Charming Shoppes F4Q08 (Quarter End 02/03/08) Earnings Call Transcript

Charming Shoppes, Inc. (CHRS)

F4Q08 Earnings Call

March 19, 2008 9:15 am ET

Executives

Dorrit J. Bern – Chairman of the Board, President and Chief Executive Officer

Eric M. Specter – Chief Financial Officer & Executive Vice President

Steven R. Wishner – Senior Vice President of Finance

Gayle Coolick – Director of Investor Relations

Analysts

Scott Krasik – C. L. King & Associates, Inc.

Lizabeth Dunn – Thomas Weisel Partners

Jeff Stein –

Analyst for Evelyn Greenwald – SIG

Holly Guthrie – Janney Montgomery Scott, LLC

Erin Moloney – Merrimen Curhan Ford & Co.

Robert Rodriguez – First Pacific Advisors, LLC

Presentation

Operator

Good morning ladies and gentlemen and welcome to Charming Shoppes fourth quarter sales and earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. With us today are Dorrit Bern, Chairman, CEO and President of Charming Shoppes, Eric Specter, CFO and Executive Vice President, Steven Wishner, Senior Vice President of Finance and Gayle Coolick, Director of Investor Relations. I’ll now turn the call over to the host of today’s call Gayle Coolick. Ms. Coolick you may now begin.

Gayle Coolick

Good morning. Thanks everyone for joining us this morning. Today’s discussion will contain certain forward-looking statements concerning the company’s operations, performance and financial condition including sales, expenses, gross margin, capital expenditures, earnings per share, store openings and closings and other matters. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those indicated. Information regarding risks and uncertainties are detailed in the company’s filings with the Securities & Exchange Commission including the company’s annual report on Form 10K for the fiscal year ended February 3, 2007. Our complete Safe Harbor statement and today’s prepared remarks are available at www.CharmingShoppes.com.

Our fourth quarter and full year income statements along with our balance sheets and cash flow statements are provided with today’s press release. We have much to discuss today and we’ll highlight the key issues affecting our earnings release this morning. There are a number of one-time items included in our financial statements which are detailed in the GAAP to non-GAAP reconciliation table in our press release and on our website. We will speak to those items later on in the call. Prior to inclusion of those one-time items, our business performed within our guidance for the fourth quarter with a net loss before extraordinary gain of $23 million or $0.20 per diluted share on a non-GAAP basis compared to net income of $24.9 million or $0.19 per diluted share for the 14 weeks ended February 3, 2007. On a GAAP basis including one-time charges the company reported a net loss before extraordinary gain of $128.7 million or $1.10 per diluted share. We have recorded an impairment charge today related to our Crosstown Traders business. This included non-cash after tax charges of $86.9 million related to the impairment of goodwill and $10.7 million related to the impairment of trademarks and represented a loss of $0.84 per diluted share.

Net sales for the 13 weeks ended February 2, 2008 decreased 10% to $784.9 million compared to net sales of $874 million for the 14 weeks ended February 3, 2007. The extra week of sales in the prior year accounted for approximately 5% of the total sales for the period ended February 3, 2007. Consolidated comparable store sales for the quarter declined 9% and are detailed by brand in our press release and on our corporate website. The year-over-year decline in operating results is primarily attributable to lower than planned sales, a decline in gross margin and negative expense leverage on sales. The combination of changing customer preferences from our merchandise offerings and the very difficult economy in which we are operating led to accelerated promotional activity and a meaningful negative impact to our merchandise margins.

For the fiscal year the company reported net income before extraordinary gain of $18 million or $0.15 per diluted share on a non-GAAP basis for the 52 weeks ended February 2, 2008 compared to net income of $108.9 million or $0.81 per diluted share for the 53 weeks ended February 3, 2007. On a GAAP basis including the one-time charges the company reported a net loss before extraordinary gain of $87.7 million or $0.72 per diluted share. Net sales for the 52 weeks ended February 2, 2008 decreased 2% to $3.01 billion compared to net sales of $3.07 billion for the 53 weeks ended February 3, 2007. The extra week of sales in the prior year accounted for approximately 1% of the total sales for the period ended February 3, 07. Consolidated comparable store sales for the year declined by 5% and are detailed by brand in our press release and on our corporate website.

The company has executed on or announcement many initiatives over the last several months geared towards the improvement of our long term operating performance, addressing the current difficult economic environment in which we’re operating and ultimately driving shareholder value. Those initiatives include the relocation of our Catherines’ home office operations from Memphis to Bensalem. The company anticipates that the execution of the new organizational structure will leverage the infrastructure used by Fashion Bug, will create synergies in a number of operating functions and will result in approximately $8 million of annual expense savings. Our Catherines’ operations are expected to be fully relocated to Bensalem by the end of this month.

The closing of underperforming stores; we’ve announced the closing of 150 underperforming stores in the current fiscal year including approximately 100 stores of the Fashion Bug chain as well as number of locations in each of our other retail concepts. In a majority of cases closing stores are in a market area supported by a number of our other stores and we plan to take advantage of opportunities for sales transfers to remaining area stores. We estimate that the stores identified for closure are currently generating a pre-tax loss of approximately $5 million on an annualized basis. Our store closing program will result in a reduction of square footage of approximately 6% by the end of this fiscal year. The elimination of approximately 150 or 13% of corporate and field management positions which were completed as of January 31, 08. The company anticipates that this initiative will result in approximately $14 million of annual expense savings.

The closing of the Petite Sophistic full line retail concept; we have announced the closing of our four Petite Sophistic retail concepts with was launched during fiscal 08. We continue to view Petite Sophistic as an exciting growth opportunity but our more immediate priorities call for dedicating a greater focus to our core businesses. We launched the Lane Bryant Women catalog leveraging Crosstown Trader’s platform, we issued a new Lane Bryant credit card which introduces a new loyalty and reward program to our cardholder base. Strong inventory management initiatives were taken during the fourth quarter which resulted in a 19% decrease in same store inventories for the fiscal period ended February 2, 08. We completed $253 million in share repurchases during fiscal 08 and announced an additional program of $200 million which will position the company for enhanced shareholder value in future years. We’ve discontinued one of our catalog titles Regalia and are executing on efforts to migrate the Regalia customer base to other of our catalog titles. We also entered into a licensing agreement with a third party for the outsourcing of our home catalog titles. A significant reduction in our cap ex spending plans for fiscal 08 versus last year; we have decreased our capital spending plans from prior years’ levels by $40 million primarily through a 50% reduction in the number of planned store openings for fiscal year 09. Our store openings in fiscal year 09 are mainly focused on our largest core brand Lane Bryant.

Our balance sheet and cash flow statement are included with today’s earnings press release and are subject to adjustments pending the completion of the filing of our 10K. Total cash, cash equivalents and available for sale securities were approximately $77 million at the end of the period compared to approximately $146 million at February 3, 2007. The year-over-year decrease is primarily related to lower net income levels and repurchases of common shares and our investment in the securitization of the Lane Bryant credit card receivables. We continue to maintain a healthy cash balance and strong liquidity and a committed revolving line of credit. Our long term debt at the end of the quarter is $315 million and primarily relates to our $275 million convertible debt due in 2014 as well as a small amount of mortgages and capital lease obligations

We continue to be active under our share repurchase program and repurchased $2.3 million shares during the fourth quarter. For the full year we’ve repurchased approximately 24.2 million shares. Total inventory at the end of the period was approximately $392 million compared to $429 million a year ago, a decrease of 9%. On a same store basis inventory decreased by 19%. Capital expenditures were approximately $29 million for the quarter and approximately $138 million for the 12 months. Depreciation and amortization for the quarter was approximately $19 million and approximately $97 for the 12 months. The company generated free cash flow of approximately $18 million for the fiscal year ending February 2, 2008. On our corporate website www.CharmingShoppes.com, we have posted a GAAP to non-GAAP reconciliation defining our calculation of free cash flow.

Given the current uncertain economic climate and our expectations for continually weak traffic trends we have taken a conservative stance in our planning for fiscal year 2009. We believe difficult retail apparel trends will continue at least through the first half of the year. In response, we will continue to reduce operating expenses and manage inventory tightly in an effort to protect our gross margin and operating margin through this difficult period to ensure profitability and to manage the company to generate free cash flow in fiscal year 09. In the context of the uncertain economic environment and our conservative planning discipline we’ve provided the following initial earning guidance for the first quarter of fiscal 09. For the three month period ending May 3, 08 the company has projected a diluted loss per share in the range of $0.06 to $0.08 compared to diluted earnings per share of $0.20 for the corresponding period ending May 5, 2007. This projection includes $0.02 per diluted share related to the company’s relocation of its Catherines’ Plus Sizes Memphis Tennessee operations to its Bensalem, Pennsylvania offices as announced on November 8, 07 and the streamlining of operations as announced on February 5, 2008.

The company’s projections for the quarter includes net sales in the range of $720 to $730 million compared to net sales of $783.7 million in the period ended May 5, 2007. The company’s projection assumes high single digit percentage decreases in consolidated comparable stores sales for the company’s retail store segment compared to a flat consolidated comparable store sales in the prior year. Our store openings in fiscal year 09 are mainly focused on our largest core brand Lane Bryant. Overall, we plan on opening approximately 45 to 55 new stores primarily at Lane Bryant and Lane Bryant Outlet, relocating approximately 48 to 62 stores and closing approximately 150 to 165 stores in fiscal year 09. First capital expenditures before construction allowances of approximately $24 million are projected at approximately $95 to $100 million which is slightly below our initial projection which we announced on February 5, 2008. Approximately 25% of the company’s cap ex plans for its new stores opening, the remainder is primarily planned for relocation, store maintenance and store improvements as well as upgrades to the company’s information technology and supply chain infrastructure. D&A is projected in a range of $90 to $95 million for fiscal year 2009.

This completes our prepared remarks. I’m going to turn the call over now to Dorrit Bern, our Chairman, CEO and President who would like to make a few comments.

Dorrit J. Bern

What I’d like to do is just comment a little bit on 2007 but also walk you through what we see going on in the businesses. When I was thinking about going through the best seller meeting yesterday of what was selling and what was not selling we kind of came up with the theme, “What makes her feel good?” So you can just think about the psyche of that comment of what she’s currently going through and what she’s experiencing and I’ll get into that in a minute.

This time last year it seems like a life time ago, but this time last year we had come off a record 2006. We were very happy, we were very pleased with the business, all the brand were working, the catalog business was sound, the ecommerce business was generating double digit sales increases. We took a good bite of the apple in terms of positioning inventory in 2007. Why not? I mean, we were on a three year trend, we felt that all the oars were in the water and we were all rowing at the same time and we motored along. I’m using that word because we motored along in the first and second quarter of 2007 making plans. We were right on plan. Were we blowing away the numbers? No, we weren’t blowing away the numbers but, we were on plan. Then, as I said in my road trip because I had an opportunity to get out and talk to our shareholders the last couple of weeks, it’s like June 4^th at 4pm every women in the United States picked up the phone and said, “We’re going to stop shopping.” We began to see a very serious deterioration of traffic.

I’m mentioning this for two reasons because the phenomena we have seen is really only been affecting the women’s apparel segment harshly for the second half of 2007. So, we are currently up against relatively good numbers of the first half of last year. She stopped walking into the store and we began to do what we always do, we’ve been at this 13 years together, we began to cut inventory, we began to cut expenses, we began to hunker down. But, what happens is we got ourselves into the fourth quarter and this is true for the majority of the retailers, we had a lot of units, we had a lot of seasonal goods, they were also confident and feeling good about 2007 and we began to very aggressively promote and you know obviously what the result was because we had talked about it earlier and we are certainly talking about it now.

However, we did have some success in 2007. So, let me just spend a few minutes talking about the fact that the right fit initiative at Land Bryant and Catherines was an incredibly successful launch for us. Fashion Bug will have that initiative for fall 2008. The Catano loveable brand launch at the Bug was very successful, it gives us that credibility, that fashion credibility because we’ve always had great products but now we have aligned it with great brands, that has been very well for us. Intimate apparel as a category, this kind of comes back to my theme, what I was talking about earlier that her need to feel good, intimate apparel is good. Intimate apparel in 2007 was good in all brands, in catalog, it’s about it has to be a little sexy, it has to involve color, it has to involve something that is going to make her feel good. Cacique which for those of the call that don’t know Cacique is our intimate apparel private label brand in Lane Bryant. We have expanded the reach of that brand by opening now almost 100 side-by-side 2,000 square foot Cacique intimate apparel stores. We have added Bali and Spanx and it is doing very well for us, very well for us. I’m very excited that now we have the opportunity because obviously we have a catalog division that down the road as we get through these tough times, but down the road the opportunity to launch a Cacique catalog al la the big sister Victoria Secret. It is a very exciting concept for Charming Shoppes, Inc.

The Lane Bryant catalog launch we talked about. Gayle talked about the credit file. We now have the fifth largest proprietary credit card in the United States. I’m very proud of that organization. Think of this, little Charming Shoppes, $3 billion in sales 14%, 14% of the female population in this country is walking around with in her handbag with a proprietary credit card from us. That is just absolutely incredible. It’s a money maker, we have an incredibly credit relationship with our credit card customer. She’s the best spender, the most loyal and she’s definitely the one that is still coming into the store and we love her.

Sourcing had a good year for us. But, what we’re seeing now is that we’re still seeing double digit decreases in traffic but once we get her in the store, once we get her to pick up the catalog, once we get her in the ecommerce channel she converts. Our conversion rate is great. Unfortunately we’re just not getting the kind of footsteps in the door. And, what is she buying? She’s buying everything she doesn’t have. She’s buying fashion, there again back to the feel good. She’s buying wide legs, she’s buying dark denim, she’s buying ITY prints, she’s buying the new Emma body, she’s buying new baby dolls, she’s buying Right Fit now that we have it in career. Intimate apparel continues to be good again, color and sexy. She’s buying dresses. She hasn’t bought dresses in the last decade. There are new jacket silhouettes, she’s buying new jacket silhouettes. But, what isn’t she buying at the moment? What isn’t she buying? And, it could be because we’re having a cool spring, it could be because we’re having the earliest Easter, it could be a lot of things or, the 700 pound gorilla sitting in the room, it could be the economy.

What we aren’t getting the throughput on compared to last year is our big unit drivers capris, tees, casual woven bottoms, casual woven tops, flip flops. So essentially what she is saying at this moment in time is, “I already have capris in my closet.” Is she going to buy them eventually? I’m sure. “I already have knit t-shirts in my closet. I already have casual woven bottoms. But what I don’t have, I don’t have wide legs, I don’t have dark denim, I don’t have Right Fit.” And, that’s what she’s buying. So, we are cautious, we’re keeping our inventories lean and mean. We’re making sure that our buyers have retired the pencils and are staying very faithful to their open to buys which we review every week. We’re keeping those expenses down, we’re using our CRM marketing organization. I know you all know we consolidated marketing when we brought the Catherines team up from Memphis. We did a whole corporate marketing initiative so we’ve got a huge group of individuals over there slicing and dicing our direct mail because we do have 75 loyal customers whose names that we have and we want to make sure that we promote intelligently to them, market intelligent to them, talk to clearance customers, talk to dress customers, etcetera, etcetera. That is a very important initiative for us.

The Catherines consolidation has gone very well which I know Gayle mentioned. Our search for the fashion retail group president, I’m very pleased with the candidates. We have been actively interviewing many candidates now so I’m very pleased with that activity and also for the last six months, as I think you know, our board has been looking for qualified retailers. So, that search continues and that interview process is going on as well.

I will now pass it back to the Q&A but think about the comment of what I said. We as retailers, we’ve got to make her feel good. We’ve got t provide products for her in this difficult economic time that gives her a reason to part with the money that she is typically now going to spend on her kids that are going to come first. She might even buy the hubby something before she buys herself something. So, we really have to make sure that we provide for her a reason to part with that very valuable money that is so near and dear to her heart.

On that Jackie, it’s time for the Q&A.

Gayle Coolick

We’re ready for the Q&A. In the interest of time it would be great if folks could limit their questions to two. Let’s go.

Question-and-Answer Session

Operator

(Operator Instructions) One moment please while we poll for questions. Our first question is coming from Scott Krasik of C. L. King.

Scott Krasik – C. L. King & Associates, Inc.

Can you talk a little bit about gross margins? I mean obviously you’ve had the mix shift with catalog having lower gross margin but they’ve been declining pretty precipitously. It seems like in the first quarter the promotion now is still very, very high. You have a large direct sourcing component. When can you start to see gross margins moving back up?

Eric M. Specter

Scott, let me try to address that with our fourth quarter release since we have highlighted these one-time charges on separate lines of the income statement. Let me comment on our gross margin which of course is net of buying and occupancy and try to give you a direct answer on that and then I’ll fast forward this to what we see in the first quarter. What happened here in the fourth quarter, put the sales side – I think it’s understood that the promotional and lower demand for apparel based product from the moderate customer – where we took compressed the margins and the margins as we stated here for the fourth quarter were in aggregate down 670 basis points which is significant. And, the majority of that drop is the pure merchandise margin and largely contributed by the three retail brands Fashion Bug, Lane Bryant and Catherines. What happen in the fourth quarter and as much as we tried to get out ahead, as we talked in our calls as early as the second quarter conference call about reducing inventories, it certainly in hindsight was not enough. We moved expeditiously in the second half of the year and I am pleased to report that we are now in line as Gayle reported her in the prepared remarks that our inventories have finally now gotten caught up with the reduced demand for sales and are now down 19% on a comp basis. That was a plan that we were looking to execute as early as last June and July.

That all said, even though we pulled back fourth quarter the promotional climate and our objectives of ensuring that we would not carry over fall prior season merchandise into the spring season forced us to take more aggressive markdowns, more promotional markdowns throughout the entire Christmas selling season. And, for all intensive purposes from Black Friday on, or the week before Black Friday we were in a very heavy promotional posture and structure in order to move and sell through the units to get through our end of inventory target at the end of January. That put very significant pressure on the margin at particularly the retail brands which were the largest contributor of this 670 basis point drop.

Now, within that 670 certainly is a component which is probably about a third of it, about a third of it is related to the negative leverage on buy and occupancy which is primarily the negative leverage on occupancy. So, 200 plus basis of that increase is purely coming from you occupancy for the better part of the contractual commitment that is fixed, relatively fixed across the retail brand obviously with a 9% comp store sales drop the leverage on the gross margin becomes significant. But, two thirds is clearly what I mentioned relative to the pure margin.

Now, let me fast forward, what can we do and what can we commit to? We clearly now have strategized as we have done in prior downturns in the earlier part of this decade, we’ve finally gotten out ahead from an inventory planning and we’re going into this first quarter and spring season with significantly lower inventories on a store per store basis and, more importantly, with lower inventories in the fall clearance buckets. Now, there’s two things to talk about that because we went much cleaner than we have in prior years we obviously will not have those clearance sales recorded in the February/March period which is part of the reason that the comp store sales trends are continuing at the levels we are. But, what we are doing is the sales that we are recording in spring because of the shift in the mix an being more weighted to forward spring categories and inventory assortment as opposed to weighting it more to the fall clearance side, the inventory that we are selling is now starting to recover a more normalized margin. So, this kind of drop that we experienced in fourth quarter will absolutely not continue. Now, there will be certainly – we’re going to narrow it significantly. Will we improve over the first quarter of last year? No, based on our outlook year but we will narrow this drop in gross margin considerably and get it much closer to last year’s margin albeit on a lower sales base.

So, we are managing and this is what we need to do when you have reduced demand for your products that you’re selling through the stores or through the catalogs. The one thing that we must get at and we’ve executed this now and we’re comfortable that our rate of inventory drop now is now ahead of in terms of further reduction and what are sales are reducing and that puts us in a much better position to recover margins here in the first quarter and certainly not see a repeat, although we’ve made no forward forecast beyond first quarter, I can assure we will not see these kinds of gross margin depressions as we move in through the year and into the second half of the year.

Scott Krasik – C. L. King & Associates, Inc.

It just seems to me and I don’t know the math but, if you’re doing what about 30 to 40% of your inventory is sourced directly by yourselves I would think that has got to be a 50% type of initial margin, how we get down to the low 20s so quickly?

Eric M. Specter

First of all, let me just clarify that. The initial markup again, for those all on the call is significantly above 50% particularly on direct source merchandise. But, let me just say that remember this is a comparison year-over-year so it’s not as if you went from not direct sourcing a year ago to direct sourcing this year. Yes, it increased but it increased nominally year-over-year so you have the benefit of direct source product in both years. But, let me just comment on the margin moving down into the 20s; a significant part of that margin is in the buying and occupancy expenses that net it down into the 20s. That does not represent anything close to what the true pure merchandise or gross margin we’re getting from the product sales. With that said, as I mentioned, if you want to dissect – I’m giving you a little more visibility to that 670 basis point drop, we did have close to a 400 basis point drop, two thirds of it was what I mentioned the much more aggressive price reductions and promotional activity again, as compared to the prior year that we were operating in for fall 06 in order to move those units.

Scott Krasik – C. L. King & Associates, Inc.

Okay. The just secondly, maybe talk a little bit more about the credit card file. I know Dorrit said that it was still profitable. What’s your model looking like for 2008 and could that turn dilutive for you guys in this environment?

Eric M. Specter

The answer to the latter is absolutely not. It’s highly accretive. In fact, I’m going to give a little more visibility and there will be a lot more disclosure in our 10K relating to the operations of our credit business unit. But, just so that it’s understood it was, as Dorrit mentioned at the top of her comments, the credit division in the fourth quarter of course coming off of acquiring the Lane Bryant file we’re now operating all of our brands through our bank and through our credit structure and it remained profitable. It actually exceeded last year’s profitability and hit our plans. What I want to outline is the fact that when you get through a credit P&L what is the set off that gets through to our SG&A expenses? And, that is a credit that comes through in the form of income and for the fourth quarter of the year that number was a little north of $10 million that set off against the SG&A and that was up about 12% from a year ago. For the full year, the credit division in terms of again, the set off that is running through our SG&A expenses, the operating income and the set off was in excess of $40 million. Both great, ahead of plan as well as ahead of last year.

As far as a little bit more color on credit, we are experiencing and I’m going to couch this as slightly higher losses against last year. But, I want to stress the word slightly meaning less than 100 basis points and well within the planned levels of charge off that we anticipated within our credit model. I also mention that the prior year and as most bank card operators and retailers that are running the files are also seeing this. Part of it is the year we’re going against of 06 was abnormally depressed coming off of the new bankruptcy regulations that were put in place and what that did was significantly for a good nine month period abnormally reduced – first of all it reduced the number of consumers that were filing bankruptcy but it artificially depressed the charge offs in the year ago. I’ll just mention that in excess of 25% of our charge offs normally are due to the fact that we’re charging off a consumer that has declared bankruptcy so it’s a fair insignificant part and we all benefited by the bankruptcy regulation of over a year ago and we anticipated that we would see more normalized levels of bankruptcy filings and therefore that is part of the slight increase in our charge off rate.

But, we are extremely profitable, we are operating now about $600 million of receivables. Again, for the benefit of everyone on the call our structure is we run those receivables through a master trust that is not consolidated in with our financial statements. This is a structure we’ve had in place now for 17, almost 18 years now. But, that is what – you had visibility to that trust, there is now $600 million in receivables. So, we are very pleased with our benchmarking and profitability of our credit division and how important a position it plays with enhancing the sales of the brand. Directionally within each retail brand private label credit sales are about 30% of the sales that each brand records in any fiscal year.

Operator

We’ll go to our next question coming from Liz Dunn of Thomas Weisel Partners.

Lizabeth Dunn – Thomas Weisel Partners

I know you’re only providing the first quarter guidance but can you provide any sort of directional commentary on how you expect the year to progress 2008? Also, what is your expectation for free cash flow for 2008 because I would imagine that is pretty important given the trends in the business?

Eric M. Specter

Since we did not give guidance beyond the first quarter relative to a free cash flow model and what you’ll see up on our website which is our GAAP to non-GAAP reconciliation at least how it looks for the year and first quarter. What I can say though and what we did mention in the release this morning is we did give some statements about the year just not quantifying it. Directionally, although we’ve got a loss projected here as we’ve projected and forecasted here today for first quarter we are committing that the business will be profitable for the fiscal year and we’ve also gone on to say that on the strength of our reduced working capital in the form of reductions in inventory and other working capital areas, as well as the significant pull back in our capital budget even on these lower levels of earnings that we recorded a year ago and under any profitable model that we would have in fiscal 2009 we would be committing that we would be generating positive cash flow. But, I’m not at liberty to disclose what that specific number would look like until we move further on into the year and get more visibility and guidance to the balance of the year.

Lizabeth Dunn – Thomas Weisel Partners

Positive free cash flow, like the net of your operating less cap ex?

Eric M. Specter

Yes. Similar to in other words the definition would be comparable to in terms of just the cash provided by operations less our capital expenditures less our principal payments of debt which is a very small number for us, it’s under $10 million a year is our required payments on mortgages and capital lease obligations.

Lizabeth Dunn – Thomas Weisel Partners

Okay. Then just a second question, I know you’re provide guidance but are you thinking that you may see some improvement as the year progresses? Or, are you managing the business such as you’re not going to increase the inventory until you actually see the turn?

Dorrit J. Bern

Liz, we want to be very conservative because as I said in my comments, Eric and I have probably discussed the cool weather, the early Easter, the economy at least 100 million times and we really don’t know, we really don’t know. So, we’re just going to make sure that we keep those inventory levels down. Wouldn’t it be wonderful if the business opens up with this check she’s going to get in her handbag and she rushes in and spends a lot of money with us, that would just be a dream but, we’re not going to plan for that. We’ve got good assortments, I’m pleased with what the buyers have in the stores and it’s just a matter now with riding it out and keeping our heads down and being as conservative as possible.

Steven R. Wishner

We are not going to step out on our inventory levels until we see a clear indication that the psyche of our customer has changed and she is more interested in buying again. We don’t see the catalyst for that yet on the horizon but when we do that’s when we’ll start thinking about starting to inventory to what is clearly developing as a higher level of demand. But, we’re going to be very conservative until then.

Operator

Our next question is coming from Jeff Stein of [Inaudible].

Jeff Stein – [Inaudible]

This is a question for Eric, follow up on the credit card securitization. Do you think there will be any issues in this environment with having the ability to continue to securitize your receivables.

Eric M. Specter

Jeff, let me say that we were pleased that we completed in this difficult environment back in October and we of course reported on that on our third quarter call, we did do a very significant $320 million securitization which was done for the most part to fund the purchase of the Lane Bryant receivables from the third party that had been operating those receivables. So, we were very pleased. Clearly, the interest rates and spreads on those transactions were higher than what we had been experiencing in prior years but still well within our plans that we had looked at. It was a very efficient way of our structure of funding the credit card business is through these securitizations. Your interest rate spreads are much more efficient backing them up with credit card receivables than we would otherwise need to borrow if we were a retailer borrowing off of working capital lines. So, I would suggest that clearly it was more difficult than it had been in the prior years but in one of the most difficult credit markets this past six months we were successful in doing a transaction.

One of the things I’ll mention relating to 08 because of that securitization and lines that we have committed of our other banking institutions that have been supporting us for well over a decade, we do not have any of our securitization prior issues coming in terms of maturing in 2008. The next maturity for any significant securitization would be our 2004-1 which is outlined in our financial statements. That will not come up until the spring of 09. So, at this point based on our plans, based on our growth in receivables, we took that into account when we did our securitization back in October and there will be no further securitization financing necessary in the fiscal year of 08 at this point.

Jeff Stein – [Inaudible]

With regard to approval rates on new credit cards, are you seeing them move down in this environment? Are you trying to be more discriminating about who you extend credit to particularly on new accounts?

Eric M. Specter

This is done by a risk scoring group that is obviously independent of the retailing side of the business and the models we’re using are very consistent in terms of who can be approved for credit. Of course, we’re regulated by the OCC as a national credit card bank so there are very strict regulations that need to be adhered to in terms of the objectivity of those scoring models and we are consistently adhering to that. I will mention though that Jeff, and again, when you look at the credit side since we are fully, with the exception of less than 1% of the credit file, 99% of our credit file is private label cards meaning that they only have utility in our brand that the card is issued in as opposed to many other retailers that have issued co-branded cards over the years with a Vis or MasterCard emblem that are running files that could have 10s of thousands of dollars in balances. The average balance across our entire portfolio now that we’re operating Lane Bryant is roughly $260 to $270. The minimum payments that are necessary from our customers to support those balances could be anywhere from $15 or $20 a month. So, we if you look at it that we’ve got $600 million of receivables that have been securitized and you think about it in the term of $270 average balances you have millions of accounts with very small balances and we feel that that is a strategic advantage in very tight credit times as our moderate consumer is under assault in terms of their ability to access home equity credit lines, refinancing of course of mortgages with the housing market and we have a lot of history operating this file, in particularly the Fashion Bug file since 1991 in terms of the cyclical nature and what happens in a down economy. So, we are managing this as we have consistently managed it.

Dorrit J. Bern

And, a lot of our promotions are credit card promotions.

Eric M. Specter

On the marketing side.

Dorrit J. Bern

On the marketing side.

Jeff Stein – [Inaudible]

Got it. One question for Dorrit real quick and that is on the Lane Bryant catalog launch. It seems like you’re in a pretty tough spot, you really need to go at it pretty aggressively this year and this is the best year to really undertake such a strategy. Do you believe that – will the cost savings that you’re affecting through the 150 store closings and the downsizing at corporate and in the field, will that be able to fund the continued startup expenses that you anticipate for Lane Bryant catalog this year? And, do you see that being a greater drag on profitability this year than it was in the brief period of time that you launched it for 2007?

Eric M. Specter

Jeff, the answer to that is that the savings that we’ve modeled and outlined are far significant than the continued investment. In fact, to quantify it and I know we talked at the last conference call on this that the $10 million pre-tax investment that we mentioned that would be needed to get the initial launch which is primarily through the mailing of catalog titles and is for customer acquisition, we will materially reduce that investment. And, that $10 million if you looked at it on an annualized basis what we’re planning to spend this year versus last year, the number will be significantly less than the $10 million that we spent in the fourth quarter so it will not be a drag and certainly not be anywhere near close to the kind of savings that we anticipate generating from the initiatives that we’ve outlined here this morning.

Operator

Our next question is coming from Evelyn Greenwald with SIG.

Analyst for Evelyn Greenwald – SIG

I have a question for Dorrit and a second question for Eric. Dorrit, Lane Bryant has struggled to deliver a consistent string of fashion wins. Given your comments that Fashion Bug customers reactive positively to the Catano roll out have you given any consideration to rounding out shall we say the assortment at LB with relevant brands or relevant brand strategy? And, my question for Eric is can you provide a little more guidance on how we should model the savings related to both the job eliminations and the anticipated store closings?

Dorrit J. Bern

We have maybe, maybe that’s too big of a statement but certainly one of the preeminent trademarks in womens's apparel which is Lane Bryant. I mean, there isn’t a woman in the United States that doesn’t know who or what Lane Bryant is so what we need to do because you know we’ve certainly talked about it, do we need to get on the designer bandwagon and introduce a designer to Lane Bryant? Do we need to possibly bring in some other brands to round out the assortment in Lane Bryant? And, where we keep landing, we keep coming back to is the fact that this is such an incredible brand that we just need to do a better job of making sure that the product is compelling, that we have great quality and we have great pricing and that’s really our charge and that’s really our mission. Now, having said that on the intimate apparel side of the store we also realized that the wonderful thing that we have in Cacique is we have a very strong position in terms of where we are in our bra and panty business. It’s a little sexier, it doesn’t have the kind of support that some of our plus side women need and that’s why we’ve introduced brands that provides that functionality that we wouldn’t put in our Cacique brand because then it would destroy the imagine of the brand. So, that particular business there was a need in terms of introducing brands that provided more function and more support than we would typically have in our Cacique assortment. So, on that note here’s Eric.

Eric M. Specter

Let me address the question relative to how the savings will be realized through the financial statements and let me just take them into the three main initiatives that were outlined in the prepared remarks Gayle delivered. I’ll start with the corporate and field management positions eliminated which again, we reported on the fact that those positions were eliminated at the end of the fiscal year. All of the employment, the severance related, the employment related costs of those are part of our fourth quarter announcement on corporate. That $14 million on pre-tax savings will be realized immediately pro-rata throughout the four quarters of the years since those individuals and positions are no longer here. So, that’s the most significant of the numbers. If we move to the Memphis and the Catherines’ relocation our of Memphis, we are on schedule to complete that relocation here at the end of the month so we will start seeing a minor amount of that $8 million on an annualized basis here in the first quarter. It will be very nominal, the majority of it will be again pro-rata, the majority of the $8 million pro-rate throughout the second and third and fourth quarters.

The last piece of it, the savings we’ll get from the store closing program that one will take a little longer throughout the year. I think hopefully everyone on the call would appreciate that we announced that on February 5^th, our real estate and legal group of course has been very active over the last six weeks in negotiating with landlords as that is contingent on us for the most part getting negotiated settlements from landlords to exit those stores. And, as we mentioned we are still on track to have those stores all closed by the end of the fiscal year but many of those will be closing in the back half, the majority will be closing in the back half of the year as opposed to the front half of the year so only a minor part of that store closing savings will be realized here in 08 of course, all of it going forward in 2009.

Operator

Our next question is come from Holly Guthrie of Janney Montgomery Scott.

Holly Guthrie – Janney Montgomery Scott, LLC

I just have a follow up, can you give us any sort of guidance on that cost savings from the closing of the 150 stores?

Eric M. Specter

Holly, the net in terms of the cost savings comes from the fact that they were underperforming on a contribution basis and those losses were approximately $6 million.

Holly Guthrie – Janney Montgomery Scott, LLC

Okay. Then, could you just walk us through what happened that lead to the impairment charge at Crosstown Traders? What it was in the business, the movement of people, what exactly it was that lead you to say, “Hey we overpaid a little bit, we’re not going to get to our goals.” What happen there?

Eric M. Specter

Let me separate in terms of what happen, let me just separate the economics from an accounting requirement. This is not a GAAP – and has been in place for several years since the changes were made in the accounting for goodwill well probably seven or eight years ago. This is a GAAP accounting requirement that we must undertake each fiscal year for all of our businesses and all of our assets. You must go through this if you have stores that you’ve built and acquired, you have to go through this for any acquisitions resulted in goodwill being recorded on your books. This is a GAAP accounting requirement that we must run through and the accounting analysis of this is what leads to the charge that we announced today.

Holly Guthrie – Janney Montgomery Scott, LLC

I understand that fact but I’m assuming because it didn’t hit certain levels of return that the charge was greater than it may have been if you had hit better levels of return and I was just wondering if you could give me some clarity on what that was.

Eric M. Specter

In terms of the detail we’ll have more to say about that in our 10K disclosures but you’re getting to a point that certainly the cash flows have been obviously impaired in that business. Of course, we’ve had visibility through the nine months of that business underperforming in this environment and clearly that plays a lot into the accounting analysis and calculations that leads to determine whether there is an impairment of any of your assets.

Holly Guthrie – Janney Montgomery Scott, LLC

Okay. Then, my final question has to do just going back to gross margin, you made a comment that you reflected back – when you started seeing this deteriorate in the second quarter and throughout the second half of the year that you reflected back on your many, many years in the business and you quickly reduced inventory, you did a lot of the right things. My question is more general, looking at this period of time as you know we’ve had a magnitude of sourcing changes, changes in the dollar, is there anything here and now that you’re evaluating that is different that might lead you to make changes as far as sourcing or costing or outsourcing now versus 10 years ago?

Dorrit J. Bern

It’s a wonderful question. It is a new age for retailers. We’ve never experienced the price increases that we have seen in Asia. We are fortunate in the fact that sourcing is a very important strategic initiative for us and for the corporation. And, as you know Holly, I personally have opened up countries for Charming, most notably Vietnam, Cambodia and parts of Indonesia and the good news is as we have seen the issues with the dollars, as we have seen the increase in the standard of living in China, we have been able to move our products quite consistently and quite aggressively into the Vietnams and the Cambodia’s of the world. So, that has been a blessing for us because we already had the factor based that was already established there.

Now, walking down the path in terms of being conservative with inventory, it is definitely a balancing game because as you know, the beautiful part of having direct sourcing is the fact that we get a great product at a great initial markup, at a great price. However, there are long lead times and you need to be very cautious now waiting to see what’s going to happen in the economy, waiting to see what’s going to happen with this customer. So, we have even set back – in fact, I was on a sourcing call yesterday with our head of sourcing and what we have done is gone ahead and placed fabric but we haven’t committed the units that we’re going to need for the fall season. So, we’re playing very close to the vest. We put a lot of strain on our sourcing organization but, they are up to the task. We have position with fabrics but it’s just a matter of trying to find out how many units we’re going to book for the fall season so everyday it’s a new projection and an interesting challenge.

Operator

Our next question is coming from Erin Moloney of Merrimen Curhan Ford.

Erin Moloney – Merrimen Curhan Ford & Co.

A couple of quick questions, first just quickly on the store closing on the 50 to 70 closings outside of the Fashion Bug division do you have a break out of those between the other retail divisions?

Gayle Coolick

Erin, I’m just going to use round numbers. Roughly 40 Lane Bryant and 10 Catherines.

Erin Moloney – Merrimen Curhan Ford & Co.

Great. Then I guess Dorrit, looking and going back to some of your comments talking about obviously the double digit declines you’re seeing in traffic I’m just wondering have you taken any steps to help drive traffic into the stores whether it’s promotions, your advertising marketing? Then, the second part of that kind of what are you doing to fix the areas of the merchandise that aren’t selling well right now?

Dorrit J. Bern

What we’re doing Erin and we’re trying to be more focused in terms of our CRM activity and let me go back to that. What is the good news? The good news is that we entered the spring season much cleaner than we have in the past. We have pared back on our spring inventory so we want to be careful. Again, I’m kind of using that balancing act comparison, we do want to get her in the store but we don’t want to give away product like we did in the fourth quarter. We want to make sure that if we take a little bit of a sales hit that at least we have the gross margin improvement in terms of margin dollars to try to offset that. So, we use our CRM group to identify the customer that only buys clearance and there’s no reason in the world to send her a direct mail piece that talks about all the great new items for the season. We talk to a customer in terms of whether she’s a career customer or a casual customer, whatever. My only point here is that we’re trying to get smarter and better and more focused in terms of how we promote, who we promote to without broad brushing 50% off the whole store, come in and I’ll be darned if they walk in and buy all our best sellers and all our fashion and then they walk out. So, we want to be very targeted and very specific in terms of what we want her to buy rather than giving away all the great jewels that we have in the assortment that she might want to buy from us at 40 or 50 off. At least we don’t have to play the unit game. We’re not in dire straits of having to generate, having to get out of units so we can move into the next season. So, at least we’re in a good spot there.

Erin Moloney – Merrimen Curhan Ford & Co.

Okay. So that’s helpful on the marketing side. So, any changes specifically to the merchandise assortment itself? Or simply just from an inventory management perspective?

Dorrit J. Bern

Mostly from an inventory management. We’re certainly out there getting those reorders in whether it’s our wide legged jeans and our screened tees. We’re not seeing the kind of outfit selling that we’ve seen in the past. We’re seeing the one off, the great new item, the great new jacket and we’re making sure that we’re more positioned in terms of units in ownership of those items.

Operator

Ladies and gentlemen we’ll take our last question coming from Robert Rodriguez from First Pacific Advisors.

Robert Rodriguez – First Pacific Advisors, LLC

Dorrit, you and I have talked extensively over the past year about the deteriorating conditions and how bad it was going to be and it’s getting worse. I’m just curious on the cap ex, even though you’ve cut it back, you’re cutting back to effectively depreciation and in my mind that doesn’t really reflect the dire nature that we’re in and why you wouldn’t be looking to husband even more cash out of this and thereby being more shall we say reticent on the expansion phase during this chaotic period? Why wouldn’t you be more aggressive on that?

Dorrit J. Bern

First of all let me give you a compliment Bob, you’re the one that figured out where the economy was going before anyone else did by the way.

Eric M. Specter

Bob, let me address that and this is an ongoing analysis, I noted your comment. If you noted today from our February 5^th announcement where we thought our cap ex would be $103, $104 million we’ve trimmed that back another $8 million. What I would say is that the 09 and particularly even though we felt we made a significant pull back in store expansion what I’ll stress is the fact that 100% of those leases for stores that we’re opening were executed on in the first half of 2007. So, certainly that would have factored in to our planning but we had lease commitments and contractual commitments out there as we turned the year. And of course, we started as you well know and as the listeners know, we started pulling back cap ex in the middle of 2007 in front of this, took out as much as we could that was not contractually committed in 07 which was roughly 10% and then scaled it backed as we reported today, over $40 million. We are absolutely focusing in on all of our infrastructure capital maintenance programs that make up a significant part of this capital budget and to the extent projects can be put on either hold or more importantly eliminated that is what we will do. Again, this is an [inaudible] process, we are making inroads to it and certainly directionally we are in agreement with your call out of reducing cap ex.

We’re doing the same thing on the working capital side. We are looking to shrink the working capital needed to operate a business in today’s climate particularly when the demand for the product and the sales are in a decline mode and we’ll continue looking at and shrinking that working capital. And of course, first and foremost is all of our G&A and other than contractual committed fixed expense are all constantly under review and there are many initiatives that just don’t arise to the more significant initiatives that we’ve talked about here this morning and in our previous announcements of February 5^th and November 8^th. Again, I think directionally we are in synch with the fact that we want to reduce our cash outflows whether they are P&L related, working capital related in order to preserve cash flow and mire our way and navigate our way through this difficult period. Which again, we anticipate and are operating as if it will be difficult for this fiscal year.

Robert Rodriguez – First Pacific Advisors, LLC

What I’m trying to get at Eric is what kind of flexibility to you have additionally in our cap ex? Could you conceivably have $25 million flexibility in your cap ex budget? Could you have at least another $25 million of take out in your working capital? Essentially what I’m getting at is how do you rebuild the cash back on the balance sheet that was taken down and get it back up to probably more like in the neighborhood of $125 million rather than $75 million is really the bottom line answer I’m trying to get to.

Eric M. Specter

Well, there certainly what I would say more flexibility in the working capital as we start to look at our forward plans for fall of 2008 and clearly we are looking to keep those inventories tight and there’s certainly more room to reduce inventory on a year-over-year basis than where we landed even though we were pleased with having a 19% drop in that. So, there’s certainly room there. Is there another 19%? No. But, there is certainly room to squeeze millions of dollars out of the working capital plan as we look to solidify the brand’s forward commitments. On the capital side Bob, there are a number of these projects are and capital maintenance projects, I should say capital maintenance is out there as a reserve as opposed to a committed expense that we need to make. And, we need to, based on running 2,400 stores we have a pretty good history on what the capital maintenance looks like in HVAC replacement, fixture replacement for broken fixtures and so on. But, we are managing the discretionary variable cap ex as I mentioned between February 5^th and yesterday, that six weeks, we further reduced another 10% and found another $8 million and we’re going to continue to squeeze that number down. I can’t say today whether there’s another $25 million that would be discretionary other than the fact that we’re going to hold up and defer projects that are in our control as opposed to capital maintenance that unfortunately, as you well know, you need to spend to keep the stores running.

Robert Rodriguez – First Pacific Advisors, LLC

Just not to beat a dead horse, I’ll go on another one. The 2004-1 that comes up next year, can you size what that dollar amount would require?

Eric M. Specter

Well, that is about half of the issue that we did here in 2008. I think it’s between $150 and $180 million.

Robert Rodriguez – First Pacific Advisors, LLC

Assuming the capital markets are still shut at that point in time then, in order to fund that would you be looking at bank lines? What’s your backstop?

Eric M. Specter

The backstop there is we have a number of banking institutions that provide conduit facilities on a committed basis. Now, the difference there and I should point out that our securitizations including the one that we just completed here in 07 gives us five year liquidity to 2012. But, the conduit facilities that are committed facilities, negotiated with our banking institutions are for 365 day facilities, one year. So, that would be an alternative to refinance through our conduit facilities that are being provided today by actual two institutions and we’re working to expand those institutions that provide those lines. That would be the alternative.

Robert Rodriguez – First Pacific Advisors, LLC

Just the last question, you mentioned the $260 or $270 per credit file out there. What kind of a max limit or is there a max limit on what any customer can use?

Eric M. Specter

Sure, again it’s done by the risk scoring model but directionally there would be a very small percentage of the file that would be in excess of $1,000. The majority of the file has lines between call it $400 and $700.

Dorrit J. Bern

Thanks everyone for joining us today. Please follow up with us if you have additional questions and thank you for joining us on our call today. Take care.

Operator

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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