Executives
Marc G. Schuback – Vice President, General Counsel & Secretary
Robert E. Bernard – Chief Executive Officer & Director
Stephen A. Feldman – Chief Financial Officer
Walter Killough – Chief Operating Officer & Director
Michele Martin – President – dELiA’s Brand
Analysts
Dutch Fox – RSB
Samantha Panella – Raymond James
Jody Kane – Sidoti & Company
Anna Andreeva – JP Morgan
Michael McCormick – Gilder Gagnon
dELiA’s, Inc. (DLIA) F4Q07 Earnings Call March 20, 2008 8:30 AM ET
Operator
Good day ladies and gentlemen and welcome to the fourth quarter 2007 dELiA’s Incorporated earnings conference call. At this time all participants are in a listen only mode. We will be conducting a question and answer session towards the end of today’s conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I will now turn your call over to Mr. Marc Schuback, Vice President, General Counsel and Secretary. Please proceed.
Marc G. Schuback
Good morning ladies and gentlemen. If you need a copy of our fourth quarter press release it is available on our websitewww.DeliasInc.com. It should be noted that statements in this presentation including but not limited to those expressed in Delia’s beliefs regarding its future results, plans or performance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, should, estimate, plan, project, anticipate or similar expressions constitute such forward-looking statements. These statements may include but are not limited to references to sales, store growth, executing plans, increasing productivity, efficiency or leverage. Our goals are based upon management’s current expectations and are subject to risks, assumptions and uncertainties that could cause actual results to differ materially from those set forth and/or implied by such statements. Additional information concerning factors that could cause actual results to differ materially is available in Delia’s filings with the Securities & Exchange Commission. The company does not intend to update any of the forward-looking statements in this presentation to conform these statements to actual results unless required to do so by law, rule or regulation. As a reminder this call is being recorded on Thursday, March 20, 2008.
At this point I would like to introduce our Chief Executive Officer Rob Bernard.
Robert E. Bernard
Good morning. Thank you for joining us to discuss Delia’s fourth quarter and full year 2007 results. Before I begin the call with the highlights of the quarter I would like to introduce the members of management who are with us today. Steve Feldman our Chief Financial Officer, Walter Killough, our Chief Operating Officer and I’d like to introduce Michele Martin, our new President of the Delia’s brand who will be available during the Q&A section. As we announced Michele joined us as president of the Delia’s brand in January to head the product development and merchandising teams. As many of you know, she’s an exceptionally challenged industry veteran with a track record of success in building brands. She was vice president and GMM of women’s and girl clothing at Abercrombie & Fitch and was instrumental launch and evolution of that brand. With Michele on board we believe our merchandising development efforts are going to take a quantum leap. Michele will answer any questions that you may have during the Q&A session.
I’ll begin today’s call by providing some highlights of the quarter and then we’ll wrap up with closing remarks before opening the call up to your questions. For the fourth quarter of 2007 total revenues were $92.8 million up 3.8% versus last year and we earned $0.19 per share for the 13 weeks in Q4 2007 versus earnings per share of $0.21 for the 14 weeks last year. We’ve stated that we believe the extra week in 2006 yielded an extra $0.03 per share. Therefore, we feel a more appropriate comparison is to compare this year’s $0.19 per share to $0.18 per share last year. During this quarter we were starting to see the positive results of a number of our strategic initiatives and we expect to continue to make progress on these as 2008 progresses.
We made some tactical investments with our cash increasing our denim inventory in retail to match the investment we made in the second half of 2007. Increasing our CCS inventory to be prepared for first quarter sales as well as making a few other purchasing decisions which you can see reflected in our higher inventories and lower cash balance. We believe that the timing of these strategic investments will contribute to our first quarter 2008 sales performance and will be offset in lower case usages in the first quarter.
For the fourth quarter revenues in our retail business were up 11% over the same period last year but up 19% for the 13 weeks versus 13 weeks. We believe that our conversion rate was strong allowing us to post a 6% same store comp increase adjusting for the calendar shift which appears favorably to most of our competitive set. In retail, we were aggressive in our promotional cadence promoting earlier than last year in order to reach our sales goals. In November and December we were able to drive our comps at an 8% and go into the post Christmas time period with clean inventories. Therefore, we were able to show roughly flat product margins for the quarter and enter the first quarter of 2008 in a cleaner inventory position than last year.
Looking at the fourth quarter retail business by major category we continue to see significant momentum in denim which is roughly 70% year-over-year comp increase in core denim for the quarter. The expanded denim presentation we initiated in June contributed to this performance and we therefore invested almost $3 million in inventory by year end to continue this trend into spring 2008. Non-denim bottoms did well and at better margins. Logo tees were up year-over-year in comp as well as in margin. Our sweaters and other kinds of knits continued to underperform but we got in front of this early with our promotions and we came out of the fourth quarter in these categories in a cleaner position than last year. Outerwear which we believe to be a brand differentiator has had outstanding success in both sales and margins.
During the fourth quarter we saw sequential improvement from second and third quarters of 2007 in the selling metrics of our stores in the classes of 2006 and 2007. We have more work to do internally but the improvement over the last three months gives us momentum going into the first quarter of 2008.
Turning to our direct business, sales were about flat from the prior year but they increased by 5% on a 13 week basis. The Delia’s brand had as solid a quarter in direct as it did in retail and we believe we are seeing even more synergies between these two channels. Delia’s direct had its strongest year-over-year growth of the year during the fourth quarter producing what we believe are record profits. CCS had another strong quarter despite seeing weakness in hard good sales which we believe was and still is a market wide trend but, we saw our footwear and apparel areas make up for most of the weakness. Alloy revenues were down reflecting in apart the impact of a higher proportion of clearance to full price sales as well as the planned circulation cuts we discussed last quarter. We’re still in the process of fixing that business to bring it back historical sales and profitability.
In the direct business in total product margins were down primarily because of the full price to clearance sales mix as well as CCS being a higher percentage of the total business. This segment’s operating profit increased as a percentage of sales on a year-over-year basis primarily due to our ability through strategic circulation cuts and reengineering of the books to lower our selling costs. Overall, we’re happy with the direction of the direct business on both the comp and margin business.
I’d like to turn the call over to Steve now to review our fourth quarter and full year fiscal 2007 financials.
Stephen A. Feldman
Total revenues for the fourth quarter of fiscal 2007 were $92.8 million compared to $89.4 million in the fourth quarter of 2006 an increase of 3.8%. The fourth quarter of 2007 had 13 weeks compared to 14 in the comparable quarter last year. The mix for the quarter was 66% direct, 34% retail versus a 68/32 split last year. Our retail sales in Q4 07 increased 11.2% to $31.7 million versus $28.5 million in the fourth quarter of 06. For the comparable 13 week period total sales increased 19% and comp store sales were up 6%. Retail sales in the quarter included 12 net new primer store opens since the end of the fourth quarter of fiscal 2006. We ended the year with 86 stores, an increase of 16%. This is down one from the end of the third quarter as we opened one store during the fourth quarter and were able to close two stores in January that we had expected to close in the first quarter of 2008.
Direct sales for the fourth quarter were $61 million, up 0.3% compared to the 14 week period last year, up 5% on a 13 week to 13 week comparison. On a consolidated basis for the fourth quarter the gross margin was 39.2% down 170 basis points from the same quarter a year ago. This reflects both lower gross margins in each segment and the effect of direct comprising a lower percentage of total sales versus last year. In the retail segment merchandise margins were basically flat however, gross margin declined over 50 basis points on a year-over-year basis to 26.2% primarily due to the delivering impact of last year’s extra week on occupancy expense. In our direct business the gross margin was 46% down 155 basis points from last year. This decrease was primarily attributable to Alloy’s higher proportion of clearance versus full price sales, higher outbound freight cost and CCS representing a higher proportion of total direct sales.
Consolidated SG&A expenses increased slightly to $30.0 million versus $29.2 million last year but were still lower on a percentage of sales basis. Total SG&A expenses for the fourth quarter were 32.3% of sales as compared to 32.7% of sales in the fourth quarter of 06. At retail, SG&A increased by approximately 320 basis points primarily due to three factors: the higher depreciation and amortization expense associated with the increased proportion of new stores, increase in store operations expense and an increased retail portion of the total allocated overhead dollars. In our direct business leveraged because of the decrease in catalog costs attributable to the planned circulation cuts in production cost savings which more than offset the postage rate increase we incurred and an offsetting reduction in its proportion of allocated overhead. On a consolidated basis we are starting to cycle the additional division and corporate overhead costs we had incurred since the spinoff as we established ourselves as a public company and prepared ourselves for growth.
For the fourth quarter of 2007 we had some one-timers. With our inventory higher than last year, as we capitalized a portion of merchandising and distribution expenses under GAAP as inventory related costs, approximately $400,000 or a little over $0.01 per share was deferred and we expect will reverse in Q1 08 as we sell the inventory recognized as expensed. We also benefited from a net recovery of amounts related to litigation including the settlement of the old Illinois sales tax case described in our financial statements. We have also added about $550,000 in charges to provide for the loss on liquidation of inventory in retail that Michele deemed brand inappropriate for summer as well as the clearance of CCS fashion overstock from holiday.
On a consolidated basis, our income before interest and income taxes was $6.4 million as compared to $7.3 million in the prior year’s fourth quarter. In the retail segment the loss from operations in Q4 was $3.1 million compared to a loss of $1.8 million in the comparable quarter last year. Income from operations in the direct segment was $9.5 million versus $9.1 million last year. Income before taxes was $6.25 million. Our tax provision in 07 represents primarily state taxes and was lower than last year primarily due to the fact that we do not expect to incur any federal alternative minimum tax.
For the fourth quarter of 07, net income was $6 million or $0.19 a diluted share compared to net income of $6.8 million or $0.21 per diluted share last year. As Rob stated, should we know that we believe the EPS for the fourth quarter of 06 benefited from approximately $0.03 per share for the extra week. Cash and cash equivalents for the period ended February 2nd 08 were $11.4 million versus the high teens level we had indicated on the last call. Net inventories were $43.1 million an increase of 36% versus the prior year end. The increase in inventory is largely contributable to investments we made in purchasing in several areas. In particular we needed to purchase approximately $3 million of denim to fund the increased denim presentations in the stores. We also made a strategic decision to bring approximately $2.5 million of these goods into the country in December, a month earlier than last year to meet the January floor set requirements. This accelerated our payments for denim into January, a month earlier than the February of last year.
Average retail store inventory at cost including warehouse back stocks was approximately $144,000 at year end versus approximately $128,000 last year. Excluding the impact of denim inventories were down 11% reflecting the better relative position versus last year with respect to seasonal inventory exposure. The increase in direct inventory at year end was approximately $7.7 million with the majority of the increase being at CCS. Last year we felt we came out of the holiday time period with too little inventory and we did not get back to appropriate in stock levels until our March book. At CCS, the top selling items typically have longer lives than in our girls books. We bought approximately $6 million of additional inventory including a number of key items to cover a longer time period going into holiday to offset the lack of inventory we had in January and February of last year. These moves however combined with softer hard line sales yielded a net inventory overstock of roughly $1 million. We do not believe we have significant markdown risk on the hard lines inventory and the overstock will be offset by lower purchases in the first half of 2008. We also provided, as we stated, for the loss on liquidation of certain excess fashion merchandise.
The other significant item impacting our operating cash flow during the fourth quarter was approximately $700,000 in the forward purchasing of paper for catalogs. With the paper market facing predicted shortages as well as substantial prices increases in the coming year, we thought it prudent to make this investment. Thus, most of the items affecting our fourth quarter cash flow are timing related and we should see the cash come back in as we reduce subsequent purchases principally in the first quarter. Last year we had a cash burn in February, this year we were flat.
Our total capital expenditures for the year before landlord contributions were approximately $20 million. Of course, there were not outstanding borrowings under our credit facility at the end of the year. This month we increased our Wells Fargo working capital facility on a permanent basis to $30 million from $25 million. In addition, we extended the term of the $2.4 million mortgage balance on our distribution center in Hanover, Pennsylvania which had been due in September of 2008. It has now been reclassified from current into long term liabilities on the yearend balance sheet. For full year 2007 revenues of $274.3 million were up 6.5% over 2006 with a mix of 36% retail 64% direct versus a mix of 33% and 67% respectively in full year 2006. Fiscal 2006 had 53 weeks versus 52 weeks this year. On a 52 week comparison total sales were up 9% with retail up 18% and direct up 5%.
For full year 2007, retail sales were $98.1 million up 16.6% versus 2006. Same store sales were up 4% for the year. As I stated, we had 12 net new stores having opened 19, relocated three, remodeled one and closing seven. For 2007 revenues of the direct business were up to $176.2 million, up 1.5% over full year 2006. Consolidated gross profit for 2007 was 37.5% of sales versus 39.8% last year. The loss for the year was $2.3 million or $0.08 per diluted share compared to earnings of $5.8 million or $0.18 per diluted share for fiscal year 2006.
Now, let me turn the call over to Walter Killough our chief operating officer.
Walter Killough
I’d like to review several of our ongoing strategic initiatives for improving productivity and expanding margins. We believe that implementing these initiatives created enormous opportunity on both top and bottom lines. First, I’ll address our non-comp store productivity. Last quarter we discussed the underperformance of some of our non-comp stores particularly those opened in 2006 due to a lack of focus on UPT, unit per transaction that was a major driver in a lower ADS, average dollar sales in those stores. We have standardly found the amount of turnover in both our district managers and store managers to be well above industry standard. This turnover caused a lack of focus on some of the selling skills that are part of the Delia’s culture.
In the fourth quarter of 07 we started to reemphasize our selling culture and refocus on UPT to drive average dollar sales and we saw the improvement in 06 and 07 stores. This improvement in Q4 was a start but not where we want to be. Our district managers were in New York last week and they were enthusiastically on board to roll out the following series of initiatives upon which we have been working for the past four months: One, we have edited, simplified and are in the process of printing our new operational manuals. It is less about changes and more about simplification. Two, with those operational guides in place we will have a day-by-day systematic training and on boarding process which ties to these manuals. This process was developed by our people in conjunction with an outside consulting that just finished a similar project for Coach. Three, we now have a reutilized, consistent and measurable selling guide for all of our associates that teaches them how to approach our customers in order to drive UPT and transaction growth.
We plan to spend about $300,000 in the first and second quarters of 2008 to get these projects completed and rolled out to the stores as well as on boarding all new managers with this new process. We expect this roll out to be completed before the important back to school period. We believe this will transform us into a more consistent and capable organization. Our plans for 2008 are based upon this improvement in productivity and to not rely upon more transactions. We believe that we can get growth even with flat transactions as we drive UPT to more historic levels especially in the second and third quarters in our 06 and 07 open stores. We believe that with these improvements our 07 stores will have the ability to meet our four wall profit goals but these stores will be under the chains average in sales per square foot productivity because none are what we consider A or A plus malls and they include a number of new [dirt] malls as compared to our chain average. As we previously stated the ability for us for many of these high volume malls has been an issue on which we have seen progress. We do not see this mix issue in our 08 openings.
Next, retail MMU, that is maintain markup. We believe we can increase by 250 to 300 basis point in 08 through three initiatives. First, we have rescaled our imports and increased our importing. We continue to consolidate our vendor base of investing in the overhead need to move more goods offshore. This should increase our IMU, initial markup as we go through the year. Second, we have cut back the amount of inventory bought by style and cut and sew knits. This over quantification had been a problem throughout 07 and we made the appropriate strategic decision to keep the inventories tight in order to limit markdowns and increase the average selling retails in this area as compared to last year. Third, we have invested in a store planning group. We started this group in the third quarter and we saw the return on inventory investment by store improving in Q4. We started with denim in the third quarter on auto replenish [inaudible] buys and are rolling this out to more items in 08. We believe we can reduce the proportion of markdowns and convert the 200 basis points of IMU to improvement of 350 points of MMU during the second half of 08. We have already seen this work in February where our merchandise margin rate were up almost 600 basis point over last year because of the lower level of holiday markdown in knits and sweaters compared to last year’s beginning balances.
In direct we will continue to implement the actions we discussed with you last quarter. We will make additional net circulation cuts to improve the productivity of our mailings. While these might contain the rate of sales increase these cuts are expected to deliver low to mid single digit sales increases and add incremental operating margin dollars. To optimize circulation we continued the implementation utilization of our data mining and other software tools. As we stated during our third quarter call we have implemented a number of production efficiencies that should save well over $1 million in 2008 and largely offset the paper and other costs increases we expect to incur. We have initiatives in place to continue to improve our web prospecting and search affiliate marketing and web functionalities. These initiatives are extremely important since over 70% of the time our customers interact with us via the web.
Steve will now wrap up the financial portion of our call with some detail on the first quarter and full year 2008.
Stephen A. Feldman
For fiscal 2008 we are maintaining our goal of a mid single digit comp store sales increase and expect to open 10 to 12 new stores and relocate two stores. The sourcing and planning initiatives in which we have invested should enable us to improve the merchandise margins by 250 basis points this year. For the retail segment based on all the things we’re doing internally we expect to significantly reduce our operating expenses on a percentage basis and narrow our operating loss. However, given the current economic environment we are no longer forecasting that we will reach breakeven on a cash flow basis for full year 2008. In direct, we expect to see low to mid single digit increases in sales as well as growth in our house files despite planned reduction in circulation.
We still expect operating margins to expand despite increases in postage, paper and freight expenses. We believe our surgical circulation cuts and other productivity enhancements will drive this direct margin improvement. However, given the economic environment we may not be able to achieve our goal of a double digit operating margin this year. For fiscal 2008 we expect capital expenditures of approximately $12.5 million after $10 million in improving allowances down from our last forecast. We expect to be cash flow positive in the 2008 fiscal year with a yearend cash balance of approximately $15 to $20 million. We expect that this cash balance and the available credit under our credit facility should be sufficient to meet our cash needs for the year. It should also be noted that we will have the benefit of utilizing net operating loss carry forwards to reduce our future cash income tax payments.
Let me turn it back to Rob.
Robert E. Bernard
I’d like to wrap up with some concluding remarks about the current quarter and full year 2008. As I stated earlier, in retail we came into the first quarter with lower markdown exposure, a higher proportion of forward merchandise and have seen good customer reaction to our display and floor set we are pleased with our February results modestly positive comps and a 600 basis point increase in merchandise margins. We’re still comp positive in March with margin improvement on our plan to increase 250 to 300 basis points for the year with the Easter shift and its effects on spring break vacations around the country we’re cautiously optimistic about our sales trend.
With Michele’s arrival we’ve reworked the summer knit assortment and are not shipping certain items deemed brand inappropriate. These goods have been replaced with others to meet our summer needs. In CCS we’re pleased that our customers are buying more footwear and apparel as the hard goods market slows. At Alloy we made the management instructional changes that should enable that brand to start its turnaround in 2008. In Delia’s we’re coming off one of our best quarters ever and we see that trend continuing thus far in Q1. So far with two books released, our direct business is up on a year-over-year basis in the quarter. We see our total direct business meeting its sales plans even with the downtrend in CCS hard goods. We believe it’s prudent in this uncertain economic time to focus the organization on operational excellence and slower growth. This enables us to conserve cash and maintain our financial flexibility.
We’ve lowered our store opening call for 2008 although we’ve reduced our store opening plans in the short term we believe the current environment affords us a better selection of real estate and we think if we’re patient we’re going to get a shot at prime locations not available to us previously in the coming months. In Delia’s we have a unique concept and a brand with a great deal of potential to extend its reach in what we consider an underserved segment of the 12 to 19 year old market, for the young customers who want feminine apparel. We have seen the customer embrace our denim, our logos, our outerwear, we strongly believe that with Michele’s experience we can see similar growth in the other categories where we have been inconsistent in delivering what our customer wants. We also have a multichannel capability in the Delia’s brand with what is essentially a profitable national ad campaign supported by over 20 million catalogs circulated annual to drive customer traffic to the stores. We see tremendous room for future growth in retail square footage and productivity as well as sales and profit growth across all our brands even with the current environment.
Now, I’d like to open it up for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question will be coming from the line of Dutch Fox of RSB. Please proceed.
Dutch Fox – RSB
I had a couple of quick questions, first I want to start with a quick question about your direct sourcing initiative, when and where do you think it could impact the gross margin line? I have a follow up after that.
Walter Killough
As we stated throughout the call we feel that it’s already starting to impact that. We targeted an IMU, initial markup improvement for the year in the neighborhood of two full points. We believe that that should lead to a 250 to 300 basis point improvement on our bottom line even with similar markdowns to last year which we weren’t proud of. So, we feel that our expectation for that is evidenced by our 600 basis point improvement in February as well as our statement that we’re comping positive in both February and March and on plan for that margin improvement in March. So, it’s already begun. We expect it to grow as the year continues and more of our sourcing goes direct to offshore.
Dutch Fox – RSB
Also, you did talk about the productivity you’re having with some of your 06 vintage stores, can you quantify the productivity of your 06 stores versus 07 stores? And, do you have the new target for your prototype stores that you’re preparing to open?
Stephen A. Feldman
We’re not going quantify the difference other than saying less. With respect to 08 Dutch, it’s an expectation based on the mix of stores as Walter indicated we think that the class of 08 with those A and A plus malls should get average sales per square foot higher than the chain average or at least equal to.
Operator
Your next question will be from the line of Sam Panella of Raymond James. Please proceed.
Samantha Panella – Raymond James
Steve, I was just wondering if you could break out the store openings by quarter this year and how we should think about store growth in 09? And, also if you have the square footage to go along with that this year?
Stephen A. Feldman
Presume about a 38,000 average store and it’s going to be a bit [inaudible]. We’ve already opened two stores, West Roads in Omaha and the Mall in Columbia in Columbia, Maryland. We’ve got a couple more this quarter and might get as many as five depending. We have had some that are basically scheduled to open at the very end of the quarter. So, if I were to spread it, it would probably be four, four, two maybe one in the fourth quarter. The relocations, we have two of them one that will be right on the cusp in Willowbrook and another that should make it on the cusp in the end of the second quarter in time for back to school in [inaudible] Maryland.
Samantha Panella – Raymond James
Okay. And, what tax rate should we be thinking about this year in our earnings projections?
Stephen A. Feldman
I would think that you’d want to use again, about an 8% rate. As we said before you’ll probably see a positive number rather than a benefit in Q1 just based on the timing so it might be $50,000 in each of the first two quarters or thereabouts and then proceed from there to come up based on how you lay out the year with an 8% rate. We will make a determination on the federal benefit at the end of the year so don’t expect any decision on the valuation allowance before the fourth quarter.
Samantha Panella – Raymond James
Okay. Then lastly, can you just talk about the traffic trends that you’re seeing ahead of the holidays, in to the holidays and thus far? And, any regional differences?
Robert E. Bernard
I think store traffic was down to last year. We were able to drive our transactions by being aggressive with the consumer figuring that we see them buying closer to [inaudible]. We saw and expected that once you got in to January that traffic patterns would be even more affected as much as down double digits. You see those spikes during predictable times like when kids are out of school, like President’s weekend they come back. We see more and more traffic coming in to our weekends, we adjusted our stores’ schedule accordingly. But, as Walter said, I believe it was Walter, that we’re not planning on transaction growth this year. We think it’s going to be flat to slightly down because we think mall traffic is going to be dicey with the gas prices and economics. However, we do believe that our units per transactions and our average dollar sales and our conversion rates are going to continue to see sequential improvement as we noticed in third and fourth quarter and so far first quarter.
Operator
Your next question will be from the line of Jody Kane of Sidoti Incorporated. Please proceed.
Jody Kane – Sidoti & Company
Can you tell us what you think the share count to be at the end of 08?
Walter Killough
Well, approximately still the $31 million. You guys will have to tell me where the stock price is going to be to come up with the fully diluted that way. The number seriously could range from under $32 to over $34 depending on what the stock price is. So, since I don’t know where it is going to even close tonight I can’t tell you where it’s going to be a year from now. I’m sorry to be unable to provide more guidance in that.
Jody Kane – Sidoti & Company
Cap ex, the reason for decline is just because of fewer stores being opened?
Walter Killough
Absolutely. And, realize again, in fiscal 07, in the first quarter we were finishing the build out on our new headquarters and that added several million dollars.
Jody Kane – Sidoti & Company
Then, did you consider at the current price of the last couple of months a share buyback at all?
Walter Killough
We thought preservation of cash in this environment was more appropriate. It would have been a delightful luxury to have.
Jody Kane – Sidoti & Company
Just lastly, do you still have the same view of the business and the brand for the next three to five years now as you did a year or so ago?
Robert E. Bernard
Absolutely. In fact, I’d like Michele Martin to tell you about her first impression of the brand and her view. You’ve heard from me, I’m an avid enthusiast about our brand but Michele’s new to the company and our president of Delia’s.
Michele Martin
I couldn’t be more excited about the potential of our brand. I just think we have some tremendous momentum currently in our core categories that the team has already spoken to and we’re strategically now working on leveraging the whole outfitting and layering approach to our top business. We have outfit completers which will completely layer in with the strategic initiatives that Walt and the team spoke to in driving our UPTs which is going to drive our ADS. So, I just think it’s Delia’s time.
Operator
Your next question will be from the line of Anna Andreeva of JP Morgan. Please proceed.
Anna Andreeva – JP Morgan
I had a couple of questions, just kind of bigger picture on retail, I guess to get to breakeven what do we need to see? Is it a matter of scale? A matter of being less promotional? Direct sourcing? Could you maybe talk about that? And, how many stores do you need in retail to get that scale to start getting those operating margins higher?
Robert E. Bernard
It’s a combination of all of the above. If you go to store [inaudible] like American Eagle and Hollister and Abercrombie and those iconic brands that we see in our space, they didn’t reach scale until they hit about $200 million in revenue. So, we’re currently close to the $100 million with our 86 stores. We expect that it’s going to be a combination of getting more stores north of 125 maybe even 150 – breakeven with maybe 125 but we need to be more productive. Our dollars per square foot, we’ve always spoken about we want to push that to a minimum of $400 dollars a foot. We feel that’s within reach with improvements in our cut and sew business that that will be one of the main drivers. As we’ve mentioned our denim business is explosive, we picked up 70% comp in fourth quarter so that productivity is on the rise. Non-denim bottoms are exploding and doing well. Our logo business is comping, all with positive margin improvements. Outerwear, rediwear growing. We’ve got one category, cut and sew knits that with Michele’s arrival and drive and brand DNA, we will push it over the top and get that productivity of $400 a foot. I think we’re in a great position to take advantage of this kind of economic climate and get the real estate offerings and locations for 09 and 010 in more productive malls that we’ve been offered in the past simply because there aren’t a lot of growth stories out there.
Our sourcing has already started I think getting a few extra points on initial markup and 250 to 300 bases point margin improvement this year with virtually no markdown improvement is our conservative profitability increase for the year. That will only get better as our direct sourcing gets to be a larger portion of our business. So, I think this is going to be a great year for us. A great year to take opportunity from our competitors. I think we look good and we’re pleased with our performance thus far.
Anna Andreeva – JP Morgan
What do you think is driving that denim business for you guys? You’re one of very few teen retailers that’s comping like this in denim.
Robert E. Bernard
Thank you for noticing. First of all, it’s a contour fit. By that I mean, and I don’t want to get too technical, but most all of our competitive sets runs a curved waistband like a gentlemen’s pair of slacks, the body is not contoured to the feminine body. We’re the only retailer in our mall, in denim, in inseams, that offers a contoured waistband, a feminine fit. That’s our brand benefit. She loves it, it’s figure flattering, it looks fantastic whether you’re a double zero or a 19/20 and fit, fit, fit, fit and fit. Customers associate consistency of fit with quality. Also, customers really appreciate it if they can walk in your store and they say, “I know I’m a size 5 at Delia’s and I don’t have to try it on.” They don’t have to go in the fitting room. So, we see momentum continuing to grow there. Another factor besides the fit, we’re the only retailer in the mall space who offers the 28 to 34 inseam at our price point $39.50 mom, the last thing she wants to do is take that piece of jeans to her local dry cleaner to get it shortened for a minimum of $10 and a couple of hours out of her day. So if she can buy a 28 to 34 inseam in our stores, if we’re not in stock she picks up the phone, gets it from the catalog with free shipping and we go to a 37 inch inseam in the book. No one does that. 28 to 37 and with an instant availability of our phones in stores. So, I think it’s the range of inseams that we have available in the stores 28 to 34, in the book 26 to 37.
In addition, our competitive set have walked away from their depth and breadth of inseam presentation in some of our competitor stores. We’re very excited about that. I think if you look at a counterpart of Buckle with over 400 stores and their brand is denim, denim and denim at Abercrombie plus prices this is where the affordable alternative for that same denim customer.
Anna Andreeva – JP Morgan
Okay. That makes sense. What is denim now as a percent of sales? Do you think there’s any chance to grow that penetration even higher?
Robert E. Bernard
Well, we don’t report on that but what we’ve said is bottoms should represent no less than 30% of our business and with non-denim bottoms and denim performing we’ve been achieving that metric now for three or four straight quarters. So, we have a lot of momentum in our bottom business in total. We still see growth, we’ve seen really astounding growth when you consider plus 70%, although it was on a lower base. So, we believe we can still grow this business in bottoms substantially, particularly with a weakened competitive set and with a brand differentiator of feminine fit and inseams that no one has. In these tough economic times our price point really stands out at $39.50. I don’t think anyone makes a garment at that price in that quality in our competitive set.
Michele Martin
It really gives us the edge to be a differentiated lifestyle brand. I don’t know if you’re a mom or if you have nieces but the girls from 12 to 19 they grow at all different spurts. So, the inseam thing is a huge lifestyle differentiator, we’re really customer centric and we’re understanding that some girls grow at 12 years old and some girls grow at 18 years old and to really dive into that demographic you have to be the destination for the inseam business.
Anna Andreeva – JP Morgan
Okay. That’s really helpful, I appreciate it. Just switching gears to direct business, Alloy has been underperforming for a couple of quarters now. What gives you confidence that this business can turnaround in the back half? And, specifically what type of initiatives are you undertaking there?
Robert E. Bernard
Well, our new management that we brought on board is starting to have an effect now in first quarter and our initiatives both in – Alloy is principally a sportswear business meaning selling tops and bottoms, that’s where they get 85% of their sales and their bottom business is one of the hallmarks that they have built their business on. We are expanding our non-denim bottom business in that brand which largely services we’re finding 19 to 29 year olds. A few other differentiators in Alloy that we are continuing to take advantage of is a growing 15 to 25 size business in Alloy as well as their 37 inch inseam business. So, as we expand those to non-denim fabrics – and knit bottoms as well we think that will be a great emphasis because if they’ll buy your bottoms they’ll buy your tops.
Operator
Your next question will be from the line of Michael McCormick of Gilder Gagnon. Please proceed.
Michael McCormick – Gilder Gagnon
Could you talk a little bit about the CCS inventory situation? It seems like you bought an awful lot of inventory. Then, the charge off that was around it. I understand the strategic initiative but maybe you could – it seems like a big magnitude, maybe you could talk about it.
Walter Killough
Last year we came out of the CCS business way under inventory. I don’t really recall the numbers but I think our book was up over 30% last year, 25 to 30% in holiday. So, we felt we were way under inventory going into the fourth quarter. With that being said, we placed the goods, we came out a little bit, about $1 million higher than we would have liked to be and most of that is wrapped around hard goods. The second thing is there are some things in there, in t-shirts, in logo tees that we did – the items fell off in holiday and we did put up a reserve to be able to mark them down very, very low and get rid of them.
Michael McCormick – Gilder Gagnon
So you would suggest that you over bought by roughly $800,000 to $1 million using hindsight as 20/20. Is that the way you would think about it?
Walter Killough
I’d put it a little differently. I think we bought to the right amount but the way the actual sales came in between hard goods and a couple of key items, it didn’t come in the way we thought. So we were basically on our sales plan but the mix of the goods came in a little differently.
Operator
Your next question is a follow up from Dutch Fox. Please proceed.
Dutch Fox – RSB
I have a question for Michele. I was wondering, regarding the merchandise that was liquidated from the spring assortment, the $550,000. What about it made you decide it wasn’t Delia’s? What are you replacing it with? I know you said a little bit about what you see as merchandise opportunities going forward but if you could elaborate on that I’d appreciate it.
Michele Martin
It’s really not that I deemed it brand inappropriate, we have a very customer centric approach here and our girl deemed it brand inappropriate. We’re really taking a look at our Q1 sales to our spring floor set and what she’s responded to and when there’s things that she has not responded to or voted no and they’re in our inventory in Q2 on a go forward basis, that’s a fashion disconnect. For us to be a lifestyle headquarters for our target demographic we need to be in the right fashion items and if she says no we can’t continue to deliver her things that she’s already rejected. So, that’s really the initiative there. What we saw an opportunity in is we’ve spoken to how strong our bottom’s business is both in denim and non-denim and in order to drive the UPTs we really needed to add some outfit completers if you will. So, we took a look at kind of what’s happening from a lifestyle look on a key outfit approach and wanted to give her some key layering pieces to outfit with some of our core bottoms that are on trends. So, that’s what you’ll be seeing us deliver in the second week of April and it should really help us drive the UPTs because now she can buy a total look from us.
Stephen A. Feldman
Just to clarify as well, the $550,000 that we set aside for liquidation in fourth quarter, only $250 of that was for Delia’s and $300 was for CCS.
Operator
This concludes our Q&A session. I will turn the call back over to Mr. Marc Shoeback for closing remarks.
Marc G. Schuback
I’d like to thank everybody for joining us today. Have a good day. Happy Easter.
Operator
Thank you for your participation in today’s conference. This concludes our presentation and you may now disconnect. Have a great day.
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