith E. Plowman

Yes. We -- actually -- we did it in 2 ways. As Brendan has said, we were able to react in the domestic market actually quite quickly, and we got ourselves positioned, actually, at the end of April and in May, where we made substantial reductions over the first quarter where we were at on our stocks. And by the pulling up of private brand as well as addressing the opening price commodities in our private brand that we have -- we knew that we were missing that in the -- basically, at the end of the quarter of the fourth quarter -- we were able to get that in and by the end of July, you will see us pretty close to last year's levels.

Karru Martinson - Deutsche Bank AG, Research Division

Okay, and so, I mean, have you...

Keith E. Plowman

And that's really -- that's really in -- you've got to understand where that traditional inventory is, that really -- it's mostly affected in the ready-to-wear categories, particularly in the moderate, petite and large-sized moderate goods. And you don't have that same kind of imbalance in shoes or in men's, or in other pieces of the business. It's mostly a female apparel issue.

Karru Martinson - Deutsche Bank AG, Research Division

Okay. And I know it's early, but have you seen a reaction as you brought that inventory back more in line with your year ago levels?

Brendan L. Hoffman

It's little tough to say so early on in the quarter and with the Mother's Day shift, things are just going starting to normalize out. But we're certainly optimistic that the gap will narrow as we go on month-by-month as Tony suggested.

Karru Martinson - Deutsche Bank AG, Research Division

Okay. And do you feel from a broader perspective, I mean, is this more about kind of having to educate those target markets that you guys are moving into kind of a more updated look? Is this a kind of a question of advertising, as you mentioned earlier, and some new media outreach in getting a new customer into your stores?

Brendan L. Hoffman

Yes, well I mean, I think as a department store, we can cater to a wide audience. We don't need to be pigeonholed into a narrow demographic like a specialty store might, yet seems like every department store gets pigeonholed in some ways. So for us, this needs to be an evolution not a revolution, and while we're doing this, we can in no way alienate that moderate traditional customers. She's far too important to us, so while we are getting a more updated customer, we need to still show the love to that moderate traditional customer. And I think as you suggested, the way to do that is to utilize the new channels available to us, to talk to different customers in different channels. And so while our print, media, our direct mail catalogs might not show much change, as you get into e-mails and certainly increased usage of the true new media, we can speak to a different customer that way and really cast a wider net without alienating one for the other because we have big enough stores that we can offer assortments to that wide of a group.

Karru Martinson - Deutsche Bank AG, Research Division

Okay. And with your bonds down a little bit here and you've got the $100 million second lien capacity. I mean, what are your thoughts about utilizing that to kind of address your near-term maturities?

Keith E. Plowman

We continue to look at all different avenues. We think we do have some value there. There's no question we've shown in the past there's value there, and we want to find the most efficient way to extract that value for the company, both short and long-term.

Operator

We'll take our next question from Chris Faddis [ph] from JPMorgan.

Unknown Analyst

I have a couple. The first is, Keith, with respect to the gross margin rate, did you say it was 50 basis points decline was attributed to the transitional and extra carryover inventory?

Keith E. Plowman

No, we're saying we think there was deterioration based upon the way we shifted around events, some of the merchandise issues, things like that would have been the 50 basis points. We think that would have been more what we need to address going forward. The remainder would be what was carryover transitional, so forth, that we got caught in the weather and had to mark down heavier in that quarter.

Unknown Analyst

So that would be 75 basis points then.

Keith E. Plowman

Correct.

Unknown Analyst

Okay. Then Brendan, I want to go back to the, I guess the merchandise issue and what I'm scratching my head with quite frankly is, last year it was communicated that the issue in the second half was that the merchandise assortment was too traditional and that you were not reaching the target demographics in your markets. And now we're through the first quarter and we're hearing that you didn't have enough traditional and the updated wasn't really resonating with the customers. So I guess my question is, do you have, at this stage, do you feel pretty good that you have line of sight on what your merchandise assortment needs to be in the fall and the years going forward? Or are you still trying to work through what that assortment is and how to get that message to the customer?

Brendan L. Hoffman

As I suggested a moment ago, I think there is on the surface it sounds inconsistent with what I'm saying because you're right, we did identify last year that we were too heavy in the traditional and we needed to go more updated. However, the degree to which we did that far exceeded where the business is. So as I think I said, we were, inventory was down as much as 30% in those areas when it probably should have been down less than 10% or 10% to fund the updated. So it was the degree we went after it. Do I think we have a handle and a line of sight on where we need to be? I think we are getting there. It's obviously a process. As I've been out to the stores and seen all the banners, now I certainly have a much better handle on the direction we need to go, the categories that need to be important to us and the mix within the categories. I've spent a lot more time in market over the last month with Tony preparing for the transition and gotten the point of view from our vendors as well. So I think that this will continue to be in process, but I certainly feel a lot better about my knowledge about it than I did 60 days ago. And I think the company as well has learned a lot from what we've experienced over the last 90 days and has taken the right steps towards improving that in the back half of the year and obviously as we go into the out years.

Unknown Analyst

Okay. And then I guess to be fair in recognizing that you haven't been there very long, how much time when you've talked to the Board, how much time do you think it's going to take to get Bon-Ton where you think you can take it?

Brendan L. Hoffman

Well I think this -- much like in my past lines, this is a -- it's a multi-year journey to get to where we ultimately want to go. But that doesn't mean that along the way that we're not going to -- as we show the improvement and the progress it's not going to make for very successful quarters and years. But as is the case in any sort of turnaround, it takes a few years to get to your ultimate destination. But I do believe we can have a lot more fun in the journey that we've been having so far.

Operator

We'll take our next question from Rishi Parekh with Sterne Agee.

Rishi Parekh - Sterne Agee & Leach Inc., Research Division

And I apologize if you've already addressed some of these questions but first thing, can you maybe give us an idea as to what percentage of your SG&A is classified as corporate expense or is tied basically to your corporate expense?

Keith E. Plowman

I can't give that to you at this point; that's not a number I have off the top of my head. The significant portion obviously is in our stores. There's a significant portion that has to do with our advertising medium that goes through there and then the other big piece would be the corporate. But the substantial portion would be in the stores themselves.

Rishi Parekh - Sterne Agee & Leach Inc., Research Division

Okay, and just with regard to your inventories, considering it's up year-over-year -- I know you were asked this before, but maybe can you give us an idea as to the increase. Are units up? I assume most of the increase is due to unit cost. Were there any forward buys in your inventory numbers?

Brendan L. Hoffman

The inventory is slightly up as we have said and most of that is really supports our initiatives really in the -- I would narrow it down to where most of it is in 3 categories, it's really in eCommerce and it's in the shoe area and it's in the strategic growth stories.

Rishi Parekh - Sterne Agee & Leach Inc., Research Division

Okay, and with just -- for the rest of the year in terms of promotions, are there any shifts in your promotional account there versus last year that we should be aware of?

Brendan L. Hoffman

Well I mean, I've been going through it myself with the team and now with Luis on board day by day by day, and we feel we have made some positive changes to strengthen events. As I said in my remarks, one of the things I felt was, our events were too choppy; they were very short, causing us to have to put out new collateral for each event to educate the customer, forcing stores to have to change over the event and I think we can accomplish more with less. Not being on sale any more or less days but just having stronger events that can last a little bit longer. So we've look at that events like Friends and Family, which are next month in June, which traditionally have underperformed for us. We've strengthened what's included, we've lengthened the event. Even this week, we will start our mega sale today -- or yesterday. We're doing a spring Black Friday event to try something new that will be incorporated into that event tomorrow and Saturday. So I think things like that, we will continue to look at the calendar and constantly make changes to try and strengthen the -- and simplify the message to the customers. Another example is our use of Senior Days, that's been an event that has deteriorated for us year after year, so we're relaunching that event in the fall to give the seniors what we hope will be a simpler and more beneficial promotional opportunity. So I think every time I'm on this call, I will tell you that we are constantly looking at the promotional calendar to try and strengthen it.

Operator

And Elie Radinsky with Cantor Fitzgerald, please go ahead.

Elie Radinsky - Cantor Fitzgerald & Co.

You may have mentioned this but a few items here, what was your CapEx for the quarter?

Keith E. Plowman

It was around $14 million.

Elie Radinsky - Cantor Fitzgerald & Co.

Okay. What was your cash flow from ops?

Keith E. Plowman

We did not put that number out yet.

Elie Radinsky - Cantor Fitzgerald & Co.

Okay. What are you doing specifically to counteract the weaknesses at J.C. Penney? You did talk about potentially having greater sales. Are you putting out greater coupons, longer sales? Have you changed your advertising given your overlap between the 2 stores?

Brendan L. Hoffman

Yes, all of that is -- I've been touching on and I think that simplifying the message will -- whether it's a J.C. Penney customer and whoever is walking through the mall, we'll hopefully lure them into the store as they understand the great value we offer. I think we got too deep into using our own terminology for events that don't mean anything to a new customer. So for example, last month we had an event, which is one of our biggest, called Capacity Days. I'm not sure as a new shopper what Capacity Days mean. Yet if you saw our signing from across the mall, all you saw were Capacity Days, not something that said "Huge Sale", "Great Discounts", "20% Savings Pass", et cetera, et cetera. So whether you -- if you were a disenfranchised customer from another store, you would have no reason to know that you should walk over to our store and give us a try. So I do think that the way we message is a big piece of it, and as I just alluded to, things like Friends and Family, we need to take greater advantage of shouting out what great values we have in order to attract new customers and not just assume that they know what Community Days are, what a Goodwill Event is, what Capacity Days are, really our own terminology. So I think that's a huge part of what we're doing going forward and as well as J.C. Penney says, drop some big brands like Easy Spirit shoes and Gloria Vanderbilt jeans, which are huge businesses for us, making sure that customers know that we're the place they can go to get those brands.

Elie Radinsky - Cantor Fitzgerald & Co.

Brendan, you mentioned about expanding vendor support. You mentioned several brands like Coach and Michael Kors and Ralph Lauren. Number one, have you already expanded the assortment of those vendors and secondly, are you trying to reach a different demographic?

Brendan L. Hoffman

Well, what we've gotten is the agreement to expand, and obviously, that takes some time because they need to have the product. And so this is something that happens over 6 and 12 months. Going online with them, it will happen later in the fall. I do -- we do believe that these brands have such tremendous recognition today because of they're just -- how they're everywhere online, on all the celebrities, that in many of these small towns we're the only store that has access to these brands. And so that if we can introduce these brands, even in a small way to some of our smaller stores, it helps validate us. It helps differentiate us from the competition who isn't able to carry those brands. So whether it's status brands like that or just going heavier into brands I mentioned like Easy Spirit and Gloria Vanderbilt and Jones and some other brands that -- or Nine West -- are mainstays for us, I do think there's an opportunity we haven't played up enough in the national brands. And of course, that translates to cosmetics as well where when it comes to things like Estée Lauder often, we're the only one in town who is able to sell that product.

Elie Radinsky - Cantor Fitzgerald & Co.

Great and lastly, do you have any expectation to move to a single banner, especially for eCommerce?

Brendan L. Hoffman

Well, there's no -- nothing in the short-term. I think mostly because it would be unclear by banner whether it would help or hurt and we don't need any uncertainty in our business right now. I think that potentially, longer-term as you suggest, perhaps the internet is the deciding factor of that, but I think that's a few years away. It's nothing that we're going to do in the near term. And as I've traveled to these stores, in these markets I realize Younkers is a powerhouse in Omaha, Nebraska and De Moine and Herberger's in its market. So I really am -- as I've gotten to know them better, I'm probably even more reluctant to make such a dramatic change without really understanding the effects.

Operator

We'll take our final question from Colleen Burns with Oppenheimer.

Colleen Burns

Most of my questions have been answered. I just wanted to follow-up on the promotions you talked about. You mentioned utilizing new media like digital versus traditional. Is that something you're putting into effect for the back half of this year? Are you shifting dollars out of traditional media into digital?

Brendan L. Hoffman

Yes. I mean, I think you'll see that as early as later this quarter. We have really underplayed things like affiliate marketing, display advertising, even the way we have our webpages setup are not suited for natural search optimization. So I think there's things like that, that are kind of quick fixes, both for driving eCom sales but also just as importantly, driving traffic into the stores, that Luis, even the few weeks he's been here, has identified and started to put into action. So clearly, this will, like everything else, be a process that evolves over time, but there's clearly some quick hits we can get that we're already taking action on.

Colleen Burns

And what are the traditional media channels that you're looking to downplay?

Brendan L. Hoffman

I think again, we wouldn't exit any of these channels, but we'll certainly look at our use of circulars, particularly as we lengthen events and have less choppy events. I think that's a place where we obviously spend a lot of money, and it's unclear the payback. I think in some of our direct mail books, they've gotten a little lengthy for the way the customer shops today. So there's an opportunity to actually get in front of them more often but with smaller collateral. On the other hand, I think things like TV perhaps could be a great way to reinforce what we're doing, so we might actually increase spend there. So I think it's really looking at all the channels and trying to optimize them but with a far greater emphasis than has been done here on the digital media channels.

Operator

And I'll turn things back over to our speakers for any additional or closing remarks.

Brendan L. Hoffman

Okay. Well, thank you for your questions and your interest in our company. We look forward to speaking with you about the financial results of our second quarter 2012 on our conference call in August. Thank you again for joining us this morning.

Operator

Thank you. And again, ladies and gentlemen, that does conclude today's presentation. Thank you for your participation.

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