Stage Stores, Inc. F4Q07 (Qtr End 2/2/08) Earnings Call Transcript

Stage Stores, Inc. (SSI)

F4Q07 Earnings Call

March 11, 2008  8:30 am ET

Executives

Bob Aronson - VP IR
James Scarborough - Chairman, CEO, Chief Merchandising Officer
Andrew Hall - President, COO
Ed Record - EVP, CFO

Analysts

David Mann - Johnson Rice & Co.

[John Conaway] - Lehman Brothers

David Glick - Unidentified Firm

[Sean Smallers] - Unidentified Firm

Presentation

Operator

Good morning, and welcome to Stage Stores conference call. (Operator Instructions)

I would now like to introduce your moderator for today's conference call, Mr. Bob Aronson, Vice President Investor Relations. Mr. Aronson, please begin your conference call.

Bob Aronson

Thank you, Operator. Good morning, and welcome to Stage Stores conference call.

Speaking this morning from the company will Jim Scarborough, Chairman and Chief Executive Officer, Andy Hall, President and Chief Operating Officer, and Ed Record, Executive Vice President and Chief Financial Officer.

Before Jim begins, I would like to point out that any reference to earnings per share during this morning's call will be a reference to diluted earnings per share.

I would also like to point out that our comments this morning contain forward-looking statements. Forward-looking statements reflect our expectations regarding future events and operating performance and often contain words such as believe, expect, may well, should, could, anticipate, plan or similar words. Our forward-looking statements include comments regarding the number of Estee Lauder and Clinique counters that we expect to open in the first half of the year, comments regarding the number of new stores that we plan to open during Q1, Q2 and the full 2008 fiscal year, and comments regarding our outlook and expectations for the 2008 first quarter and full fiscal year. Thus, forward-looking statements are subject to a number of risks and uncertainties which could cause our actual results to differ materially from those anticipated by the forward-looking statements. These risks and uncertainties include but are not limited to those described in our most recent annual report on Form 10-K, as filed with the Securities and Exchange Commission, and other factors as may periodically be described in other company filings with the SEC.

And now, with that said, I would like to turn the call over to Jim.

James Scarborough

Thanks, Bob, and good morning everyone. We appreciate your joining us today for our fourth quarter conference call.

I'll start off today's call by spending a few minutes providing a high-level overview of our fourth quarter financial results, and then Andy will follow up with a quick review of our operational highlights for the quarter. Then after Andy is finished with his remarks, Ed will discuss our Q4 financial results with you in greater detail, and then he'll cover our 2008 Q1 and full year sales and earnings outlooks. Then, when Ed has finished with his comments, we'll open it up for questions.

The fourth quarter of 2007 concluded an extremely challenging year for us. Throughout the quarter we faced a number of critical issues, including an economically stressed consumer, unseasonable and inconsistent weather patterns, and a general lack of must-have apparel items, particularly in the Missy Sportswear area. These factors all combined to dampen consumers' holiday cheer and spending during the quarter, particularly during the allimportant holiday shopping period, and even though we bucked the general industry trend in January by posting a 1% comp store sales increase, we nevertheless would up with an overall comp store sales decline of 3.1% for the quarter.

The good news is that based on the soft sales trends we saw during the first half of the year we took a much more conservative view of our sales and expense plans going into the back half of 2007, and as a result we did a good job of managing our inventory levels, our merchandise receipt flows, and our operating expenses in sync with the pace of our business during the second half of the year.

So despite our disappointing Q4 sales results, thanks to our efforts around prudent inventory management practices and diligent expense controls - and also due to the beneficial impact of our share repurchase activities  I'm pleased to say that our earnings per share of $0.78 for the fourth quarter are even with last year after adjusting for last year's noncomparable income items, which totaled $0.10 per share.

Another benefit of our tighter inventory management practices was that we ended the fourth quarter with our inventories at appropriate levels. Our inventories totaled $342.6 million this year versus $332.8 million last year. The year-over-year increase of $9.8 million is due to the fact that we had 39 more stores in operation at the end of this year's fourth quarter than at the end of last year's fourth quarter. On an inventory per selling square foot basis, our inventories at year end were down versus last year by 3.4%.

As we look ahead, we're comfortable with both the quantity and the currency or the freshness quotient of our current inventories. We're also excited about our new product offerings for the Spring season, and hopefully we'll see the weather become more seasonal and Spring-like in all of our markets as we get closer to Easter.

Before I turn the call over to Andy, I just want to say that although our sales and earnings for 2007 certainly didn't meet our original expectations, we're nonetheless pleased with the progress that our company made on its key operating and merchandising initiatives during the year.

There is no question that these are difficult and uncertain times that we're all experiencing today. However, we believe that in the long pull we'll all benefit from the unrelenting focus and intensity of each of our Stage Store management team members of getting the job done well on a daybyday basis.

Stage is a great company and one that is poised for growth. We have a solid business model combined with a strong balance sheet and cash flows which affords us the opportunity to grow even during these difficult economic times. We also have some of the best employees in the retail industry, and I believe that based upon all of these positive attributes and core strengths we're well-positioned to benefit, particularly once the mood of the consumer and the general economy begins to improve.

We firmly believe that we have the right strategies and initiatives in place to further strengthen our business, to build upon the years of positive relations that we've had with our loyal Stage customers, to continue growing our top and bottom lines, and, as always, to enhance our shareholders' value.

And now, with all that said, I'll turn the call over to Andy.

Andrew Hall

Thanks, Jim.

As Jim discussed, the fourth quarter was certainly a challenging period. Inconsistent weather and a tough economic environment made it difficult to generate comparable store sales gains and yet, after adjusting for last year's noncomparable income items, we achieved flat fourth quarter earnings per share.

Our associates did a great job to achieve this result. Our merchants, planners, allocators and distribution center associates did an outstanding job in managing our merchandise receipt flows and inventory levels. Sales promotion and advertising created a responsive promotional calendar, store associates provided exceptional customer service, and our sales support associates gave an invaluable effort while controlling expenses. Without a team contribution, we would not have been able to accomplish all that we did.

Despite our overall 3.1% decrease in the fourth quarter same-store sales, we did achieve comparable store sales increases in two of our key merchandise categories. Driven by continuing installation of new Estee Lauder and Clinique counters, Cosmetics was our strongest performing business, with a 4.5% comparable store sales increase. That was followed by a comp increase in Children's of 0.4%. Other categories that performed better than the company average included Dresses, Home and Gifts, Men's and Plus Sizes.

Speaking to Cosmetics, during the fourth quarter we completed the installation of 10 additional Estee Lauder and 12 additional Clinique counters. These fourth quarter additions brought the total number of our Estee Lauder counters to 125 and our Clinique counters to 118. Our rollout of additional Estee Lauder and Clinique counters continues to be a very high priority. We expect to open 24 new Estee Lauder and 17 new Clinique counters during the first half of 2008. We are currently working with Lauder Clinique to finalize our plans for the back half of the year.

For the full year, our strongest performing categories were Dresses, Cosmetics and Plus Sizes, with comparable store sales increases of 8.9%, 8.5% and 3.7% respectively. We anticipate that Spring 2008 will be another strong Dress season. We expect to achieve further comp gains in our Cosmetics and Plus Size businesses as we continue with the implementation of our growth initiatives in these categories.

We also expect to see improvement in our Missy Sportswear area as we are well positioned on this season's trends, color, feminine tops, plaids and alternative lengths and bottoms.

Additionally, we anticipate an improved performance in Shoes through the introduction of better brands such as Nine West, Bandolino, Naturalizer, Soft Spots and Florsheim.

With regard to our comparable store sales by market size for the fourth quarter, our small market stores, at down 2.1%, performed better than the company average. Our mid-size markets were down 3.5%, and our large markets were down 5.4%. For the year, our small markets - which we define as having a population of less than 50,000 people within a 10-mile radius of the store - were our best performing markets and were up one-half of 1%. We continue to be encouraged by the performance of our small markets, which now comprise 69% of our store base, and they will continue to be the focus of our new store expansion plans.

Turning now to the fourth quarter based store activities, during the period we opened 12 new stores  one Stage and 11 Peebles - relocated 10 stores, and closed five underperforming stores - one Bell's, two Stage and two Peeble's. For the year we had a net increase of 39 stores, growing from 655 stores at the beginning of the year to 694 stores at the end of the year, which equates to unit growth of 6%. During the year we increased the number of states in which we operate from 33 to 35. We added approximately 800,000 selling square feet to our store base, growing from 12.1 to 12.9 million selling square feet, which is almost a 7% increase.

With regard to fiscal 2008, we continue to plan for 70 new store openings. We expect to open 14 new stores in Q1 and 15 new stores in Q2. We will closely monitor economic and market conditions as the year progresses, and should economic conditions deteriorate significantly, we have the flexibility to scale back our new store opening plans.

Lastly, a quick update on systems and distribution. We continue to climb the learning curve of our new SAS Market Max merchandise planning system. We successfully created by month Spring 2008 merchandise plans for receipts, inventory and turnover at the store level. This approach will improve our receipt flow, inventory currency and inventory position by store throughout the Spring season. Finally, we are on track to bring our new Jeffersonville, Ohio distribution facility online in mid-2008.

As Ed will discuss shortly, we do not expect the currently tough economic conditions to improve significantly in the near term, and we have built our expense and inventory plans for 2008 based on a conservative view of sales. Having said that, we will nonetheless continue to work diligently on executing our growth initiatives, which we believe will position us well for the long term. We invite you to look at our investor presentation which is posted on our website as it contains a good overview and update of our various growth initiatives.

That concludes my remarks, so at this point I'll turn the call over to Ed.

Ed Record

Thanks, Andy.

I will move quickly through the P&L and then spend a few minutes talking about our outlook for 2008 first quarter and full year.

Sales for this year's 13-week fourth quarter were $473 million, while they were $491.2 million for the 14week fourth quarter last year. When you exclude the $21.4 million in sales generated during last year's 14th week, our sales were up over last year by $3.2 million. In analyzing the components of this increase, contributions from net new stores of $17 million were partially offset by a reduction of $13.8 million in comparable store sales due to our negative 3.1 comps for the quarter.

Our fourth quarter gross profit as a rate of sales decreased by 110 basis points to 31.0% from 32.1% last year. The decline reflects a 20 basis point drop in our merchandise margins and a 90 basis point increase in the buying, occupancy and distribution components of cost of sales.

The 20 basis point decline in our merchandise margins is attributable to downward pricing pressure due to the soft economic environment we experienced throughout the quarter. This pricing pressure resulted in a 1.2% decrease in our average unit retail for the quarter.

The 90 basis point increase in the buying, occupancy and distribution component is principally due to deleveraging of expenses as a result of our negative comps for the quarter in addition to anniversarying the positive leveraging effect of last year's 53rd week.

Fourth quarter SG&A expenses as a rate of sales increased 90 basis points, rising to 19.7% this year from 18.8% last year. Last year, however, included the one-time beneficial impact on SG&A expenses of the recognition of gift card breakage income and insurance proceeds related to prior hurricane losses which in total amounted to 110 basis points. Adjusting for these one-time benefits, this year's SG&A rate levered versus last year's, reflecting the benefit of our conservative planning and tight control over our expenses during the quarter.

Store opening costs in the fourth quarter were $978,000 this year versus $1.1 million last year. We opened 12 new stores during the fourth quarter this year while we opened 15 new stores during the same period last year.

Interest expense was up $200,000, increasing to $1.7 million this year from $1.5 million last year due to higher average borrowings on our revolving credit facility this year versus last year as well as $32.4 million in equipment financing notes that were outstanding at the end of the quarter. These are five-year fixed interest notes secured by certain fixtures and equipment.

Our higher debt levels reflect the funding required for our $50 million share repurchase program, which was started and completed in the fourth quarter.

Our tax rate for the fourth quarter was 37.4% this year while it was 36.9% last year. Our tax rate for the entire year was 37.6% this year versus 37.0% last year. The year-over-year rate increase is attributable to recent changes in Texas' tax laws.

Overall, we earned $31.7 million or $0.78 per share during this year's fourth quarter as compared to $39.6 million or $0.88 per share last year. As we reported, last year's fourth quarter results included various noncomparable income items which totaled $0.10 per share. With the noncomparable items removed, earnings per share were the same in both years.

Our diluted share count this year was 40.5 million shares, while it was 45 million shares last year. This reduction of 4.5 million shares from last year reflects the beneficial impact of this year's share repurchase activities, in which we spent a total of $112 million.

For the full year 2007 fiscal year, our sales were $1.546 billion. Taking out the 53rd week impact of $21.4 million in sales, we had a 1.1% increase when compared on a 52-week basis.

Our net income was $53.1 million or $1.24 per share this year versus $55.3 million or $1.25 per share last year. As for any noncomparable items between the two periods, this year's first quarter results included income of $0.04 per share related to the March 2004 sale of the Peeble's private label credit card portfolio. 2006's noncomparable income and expense items for each quarter essentially nets to zero.

With regard to liquidity, at the end of the fourth quarter we had outstanding borrowings of $63.5 million on a revolving credit facility. Our excess availability was $137 million.

Our capital expenditures for the fourth quarter net of landlord construction allowances totaled $32.1 million this year versus $18.5 million in the fourth quarter of last year. For the full year 2007 including accruals for work completed but not paid for, we completed $82.7 million in capital projects.

During the fourth quarter, we spent $50 million buying back 3.2 million shares of our common stock. The 3.2 million shares repurchased equated to 7.8% of the shares that were outstanding at the time the share repurchase program was implemented. The $50 million spent under this program raised the total amount that we have spent repurchasing our shares since 2002 to $277 million, with a total of 16.9 million shares bought back over that period.

That completes my remarks on 2007's operating results. At this point, I would briefly like to review our outlook for the first quarter and full year 2008 as included in this morning press release.

We believe that our outlook for the periods reflect reasonable estimates based on information available to us at the time that our estimates were developed. As Jim and Andy have already mentioned, we do not expect the currently tough economic conditions to improve significantly in the near term. As a result, we have taken a conservative view in developing our sales estimates for the first quarter and full year.

We are projecting that our comparable store sales will be in the range of flat to down in the low single digits for both the first quarter and the full year, and we have planned our inventory and expense levels accordingly.

With regard to our 2008 gross margin rate, at the high end of our sales guidance we expect to be flat with last year. Also at the high end of our sales guidance we expect our first quarter gross margin rate to be slightly better than last year. Conversely, at the low end of our sales ranges we would expect to see the gross margin rate below last year for both the first quarter and the full year due to the deleveraging impact on the buying, occupancy and distribution cost components of gross margin.

SG&A expenses as a percent of sales are expected to delever for the first quarter of 2008, however we expect that our SG&A expenses for the full year will lever versus last year at flat comp sales.

For the first quarter ending May 3, 2008, we expect to report revenues in the range of $360 to $367 million. Within the quarter itself, we anticipate that our comparable store sales for March will be negatively impacted by the Easter calendar shift. Last year, Easter fell on the first day of the fiscal April. This year, Easter Sunday falls into fiscal March. So while March this year will again include all of the Easter sales, it will now also have one less selling day. Conversely, April - which gains a selling day - will benefit.

We are currently projecting our Q1 net income to be in a range from $5 million to $6.2 million or $0.13 to $0.16 per share. Our outlook compares to sales of $358.2 million and earnings of $9.1 million or $0.20 per share for the last year's first quarter.

In projecting our earnings per share for the first quarter, we have used an estimated diluted share count of 38.9 million shares versus 44.8 million shares last year. As a reminder, when comparing this year's projected results for Q1 to last year's actual results, you should take into consideration the fact that last year included a noncomparable gain of $1.7 million or $0.04 per share related to the March 2004 sale of the Peeble's private label credit card portfolio.

For the 2008 fiscal year ending January 31, 2009, we expect to report revenues in the range of $1.600 billion to $1.640 billion. We are currently projecting net income to be in a range from $48.4 to $53.7 million, or $1.24 to $1.38 per share. Our outlook compares to sales of $1.546 billion and earnings of $53.1 million, or $1.24 per share for fiscal 2007. In projecting 2008 earnings per share, we have used estimated diluted share count of 39.0 million shares versus 42.7 million shares last year.

So despite the tough macroeconomic environment, we believe that we can achieve increases in both total sales and diluted earnings per share in 2008, driven by disciplined inventory management, tight expense controls, new store growth, and the beneficial impact of our share repurchase activities.

Before I conclude, I would like to provide some guidance in a few other specific areas.

Store opening costs for the first quarter and full year are projected to increase commensurate with the increase in new store openings. We expect to open 14 new stores in Q1, 15 stores in Q2, and the remaining 41 stores will predominantly be third quarter openings. For comparison purposes, last year we opened 12 new stores in Q1, two new stores in Q2, 21 new stores in Q1, and 12 new stores in Q4.

Interest expense is expected to increase year-over-year as the incremental costs from our increased debt will exceed the savings from our anticipated reduced borrowing rates, with Q1 showing the largest increase over last year.

Our tax rate for the year is currently planned to increase to 38.0% as the remaining impact from Texas' tax law changes are phased in.

And our capital expenditures, net of landlord construction allowances, are currently planned at approximately $95 million. This increase in capital spend over last year is explained by this year's incremental new stores and the remaining spend for the third distribution center.

That completes my remarks, and with that, we would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from David Mann from Johnson Rice.

David Mann - Johnson Rice & Co.

Yes. Thank you. Nice job in a tough environment, guys.

James Scarborough

Thanks, David.

David Mann - Johnson Rice & Co.

Ed, you talked about being able to leverage this year to flat comp. Can you talk a little bit in detail about some of the areas where you expect to have tight expense control given, you know, there clearly are some other pressures in terms of freight and other things and utilities in your cost structure?

Ed Record

Sure. You know, predominantly most of this leveraging is coming out of the corporate office. As we continue to open 70 stores and expand, we're going to leverage the corporate office tremendously next year.

In addition to that, we have initiatives in the stores that will allow them to leverage at a flat comp, both in utilities and in other controllables.

David Mann - Johnson Rice & Co.

Can you give us just a sense on the corporate expense, you know, what percentage of sales is that and how much you might expect to leverage that?

Ed Record

We don't give exact percentages, but we're looking at between 7% and 8% for corporate overhead and we expect it to grow about 2% next year.

David Mann - Johnson Rice & Co.

Okay. And then, Jim, in your prepared comments you talked about I guess the lack of must-have apparel and also I guess I've listened to you for too long talking about, you know, weather this time of year; it sounds like it may be tough a little bit thus far in March. Can you just give a sense on any indications on Spring merchandise, on how that's going?

James Scarborough

Sure, Dave, yeah. Actually, Andy and I were in New York last week. We were at Bear Stearns for a day and then got to spend a few days in the market with our buying team.

I can tell you that the merchandise looks a lot brighter and perkier than it did a year ago, particularly in the Missy area. Last year there was an absence of color. Generally when that happens our sales suffer for that, and this year we see lots of explosive bright colors and I think a lot of good looking product. So hopefully the lady that took the year off last year will be back shopping in our stores this Spring. Obviously in February our Stage division, when the long weather broke earlier, you know, I had some checkouts on Spring goods, so we're starting to see the activity that would support the sales level that we think color will bring back to the Missy area.

As Andy mentioned, our Dress business continues strong, and that looks very good. But the missing ingredient, as you know, in the last year, year and a half, has been Sportwear. I think she'll be back. The product offering looks a whole lot better than it did a year ago.

David Mann - Johnson Rice & Co.

Thank you very much.

James Scarborough

Thanks, Dave.

Operator

The next question comes from Robert Drbul.

John Conaway - Lehman Brothers

Hi. This is actually [John Conaway] stepping in for Bob Drbul today. Just a quick question, if you could give any updates around the former B.C. Moore stores and any progress you've had from a productivity point of view.

Andrew Hall

Yeah. This is Andy. I'll go ahead and take that one.

The Moore stores, you know, we opened 69 stores in Fall of 2006 with the anticipation that a few of those stores had short lease lives. We closed two of those this year.

I would say in general as an overview the B.C. Moore stores are operating at the lower end of the range of our expectations. We do think that we're getting better, understanding that customer a little better, and they're starting to understand who we are. We're significantly different than what the B.C. Moore operations were in that market, so we're making some changes and modifications to our merchandise mix and our merchandise flow and our vendor structure down there.

So, you know, we feel optimistic about the Moore operations.

John Conaway - Lehman Brothers

Great. Thank you very much.

Andrew Hall

Sure.

Operator

(Operator Instructions) The next question comes from David Glick.

David Glick

Good morning. Jim, I was wondering if you could give us some color on your thought process on your comp sales guidance, and certainly Andy and Ed chime in as well. Your run rate in Q4 was around minus 3. In February it was a little better than that but, you know, still I guess at the low end of your negative low single digit guidance. March, you know, is an early Easter, potentially could be challenging. Why not be more conservative on your comp sales or EPS guidance, particularly for the first half and, you know, what gives you the guidance that you can see a slight improvement in your run rate as you head into '08?

James Scarborough

I think we'll all chime in on that. Andy, you want to -

Andrew Hall

Yeah. Thanks for the question, David.

David Glick

Sure.

Andrew Hall

Well, let's go back into the fourth quarter. So what we saw in November on a calendar-adjusted basis - so looking at the same weeks this year, the same weeks last year, a little different than what we reported on a fiscal basis - we were minus 6.5% comps for November. December was a much better month. We were down 0.2 of 1% for the month of December. In January, again on a calendar-adjusted basis, we were down 1.4%.

So our view of the world was we felt like we bottomed out in November. At the time we thought it was primarily a weather story. In hindsight, it was weather as well as the consumer. So we felt like the bottom of the trough was November. We bounced back in December. January was a clearance month, down 1%. Our sales in February were pretty much right on our plan.

So, you know, we discussed it significantly, about what we ought to look like this year. We think we're conservative in our sales outlook. We're conservative in our inventory and receipt plans and receipt flows this year, and we wanted to put a number out there that we think is realistic. We think that we're going to operate between flat comps and negative low singles.

David Glick

Okay. I appreciate it. I think it's helpful to understand the calendar-adjusted numbers. I appreciate your breaking those out.

Andrew Hall

Sure.

David Glick

And can you give us some sense for the spread between March and April? I mean clearly, you know, Easter's earlier. You're more susceptible to colder weather early in March when you have the traffic, you know, in the stores. You have one less selling day. I mean, is it a couple hundred basis point difference in terms of how you plan the business? Can you help us gauge your expectations there?

Andrew Hall

You know, we expect March to look pretty similar to February, and April to be in the flat range.

David Glick

Okay, great. That's very helpful. Thanks, and good luck.

Andrew Hall

Thank you.

Operator

At this time I show no further questions. (Operator Instructions) The next question comes from [Sean Smallers].

Sean Smallers

Hi. Good morning, guys.

James Scarborough

Good morning.

Sean Smallers

My first question relates to B.C. Moore. I wanted to know, as a group, are those stores currently profitable?

Ed Record

Yes, they are.

Sean Smallers

Okay. So they're just operating at the low end of the store base?

Andrew Hall

Yeah, at the lower end of our sales base. You know, when we bought the Moore stores we knew that they were a different animal. And we had a sales range out there, and we're at the lower end of that sales range.

Sean Smallers

Okay. And for the annual - for the whole year of fiscal 2007 - could you tell us what the average unit retail was and average ticket?

Ed Record

Yeah, hold on. I'll find it. So for the full year?

Sean Smallers

Yeah.

Ed Record

Our average AUR was 1590, so it was down slightly to last year.

Sean Smallers

And average ticket?

Ed Record

The ARU was flattish and our comp for the year was down 1 and some change. So you can conclude from that that, you know, traffic was down slightly.

Sean Smallers

In terms of UPTs?

Ed Record

No, in terms of either footsteps into the store or the units per transaction that they acquired were slightly down.

Sean Smallers

Okay. And then let's move on to store openings. How committed are you to opening 70 stores this year, and have you considered scaling back those plans given the challenging retail environment?

Andrew Hall

Yeah, this is Andy. I'll jump on that. We heard that question a lot last week at the Bear Stearns conference and, you know, we're absolutely committed to the 29 stores that we have lined up for Spring. I would tell you that if we operate in the sales range that we've given guidance to, we will absolutely open 70 stores. Jim mentioned it in his part of the script that, you know, we're in a great position with a great business model and we've got free cash flow that we're able to invest into opening these stores. And from a long-term strategic basis, that's absolutely the right thing to do.

So, you know, unless the world falls off a cliff here in the next four to six weeks, which we don't see at this point, we're probably going to open those 70 stores.

Sean Smallers

All right. Thank you very much, guys.

James Scarborough

You, too.

Andrew Hall

Sure. Thanks, Sean.

Operator

The next question comes from David Glick.

David Glick

Hi. I thought I'd ask a couple follow-up questions.

Could you give us some color on the pre-opening expense per store that you're seeing this year versus last year? Some other department stores are talking about an increase in pre-opening expenses. Are you seeing that as you finalize your '08 plans?

Ed Record

Yeah, we're seeing it pretty much flat to last year.

David Glick

Okay, great. And then also on, in terms of cost inflation, most retailers, you know, that you talk to acknowledge that there's an issue in certain areas that's causing product cost to go up, but no retailer seems to be acknowledging it's going to impact them very much specifically. I'm just curious what you guys are seeing. Is it focused in certain areas? Are you trying to pass through those costs? What are you seeing, and how are you approaching it?

James Scarborough

Yeah. We're seeing a little bit of pressure in the Fall season, for Fall season product placement.

You know, we're about 15% private label, so the 85% that we're branding, that comes from vendors, you know, there will be one of three things that will happen. Either the vendor may take a little bit out of the product to help offset some of the cost increase. They may take some out of their profit margin to us. And, you know, we'll try and pass some of that increase onto the consumer. In reality, I think some of all three of those will happen for the bulk of that.

Fortunately, we're in a position where we are 15% private label and principally branded, so there's probably less pressure on us than some of the other retail formats that are, you know, 40% to 60% private label. They may have less options than we have.

David Glick

Where are you seeing it? Is it mostly in Home and Accessories, or is, like, Footwear and Handbags - can you give us some color on where you're seeing it?

James Scarborough

I think it's across the board. A lot of it's coming out of China. And, you know, you hear a lot of folks out there talking about China and potentially moving some sourcing to wherever - Vietnam or India or wherever. There's not a whole lot of that movement that's going to be able to take place to offset a lot of that, but some of it will.

But I think it's across the board, David.

David Glick

Okay, great. Thank you very much.

James Scarborough

Thank you.

Operator

The next question comes from David Mann.

David Mann - Johnson Rice & Co.

Yes, thank you. Can you update us on what you're seeing in the credit card portfolio, and how are you planning sort of the shared income component from that portfolio?

Ed Record

You know, honestly, our shared income has some components to do with the prime rate. So as the prime rate has come down, we get a benefit there. So we're actually planning our credit card flat as a rate of sales with last year.

But we have not, you know, we've seen a slight bubble that started in November that's working its way through from an aging standpoint, but nothing severe or dramatic. And frankly, the portfolio's held up pretty well.

Andrew Hall

Yeah, David, I agree with Ed's comments. I watch the delinquency rates in that portfolio very closely. The portfolios for all four brand names are very strong. And we saw a little bubble in November. That was the first time this year we saw it.

I look at it closely because usually what you see inside the credit portfolio is a precursor for what you'll see on the selling floor in four to six weeks. We saw a little bubble in November and not much since then. So, you know, our private label credit looks like it's in very good shape.

Ed Record

Good shape, yeah.

David Mann - Johnson Rice & Co.

In your loyalty program, how are your best customers performing? Are they just shopping less? Are they trading down at all? Can you just give us some color there?

Andrew Hall

Yeah, it doesn't appear, you know, in our gold, silver and bronze VIP customers on the private label card, not seeing a whole lot of trading down. We're fairly flat year-over-year with their level of purchases, which is very encouraging as well.

David Mann - Johnson Rice & Co.

Absolutely. And then one last question.

Obviously, we're reading a lot in the environment about store closures and bankruptcies that primarily affect some of the larger markets. What are you seeing in terms of that kind of opportunity from other closings in the smaller markets? Is that having any effect on your cost to operate in those markets in the future and rents and what have you?

Andrew Hall

Yeah, we're not seeing much, but again, David, remember, our small town model and where we're opening these 70 stores this year it is really devoid of a natural competitor. You know, there's a Wal-Mart in town, and that's about it. So from a competition standpoint, a store closing in small town America, we really don't see it.

We also get a lot of questions about, you know, commercial real estate costs in small town America. We don't see a whole lot going on in small town America. And remember, we're going in to secondary use space. So we're going into, you know, Wal-Mart goes across the street to build a super center, we're going to take a slice of their building, or a local grocery store goes out of business, we'll take that space.

We don't see a whole lot of movement in the commercial real estate market in small town America.

James Scarborough

One of the things we've always liked, David, is the consistency in small towns. We've never had the boom. We've never suffered with the bust. And it continues to fare that way.

And if you look out comps and the strength of our comps in small town versus the larger markets where everybody else is having the heartburn, we do a whole lot better in those small towns and we're glad that 70% of our store base is in those small markets.

David Mann - Johnson Rice & Co.

They are good. Thank you.

James Scarborough

Thank you, too. Any other questions, Operator?

Operator

The next question comes from Sean Smallers.

Sean Smallers

I had a quick follow up. I understand that a lot of your stores are located in the same shopping centers as WalMart stores. I just wanted to see if you could just briefly go into some detail on the synergies that you have with WalMart from a location standpoint?

James Scarborough

Well, ideally we'd like to be next to every small town Wal-Mart there is. It's certainly a symbiotic relationship. You know, Wal-Mart draws far and wide, yet they draw on a very frequent basis. Customers will shop Wal-Mart, you know, on a weekly basis.

Our customer certainly shops WalMart for groceries and for hard lines. Generally, she's not buying her apparel over at Wal-Mart, so if she's making a weekly trip to Wal-Mart and we're in close proximity, that's a good thing for traffic flow and customer flow into our store.

Sean Smallers

All right. That was very helpful. Thank you.

James Scarborough

Sure. Thank you.

Operator

There are no further questions.

Bob Aronson

All right, Operator, I guess we'll wrap it up. We'd like to thank everyone once again for participating in our conference call today. We look forward to visiting with you again at the end of our first quarter. Thanks, and have a great day.

James Scarborough

Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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