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Christopher and Banks Corporation (NYSE:CBK)

Q4F08 Earnings Call

April 9, 2008 5:00 pm ET

Executives

Jean Fontana - Integrated Corporate Relations

Lorna Nagler - President and Chief Executive Officer

Andrew K. Moller - Executive Vice President, Chief Financial Officer

Monica L. Dahl - Executive Vice President, Chief Operating Officer

Analysts

Lyn Walther - Wachovia Securities

Roxanne Meyer - Oppenheimer

Margaret Whitfield - Sterne, Agee & Leach

Robin Murchison - Suntrust Robinson Humphrey

Crystal Kallik - D. A. Davidson & Co.

Howard Tubin - RBC Capital Markets

Barbara Wyckoff - Buckingham Research

Christopher Kim - J.P. Morgan

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to Christopher and Banks Corporation fourth quarter fiscal 2008 earnings conference call. (Operator Instructions) I would like to turn the conference over to Jean Fontana of Integrated Corporate Relations.

Jean Fontana

Thank you. Good afternoon. Thank you for joining us to discuss Christopher and Banks fourth quarter and full year fiscal 2008 earnings results. Joining us on our call are Lorna Nagler, President and Chief Executive Officer, Andrew Moller, Chief Financial Officer and Monica Dahl, Chief Operating Officer.

After management has made their formal remarks we will open up the call to questions and answers.

Before we begin I would like to remind you that some of the comments made on the conference call during the prepared remarks or in response to your questions may constitute forward-looking statements that are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. These forward-looking statements may address the beliefs, plans, objectives, estimates or expectations of the company. Such forward-looking statements are subject to both know and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and in Christopher and Banks most recent annual report on form 10K, its recent 10Q filings and the company’s filings on form 8K filed with the SEC.

Investors should not assume statements made during the conference call will remain operative at a later time. Christopher and Banks undertakes no obligation to update any information discussed in this conference call including its forward-looking statements even if actual results, future events or changes reflect that the projected results or expectations discussed in such forward-looking statements will not be realized.

Now I’d like to turn the call over to Lorna Nagler, President and Chief Executive Officer of Christopher and Banks.

Lorna Nagler

Thank you, Jean. Good afternoon everyone and welcome to the Christopher and Banks fourth quarter fiscal 2008 conference call. With me today are Monica Dahl, the company’s Chief Operating Officer, and Andy Moller, the company’s Chief Financial Officer.

During today’s call I will be providing you with a brief overview of the company’s fourth quarter performance and some highlights of the business. Following that I will turn the call over to Andy for a more detailed review of our fourth quarter fiscal 2008 financial results and then Monica will provide an update on various business initiatives.

Last I will make a few closing comments and then be happy to take your questions.

Turning to the fourth quarter needless to say we were disappointed in our overall fourth quarter performance. Total sales for the 13-week fourth quarter were $125.3 million compared to $134 million for the 14-week fourth quarter last year. Comparable store sales declined 3.5%. On a GAAP basis our net loss per share was $0.23. As mentioned in our press release the impairment charges related to good will as well as store assets totaled $0.16 per share. These impairment charges primarily related to our Acorn Division.

As we discussed in our press release the performance of our Acorn Division has not met our expectations. We believe this is primarily due to our merchandise mix and the cost of many of our real estate locations. We are in the process of repositioning Acorn from primarily offering private label merchandise to featuring recognized brands. We also plan to increase the penetration of the accessory category. As we go forward we will continue our evaluation of the entire Acorn operation and do not plan to open any Acorn stores in fiscal 2009.

While our fourth quarter sales results were softer than expected we were pleased with a number of our elements of our business in the fourth quarter. We were encouraged by the quality of our sales. While we saw a decline in traffic we show improvement in both ADF and UPT’s.

In addition merchandise margins for the fourth quarter improved more than 300 basis points compared to the fourth quarter of last year. While we did not recover all of the merchandise margin deterioration from last year’s fourth quarter, we ended the year with a much cleaner inventory position. We improved the freshness of our inventory as a result of taking more timely mark downs and as Andy will discuss, we finished the quarter with 22% less inventory per store than last year.

During the fourth quarter we made strides in laying the groundwork to position our company for long term growth. What you can’t see in the fourth quarter numbers was the solid progress we made in returning to our roots as a casual lifestyle brand retailer. Our strongest performance during the quarter was in our knits and woven top categories, including jackets. Our spring assortment will continue to build on those successes.

We returned to the heritage of our brand in terms of the fabrications that our core customers are accustomed to seeing from Christopher and Banks. In addition, for spring we have updated our looks with new silhouettes, colors, prints, patterns and textures along with an increased emphasis on novelty balanced with an expanded offering of fashion basics.

Beginning with spring our goal was to improve the freshness and color of our product assortments. We have changed our practice of being quad driven, where colors are featured for two consecutive months.

Also with an increase emphasis on unit planning relative to store capacity and a smoother product flow we will do refresher floor sets each month in between the more traditional larger, monthly sets to ensure that our customer sees fresh products every time she visits.

In addition, as we mentioned in our last conference call, we have planned a reduction SKU comps for the second quarter fiscal 2009. We believe that we need to avoid duplication in the assortment while providing more clarity in our merchandise offerings.

Our petites offerings currently in 95 stores has also been performing well and can be a strong point of differentiation for our Christopher and Banks brand. We continue to see significant potential for this collection and will feature petites in about 300 stores by September.

In February we completed the rollout of our e-commerce site for Christopher and Banks and C.J. Banks. Thus far performance has exceeded our expectations. We believe that our e-commerce sites not only offer a convenient shopping research for our customers but also provide us with an additional tool to drive traffic to our stores.

Now I’d like to speak to some of the programs and initiatives that we have been focusing on since I arrived here about seven months ago which will be the platform for growth over the coming years.

First we continue to make progress on the installation of our new planning and allocation modules. We expect to see benefit from this initiative beginning in late fiscal 2009 and to a larger degree in fiscal 2010. The planning and allocation systems will help us execute on our merchandising strategies as we tailor our assortment to geographic areas so that our merchandise reflects climate as well as fashion preference differences.

Given the benefits expected from our planning and allocation modules, we are adding additional staff to ensure we fully maximize the benefits of these systems. Monica will provide you with an additional update on our progress in this area later in the call.

Next we have identified opportunities to improve efficiencies in sourcing. We announced the hiring of a new VP in sourcing last fall and are building a dedicated team for this function. We plan to diversify our vendor base and add key suppliers with expertise along category lines. By diversifying our vendor base and shifting production among countries we anticipate we will be able to mitigate costing pressures which are occurring across the industry.

Along with planning and allocation we believe sourcing capabilities are among the most powerful tools we can give to our merchandising team to allow them to focus on delivering great products on a timely basis to our stores.

Turning to marketing, our focus going forward continues to be on growing our customer database. In particular, we are increasing our efforts on our email capture which will provide us with a cost-effective means of reaching our customers on a regular basis. We continue to test various types of offers to determine the greatest response and ultimate return to our bottom line. While this initiative is still relatively new to us we are pleased with the response our customers have shown. Based on the success of our initial Friends and Family Event held last November, we repeated the promotion this past weekend and we were very pleased once again with the customer response. This promotion continues to help us in attracting new customers and building customer loyalty.

In addition, with more time to plan our second Friends and Family event we were able to ensure a fresh flow on new products into our stores before and after the event.

In fiscal 2009 we expect to increase the number of carefully thought out, pre-planned promotions which we believe will drive home our value proposition and increase awareness of our brand. We will also be conducting grand opening events for all new stores in fiscal 2009 as well as the one-year anniversary event for stores opened in fiscal 2008.

For spring we are planning a direct mail piece which we believe will help drive sales leading up to Mother’s Day.

Another important initiative is the evaluation of our real estate strategy. We see opportunity in all small locations in lifestyle and strip centers. However, given the current economic climate and our desire to make key infrastructure investments, we believe it is prudent to take a more conservative approach to store expansion. Therefore, we are planning approximately 30 new stores in fiscal 2009. We will also continue to evaluate existing store performance and plan to close approximately 10 stores during the year.

Going forward, we will not only be focusing on store growth but also on increasing the profitability of our existing stores. We intend to conduct a full portfolio review in May, again with an eye on improving store productivity.

Looking further ahead, we plan to utilize a demographic software package to develop a more strategic approach to store expansion.

Finally, we plan to install new point of sale registers in 550 of our stores by the end of the second quarter. We believe that technology improvements, more even product flow, assorting based on climate difference, and other operational improvements will assist us as we transition to a selling culture across our entire field organization.

In closing, we will continue to invest in our business to position us for long-term growth. We are working to ensure that we are aligned cross-functionally to achieve our goals. Over the next few quarters, we will continue to provide fashion and value to our customers. We will work to control our inventory levels and expenses and also invest wisely in our business.

Given the current economic distractions, we anticipate that value will be top of mind to our consumers in the near-term. We believe we are positioned to offer a solution to our customers with honest prices every day.

I would now like to turn the call over to Andy to discuss our financial results.

Andrew K. Moller

Thank you, Lorna. Total sales for the 13-week fourth quarter were $125.3 million compared to $134 million last year, which was a 14-week quarter. Our net loss for the quarter was $0.23 per share this year on a GAAP basis compared to earnings of $0.05 per share last year.

During the fourth quarter, we recorded a $6 million pretax non-cash long life asset impairment charge. We also recorded a $3.6 million pretax non-cash good will impairment charge. The impact on fourth quarter results from the total of the $9.6 million in impairment charges was $0.16 per share. This assumes a normalized tax rate of 39.5%.

In fiscal 2008, excluding impairment charges, Acorn operations reduced store level operating income by approximately 90 basis points.

Same-store sales for the 13 weeks ended March 1 2008 declined 3.5% when compared to the same 13 weeks of last year. The decrease was due to a decline of approximately 14% in the number of transactions per average store, which was offset by an increase of approximately 10% in the average transaction value.

From a geographic standpoint, approximately half our comp stores are located in the eight states that touch the Great Lakes and Iowa. Same-store sales for this group of stores declined approximately 3% while comp sales for the combined group of stores located in all other states declined approximately 4%.

Cost of merchandise buying and occupancy expense as a percent of sales was roughly flat in the fourth quarter compared to last year. We gained 330 basis points of improvement in merchandise margins. This gain was offset by 260 basis points of deleveraging of occupancy costs. We also had 70 basis points of negative leverage related to other buying and distribution costs.

Last year’s fourth quarter had 14 weeks with $11 million in sales in the additional week. The impact on occupancy leverage from having an additional week of sales last year was approximately 130 basis points.

SG&A expense for the quarter was $42.3 million or 33.8% of sales compared to $37.2 million, or 27.8% of sales last year. We had approximately 600 basis points of negative leverage.

The major components of negative leverage were as follows: store related costs, including salaries, approximately 230 basis points; corporate salaries and benefits, stock-based compensation, medical and workers’ comp claims, and other insurance, 170 basis points; marketing related costs, 100 basis points; and IT consulting and other professional fees, 100 basis points.

Depreciation in the fourth quarter was $6.1 million, or 4.9% of sales. Last year depreciation was $5.4 million or 4% of sales. The increase as a percent of sales primarily resulted from a lower level of sales this year.

Including impairment charges, we had an operating loss in the fourth quarter of approximately $15.6 million compared to operating income of $1.7 million in the fourth quarter of fiscal 2007.

During the fourth quarter, we realized an income tax benefit of $6 million with a tax benefit rate of 42.1%. For the year, we had a tax rate of 35.8%, which was lower than we previously expected. This occurred primarily due to a higher amount of tax exempt interest and as a result of the expiration of the statute of limitations with respect to our tax returns in several states.

Turning to the balance sheet, cash was $78.5 million at the end of the quarter. We’ve also classified $24.5 million of auction rate securities as long-term investments. These investments are currently valued at par. As we indicated in our press release, if we deem these investments to be temporarily impaired, we will adjust our balance sheet accordingly when we file our 10-K and we do not anticipate an impact to fourth quarter earnings.

We had approximately $36 million in capital expenditures during fiscal 2008 and plan for $22 million to $24 million of CapEx in fiscal 2009. Of this amount, approximately $14 million is planned for the construction of new stores, fixture replacements, and store remodels. The majority of the balance relates to various IT projects, including new point of sale hardware for more than 550 stores.

Inventory total -- in total inventory, including in-transit, was $43.8 million this year compared to $52.4 million last year. Inventory per store declined 22% and was approximately 52,000 this year compared to 67,000 last year. [The inventory that] was current was approximately 1% of our inventory value related to inventory that was more than 120 days old.

Turning to our guidance for the first quarter of fiscal 2009, we expect earnings per share in the range of $0.25 to $0.27 compared to $0.32 per share in the first quarter of fiscal 2008. Our first quarter guidance assumes a roughly flat same-store sales.

In the first quarter, we plan to increase marketing related expenses by approximately 100 basis points over last year. In fiscal 2008, we had interest income of $4.7 million for the full year and in fiscal 2009, we expect interest income of approximately $2.5 million, or approximately half of what we earned last year due to much lower interest rates. For the first half of the year, we expect a tax rate of 39.5% and for the full year, we anticipate a 38% tax rate with lower rates in the back half of the year.

A couple of other points on guidance -- in the second quarter of last year, we had a one-time CEO transition charge of $0.04 per share. We also believe we have the opportunity to improve merchandise margins in the second quarter as compared to last year and in the fourth quarter for us, which is December through February, we believe it will continue to be difficult to achieve positive earnings.

And now I’d like to turn the call over to Monica.

Monica L. Dahl

Thank you, Andy. First, let me provide you with an update on our e-commerce businesses. As Lorna mentioned, we successfully launched the C.B. and C.J. websites this February. Our customers and store associates have responded favorably. Both e-commerce sites are off to a strong start with early sales exceeding our initial expectations. We are working towards forecasting and adjusting inventory levels to keep pace with the demand by division and by product. We believe that these sites are a great way to offer convenience and product research for our customers, as well as to gain effective exposure to potential new customers.

In addition, we are in the initial phases of rolling out our online marketing efforts that will help build our brand awareness and contribute to growing our e-commerce sales. We are confident that making the move to an integrated, multi-channel retailer will have a positive impact on our sales and we look forward to updating you on our progress throughout our first year.

Moving to the planning and allocation front, our focus on disciplined inventory management continued through the fourth quarter. Given the challenging retail environment, we are pleased to have reported a 22% decline in inventory levels at the end of the year against the prior year. We continue to take a conservative approach in our inventory planning for the spring season and we anticipate receipts to be down considerably again for the first quarter, approximately a mid-teen decline, given that we had significant inventory growth last year.

As we move through the second quarter, we expect to have more normalized inventory levels and expect receipts per store to be down approximately low single digits.

We have made further progress in implementing some of the planning and allocation system modules that we spoke about on past calls. We are currently using the new allocation module, which gives us increased flexibility and product placement.

For example, this system enabled us to use the results of the model for the sales curve around the friends and family event to more appropriately distribute the flow of product to stores both before and after the event. Using the allocation methods now available to us, we can more easily manage store groupings for volume, climate, and size assorting.

With the new financial planning modules, we will for the first time be able to supplement our dollar planning with unit planning for improved, in-season forecasting of sales, merchandise margins, and inventory.

Additionally, we can move to managing our businesses at a lower product classification level than previously. These new capabilities will contribute to the success of the initiative around increased product flow and management of SKUs and store unit capacity.

As we have previously shared, an implementation of this magnitude is a long-term project and we expect to gain benefits from the new planning and allocation system later this year but more fully into fiscal 2010.

As for updates on real estate, during the fourth quarter we opened three new stores and closed seven. For fiscal 2008, we opened 59 new stores and closed ten. This brings the total number of stores at the end of the quarter to 837 compared to 778 at the close of last fiscal year, or an 8% increase. As we look to the current fiscal year, we are planning to open approximately 30 new stores. We will plan to open approximately 18 during the first quarter, eight during the second quarter, and the balance in the third quarter and we expect about half of those new stores to be C.J. Bank and half to be Christopher and Bank. No Acorn store plannings -- openings are planned. We also plan to close approximately 10 stores during this fiscal year.

The selection of new locations continues to be done with great scrutiny, working to ensure that we are making investments that will be optimal for the short and long-term health of our business. We continue to see opportunities in the off-mall strategy and approximately 80% of our fiscal 2009 openings are planned to be located off-mall.

We are planning a comprehensive review of our entire real estate portfolio in May. The goal -- to identify where our opportunities are on a longer term basis not only for store expansion but also around future lease renewal opportunities.

In summary, our focus is on maximizing productivity and achieving increased returns in all of our real estate investments.

And with that, I will now turn the call back to Lorna.

Lorna Nagler

Thank you, Monica. In summary, we believe we have a competitive advantage in offering casual lifestyle merchandise which targets an attractive, under-served demographic. Our differentiated product offering, our value proposition and customer service have garnered us great customer loyalty and we have an opportunity to further expand our customer base with newness and novelty.

We will continue to evolve our merchandising strategy, enhance our marketing plans, develop our e-commerce business, and reassess our real estate strategy to strengthen our competitive position and generate solid long-term sales and earnings growth while delivering increased shareholder value.

Now I would like to turn the call back to our moderator to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Lyn Walther with Wachovia Securities.

Lyn Walther - Wachovia Securities

Thank you. A couple of questions; can you talk about the impact of the friends and family event on comps? Maybe if you could just give us a sense of the run-rate before you ran the event, that would be helpful.

Andrew K. Moller

In terms of the guidance that we’ve given, we’ve given guidance for roughly flat for the quarter, so certainly we know the results of the friends and family event and have -- you know, know our sales obviously through yesterday and have factored that into the guidance that we’ve given. We’ve modeled the remainder of April similar to a pattern that would have occurred in November after we ran the friends and family event in the fall and then obviously with May, we still believe we have good opportunity there with good product flow, in-store marketing events, and as well as other marketing plus with Mother’s Day being one of the larger weeks that we have that occurs in May.

Lyn Walther - Wachovia Securities

Okay, thanks. And could you just maybe talk about the frequency of the friends and family event? Is this something you are going to do twice a year, maybe more frequently? How are you thinking about that?

Lorna Nagler

Well, I would just say that we really feel good about -- that the friends and family event is a great way to really reward our loyal customers and invite new customers to get to know our brands in truly a great grassroots event. But certainly to make it special, we need to limit the number of times we do that to really keep the essence of what it’s all about. So I think I’ll just leave the comments at that and you know, obviously everyone knows that we are up against one in the back half of the year, so safe to assume we would anniversary that event.

Lyn Walther - Wachovia Securities

Okay, thanks and then just a little bit more color on Acorn. You talked about some changes that you are making there. How long do you think it’s going to take before that gets where you are comfortable or how much -- how long are you going to give this concept?

Lorna Nagler

Well, certainly Acorn’s performance clearly has been disappointing and it certainly contributed negatively to the company’s earnings. The [inaudible] and good will impairment really only compounded that. Having been here a little more than six months, I’ve had really the time to review in detail the Acorn strategy, as well as the past performance so it’s clear that poor performance is really due to a number of factors, including a number of our store locations, the size of the locations, merchandise selection, and I think a clear lack of a clear identity or brand, as well as the overall retail environment.

However, I continue to believe that you know this, a well-conceived and effectively executed boutique strategy really can be successful and clearly there is white space in the market for this kind of concept. So you know, where we are -- where we can, we are modifying Acorn’s current strategy to test these concepts in our existing store base.

We’ve seen some bright spots and improvements but to your question, we will continue to implement those changes and not -- and really continue to evaluate because if we don’t see additional traction later in the fiscal year, certainly that’s something the board and I will revisit whether the Acorn concept is a viable one.

Lyn Walther - Wachovia Securities

Okay, thanks. Good luck, guys.

Operator

Thank you. We’ll go next to Roxanne Meyer with Oppenheimer.

Roxanne Meyer - Oppenheimer

Good afternoon. First, a couple of questions; first is can you disclose what your exposure to China is now? You know, how might it be changing by year-end and are you assuming -- I know you really haven’t given full year guidance but are you assuming that you are and will be seeing increases in your cost?

Lorna Nagler

That’s a great question. Certainly as I mentioned in my opening comments, we have hired a VP of Sourcing because we think this is one of the big initiatives that we really need to be focusing on at Christopher and Banks. We also talked about in my comments about really looking at diversifying our vendor base and really looking at our country sourcing.

We currently have the majority of our products sourced in China and we really see that with the increased costs and the other pressures on China, that it is in our best interest to diversify and really focus on this strategy, so that we think with this diversification strategy we will mitigate the cost increases that we are seeing and certainly that you are hearing about in the news today.

Roxanne Meyer - Oppenheimer

And do you think that as we move throughout this year, you’ll be able to move a meaningful part out of China, or is this more of a 2009 strategy?

Lorna Nagler

We’ve already -- this was one of the first things when I joined the company that we really started to focus on, so we are -- have good traction and we are moving towards that so we see that there will be impact on the back half of this year.

Roxanne Meyer - Oppenheimer

Okay, great. And then, as it relates to your off-mall opportunity, how many stores do you currently have off-mall now?

Monica L. Dahl

We have less than 15% of our existing store base is off-mall currently.

Roxanne Meyer - Oppenheimer

Okay, and are you able to provide any metrics as to how those stores are doing relative to your mall-based stores and how you see the size of the opportunity?

Monica L. Dahl

Well, we clearly believe the off-mall strategy is a viable one for a couple of reasons. Obviously with the decline of new malls going up and the customer migrating from a convenience factor to those off-mall locations. We don’t separately report on them. Let’s just say it this way -- the cost to build those stores tends to be less and the occupancy costs coming out of those stores is also less, obviously due to fewer common [and maintenance] charges, so from an occupancy cost and a depreciation standpoint, they become favorable.

Roxanne Meyer - Oppenheimer

Okay, great. And then last, can you just talk about where you are in your merchandise repositioning? I mean, it certainly sounds like you are pleased with returning to some of the traditional things that have made Christopher and Banks resonate with its core customer. How much more is there to go and where do you see some of the bigger opportunities?

Lorna Nagler

Certainly we are seeing our customer preferences continue to evolve and certainly this boomer is a more modern consumer, so we are really seeing that her taste levels, her expectations of us are evolving and I am pleased to say that we are moving in that direction to really accommodate her expectations from us. So in terms of newness in silhouette, we’ve still got more progress to make but in terms of the kind of novelty we are delivering to her, prints, pattern, texture, I think we are evolving and the taste level and really continue to refine that.

You know, no merchant will ever tell you that are ever there and I think we are learning something every day from the consumer and we are very pleased with her response to the newness that we have on our floor. So I would say it’s a continual process and we are going to continue to move even more down that path as we get to the fall and holiday assortments.

Roxanne Meyer - Oppenheimer

Okay, great, thanks and best of luck.

Operator

Thank you. We’ll go next to Margaret Whitfield with Sterne, Agee.

Margaret Whitfield - Sterne, Agee & Leach

Good afternoon, everyone. I wondered if you could size the loss of Acorn last year and comment on the brands that you’ve recently added, whether or not that has had any recent impact. And also, you mentioned accessories -- what is your planning there, as well as for the main chain? Because I didn’t see any when I visited the Mall of America over the weekend.

Monica L. Dahl

Well, I’ll take the merchandising piece of it and then I’ll it over to Andy to talk about the other pieces. First of all, let’s talk about accessories in general because truly that is an untapped category for us and it is one that I see as a great outfit completer. To that end, we are starting our initiative in Christopher and Banks and C.J. Banks, we are going to be testing jewelry and that’s going to be going into approximately Christopher and Banks stores and about 50 C.J. Banks stores about -- towards the end of May. And like I said, we believe this business is the perfect outfit completer and we look to expand in more stores as we measure the results. Certainly jewelry is just the tip of the iceberg in accessories, so we are going to kind of focus on jewelry first and then add other categories.

Talking about your question about Acorn, we have just started to add some brands such as [Bank], Not Your Daughter’s Jeans, Karen Cain, just to name a few. We are just really in the initial reads of that but as you guys remember, Acorn was a collection of brands before we acquired it back in -- was it 2004?

Andrew K. Moller

2004.

Lorna Nagler

So we really again are returning to some of the heritage of the success factors of what Acorn was all about. And then within the Acorn piece, certainly accessories, whether it be jewelry, gift items, these impulses pieces are a very important piece to really making that boutique concept work, so we are ratcheting up our focus and testing a lot of new products in that concept as well.

Andrew K. Moller

And with regard, Margaret, to the profitability, again we have not reported separate profitability for our concepts. I did indicate in my previous comments though that excluding the impairment charges that the Acorn operations reduced our overall store level operating income by approximately 90 basis points in fiscal 2008.

Margaret Whitfield - Sterne, Agee & Leach

Okay and I wondered -- you mentioned, Andy, several factors affecting your SG&A line. I wondered if directionally if you could comment, how much are you spending on marketing as a percent of sales, where might that go this year, and you know, some of the professional and IT activities, will that be accelerating or decreasing over the course of the year?

Andrew K. Moller

Okay, sure. First, with regard to the marketing, last year we spent approximately 1%, with more being spent in the second half of the year. This year, we are planning to be around 1.5% for the full year. And then just to expand a little bit on the SG&A negative leverage, from the fourth quarter there were again several reasons. I think I talked to a few of them but overall, we did have a 3.5% decline in comp sales. In the fourth quarter, we did plan for the increase in marketing costs, which we said was approximately 100 basis points. Also we, did plan for an increase in IT and consulting fees as we did work to install new systems, including the planning and allocation system.

Going forward, this year in terms of the consulting piece of it, we will bring on people as full-time equivalents versus using as many consultants and -- so that we would expect to have a reduction there.

In last year’s fourth quarter, we did have a couple of one-time benefits. We did have a 7% comp decline yet we did have 90 basis points of positive leverage from a lower level self-insured medical claims, and we also had virtually no stock-based compensation. So much of the 170 basis points of corporate salaries and benefits that I spoke about did occur because of those couple of items. And then finally, we did have 230 basis points of store level expenses where we had negative leverage, which that did occur primarily due to the 3.5% comp sales decline that we had in the fourth quarter and then also to a lesser degree, there was some impact from last year’s fourth quarter having 14 weeks.

Margaret Whitfield - Sterne, Agee & Leach

Thank you for that explanation, Andy. Just one final question; Lorna, I know Susan’s first lines are coming into the stores and I wondered in terms of C.J., directionally what new direction this merchandise might take since you both have that background?

Lorna Nagler

As we’ve talked about earlier, Susan’s fingerprints on the business is really evident in the stores now and I think if you look at what should be in the store, I think the first thing you’ll see is I think a change in color in both of our concepts. I think as we progress throughout the spring season, I think the change in how we are flowing product and how we are moving away from the [old] kind of philosophy will evolve into newness. I think what we are seeing above Christopher and Banks and C.J. Banks is that there is really an evolved chase level for novelty, meaning you know, that the traditional schematics as we talk about are really evolving. She still wants novelty but it is just taking a different form.

As far as C.J., you know, Susan and I both are very passionate about that plus-sized consumer, having spent the last five years there so I think really working on fit. We just hired a new VP of Design and we are really looking to ensure that we’ve got the best [style and fit], particularly in our bottoms category, and I think you are going to see the -- what we are finding is that the customer is really looking for and thirsty for a slightly evolved fashion taste level than where we are now.

So we are excited about that and look to really grow the C.J. business.

Margaret Whitfield - Sterne, Agee & Leach

Thank you very much.

Operator

Thank you. We’ll go next to Robin Murchison with Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

Thanks. Congratulations. I wanted to ask you a few questions. One is Andy, if you’ll remind us, the leverage point on comps, isn’t that about mid-single?

Andrew K. Moller

Yeah, in terms of the comp percent, in our case it does vary by quarter but for the full year, we do anticipate this year that it is around 4%. We are planning to increase our marketing costs some and again, assuming that we do make our performance targets, we would have some bonus expense this year, which we had very little bonus expense in fiscal 2008.

Robin Murchison - Suntrust Robinson Humphrey

Okay, and then also I wanted to see if you would comment on the impact of the competitive market, especially your thoughts regarding trying to compete in a world where J.C. Penny and Kohl’s are weak. How does that change your -- not performance, but strategy, or does it?

Lorna Nagler

Well, I think there’s no doubt that the overall apparel industry is suffering a little bit and not just the [inaudible]. Certainly with an unsure environment, many retailers have raised their voice and level of promotions but I think when you really get down to it, it’s about focusing on product and giving her that surprise and delight when she walks in the door. And yes, we understand what’s on our consumer’s mind but we also think that we are a great solution for her based on how -- really, our price points, the value we offer to her every single day is truly we think a real competitive advantage.

So you know, the environment is out there. We understand the promotional environment is -- continues to be aggressive but we focus on what we know that we can do to control our own destiny, which is really working on that merchandise content, the newness, the novelty, the improvements we are making to how frequent we are flowing that newness, pre-planning promotions so that we really can think about that up-front and so that it’s thought through in the margins. Really I think the team has done a great job on disciplined inventory management. We’ve got a great new e-commerce world that we can leverage and we are working future plans on in-store environment and really ratcheting up our customer service, which is again I think a point of differentiation for our company versus a big box retailer.

So nothing is going to change, I don’t think, with the voices and the -- [raised voices] and the consumers but I think we are focused on what we think we can do to make a difference and increase our business.

Robin Murchison - Suntrust Robinson Humphrey

Lorna, do you view the competition as less in a strip center than in a mall, or does it -- is it a wash?

Lorna Nagler

You know what, I think if you continue to try to understand where the consumer is evolving, I think convenience is a big factor. So I do think that power strip centers where she can be in and out, get to some of her destinations like a Kohl’s, certainly J.C. Penny moving to those, I think the competition is everywhere but I think the convenience on where she can shop, and particularly for the C.J. Banks customer where malls maybe aren’t as relevant to her with the number of choices that she can shop in a mall, so I think that’s why we talked about real estate being maybe more opportunity for us out of the mall format.

Robin Murchison - Suntrust Robinson Humphrey

And where would you be right now in terms of looking at locations? I mean, are you guys working on 2010 locations yet? Because presumably there’s say -- you know, the mall operators are ending up with more space than they like, which maybe gives you a competitive advantage to get some advantageous lease breaks.

Monica L. Dahl

Obviously our real estate department and our vice president always keep their eyes open on an ongoing basis and we are still meeting on a monthly basis, but our real intention right now is dealing with the present time. Those approximate 30 stores that we are opening for this year are basically committed for and leases are not all signed. We’re even finding shifting going on those, so to answer your question, no, we are not currently looking and concentrating on fiscal ’10. We are taking this time, as we said, to evaluate what our opportunities and our strategic, our growth plans are going to be so that when we get to the point where the environment feels a little more stable that we are making the right choices for those openings next year.

Robin Murchison - Suntrust Robinson Humphrey

And then the new sourcing executive, his main goal is to hold costs in line versus building IMU at this point. Is that correct or is that over-simplifying?

Lorna Nagler

Well, I think I’d step back -- first of all, it’s her but I think the main thing is when we look at our merchant team, the number one initiative is to really allow the merchants and take some of the, you know, burden off their shoulder. So really when we look at the adds that we are adding to the organization, it’s around planning and sourcing because to me, nothing is more important than giving the merchant teams the support they need so they can concentrate singularly on the design and quality and product that’s going into the stores.

So we really see that the role of that sourcing is first and foremost to support the merchant, second to really evolve who we do business with and really building, as I spoke in my earlier comments, really aligning ourselves with people that are category experts so that we continue to get the best product, quality, for our consumers. So there’s really multiple reasons as to why we are really building that sourcing team.

Robin Murchison - Suntrust Robinson Humphrey

And just a last question -- in the New York Times today there’s an article about farmers, basically about the benefit farmers have right now, given the uses for their farm land and such. I mean, to what effect if any do you guys benefit from that, given that a majority of your stores are in the Midwest and farming areas -- well, farming geographies, not necessarily areas but certainly geographies.

Andrew K. Moller

It’s probably hard to say completely. You know, in terms of our comps from a geographic standpoint, you know, I think in the fourth quarter we did have roughly the same level of decline in our core region of those eight states that touch the Great Lakes and Iowa as we did in the rest of the country, although we did have increases in Minnesota and Iowa. So certainly in some of our core regions, we are in some smaller communities where agriculture is a big part of the economic base of the community, so it’s not part of the -- you know, if the economy is going well, that can be a benefit to us but it’s very hard to parse to that degree.

Robin Murchison - Suntrust Robinson Humphrey

Thanks and keep up the good work.

Operator

Thank you. We’ll go next to Crystal Kallik with D. A. Davidson.

Crystal Kallik - D. A. Davidson & Co.

Good afternoon, everyone. Monica, just real quickly now, you talked about the POS, new POS in did you say 500 stores by the end of Q2?

Monica L. Dahl

Five-hundred-and-fifty, actually.

Crystal Kallik - D. A. Davidson & Co.

Five-hundred-and-fifty stores, okay. And can you walk us through some of the benefits, since you are obviously ramping up your IT systems, what you are looking to tap into as far as existing systems with planning and allocation, et cetera with the new POS system?

Monica L. Dahl

Well, in terms of the POS system, it’s really a hardware upgrade that allows our stores to be on a more current platform or functionality, if you will. There are benefits both from an operational standpoint and a communication standpoint and there certainly are benefits once we get that hardware in, in terms of our ability to download and transmit communications like markdowns more effectively to the stores, allow the stores to be able to do those markdowns more effectively.

Crystal Kallik - D. A. Davidson & Co.

Okay, great. And then Lorna, I know you talked about this a little bit -- do I understand that -- it sounds the like the representative assortment will be in stores, primarily the majority of the assortment in the second half is what we are looking for, as far as your reinterpretation of Christopher and Banks and C.J. Banks?

Lorna Nagler

I think that it’s going to be later than that. You know, when I walked in the door, we were really at Q2, so I’d say each delivery evolves a little bit and we are learning a lot more. I think you are going to fully see more of that in the fourth quarter -- you know, in the third quarter and fourth quarter.

Crystal Kallik - D. A. Davidson & Co.

Okay, and could you give us some idea -- when you talk about lowering the SKU count, what kind of magnitude you are looking at? I mean, what you were before and what makes sense at this point?

Lorna Nagler

I’m going to let Monica talk. I think just philosophically, all of you have been in our stores and I think you’ve noted there’s no shortage of SKUs. So I think the intent is really starting to think more in units versus salary and to really understand the capacity of the store. That’s why when we really talked about the flow of newness and how we really orchestrate and really think about it from a unit standpoint, obviously the SKUs come into consideration.

I think the second thing is how do we avoid duplication of items so we can really stand a little more aggressively on the things that we think are great and really use our money more effectively, and also provide a greater clarity of making great outfits for the stores. So that’s an ongoing process. I think it’s very hard to really talk about SKU count because on the other hand, I’m going to tell you that we are focusing on buying -- for the first time really buying unique product for some of our top volume store. We’re talking about really looking at climate differences and tweaking our long sleeve versus three-quarter sleeve, so it’s really hard to put a number on it. But I think it’s really more from the customer perception of when she comes in there, easier to shop, easier to navigate, and avoids the duplication of the multiple things that are very similar, similar color -- so I think it’s hard to really put a number on it but I think from the customer standpoint, I think that’s where she is going to see the difference and I think again, we’ll evolve and you’ll see more of that as we get later in the season.

Monica L. Dahl

Lorna’s exactly right, Crystal, just to add to that. One of the other things that we know will help or has been a problem in terms of lack of clarity for the customer and over-SKU concentrates and goes back to how we were [plotting] our deliveries and the significant amount of carryover that we continued to carry. So we were over-SKU’d, over-capacity’d at a lot of different points, not just always off of the fresh delivery but combining and compounding that was the deliveries that continued to stay around a little too long and had too much overlap, if you will, in terms of product offerings.

Crystal Kallik - D. A. Davidson & Co.

Okay, and so I guess to tie into that, because you have such a big focus on your real estate portfolio now looking at SKU count and getting the systems in place, where are you as far as looking at store formats? Are there new store formats coming down the pipeline or new fixturing or how are you addressing or tying all of these pieces in?

Lorna Nagler

I think one of the things we talked about in the last call was really looking at assessing our brand evaluation, brand positioning. Phase two is really thinking about that in-store experience, thinking about new ways to merchandise so we are kind of just rolling up our sleeves to really look at that. Do I have some new ideas? Yes. Am I going to share them with you today? No.

So work in progress. When we have a more fully robust thing to talk about, we will -- you know, I think the main thing as we are taking kind of a pause here as we are ramping up is really to evaluate what makes a successful real estate portfolio and really making sure we understand those factors, whether it be demographics, size of market, co-tenancy, and then with that really what should -- what should the tweaks be to this, the in-store environment?

So work in progress and we’ll share when we’ve got a little more detail.

Crystal Kallik - D. A. Davidson & Co.

Great, thank you and then just finally, Andy, quick housekeeping question; could you talk about the difference of the new versus the mature store performance for Q4?

Andrew K. Moller

Okay, sure. In terms of the breakout, I think what we’ve usually provided is the comp stores that opened in fiscal 2005, 2006, and 2007 declined approximately 3% and the mature base of the fiscal 2004 and older stores were down approximately 4%.

Operator

Thank you. We’ll go next to Howard Tubin with RBC Capital Markets.

Howard Tubin - RBC Capital Markets

Is there any significant difference between the performance at the C.J. stores and the Christopher and Banks stores?

Andrew K. Moller

There again we have not broken out specific performance by concept. I think probably going back quiet a ways, there was probably some difference originally in the merchandise margins. As we gained scale, the merchandise margins have come pretty close together for the C.J. Banks division and the Christopher and Banks division.

Howard Tubin - RBC Capital Markets

Okay, and just in terms of -- I know it’s tough predicting the future, particularly in this environment, but coming off of two relatively difficult fourth quarters, how come you don’t think you could be profitable in the fourth quarter of ’08?

Andrew K. Moller

Well, I guess at this point, certainly we’ve had two very difficult fourth quarters. Our fourth quarter is probably different than most other retailers because we have December, January and February, so we have January being a very heavy clearance month, February being a very small sales month, so our fourth quarter isn’t probably like the traditional retailer. And so certainly December has become very promotional and obviously we are going to do the best we can to generate performance in the fourth quarter but based on what we’ve seen, we think it will be difficult to achieve profitability in the fourth quarter of the coming year, given the environment that exists now.

Howard Tubin - RBC Capital Markets

Got it. Okay, great, thanks. Thanks a lot.

Operator

Thank you. We’ll go next to Barbara Wyckoff with Buckingham Research.

Barbara Wyckoff - Buckingham Research

I want to congratulate you on making progress on getting a better focus and rhythm to this business. I think that it’s refreshing to see -- you know, you input some strategies and you are getting, you know, you are making some progress. So anyway, in terms of just questions, have you done any market research, focus groups? If so, what have you learned? Lorna, can you talk about how you see the customer now versus maybe how the company saw her a little while before, you know, with the two or three ladies names and things like that, and then I have a couple of more questions.

Lorna Nagler

First of all, thanks, Barbara, for those encouraging words. I think one of the things we talked about, we engaged with an outside consultant who really pretty quickly after I got here to really look at the brand evaluation, the brand positioning. We looked at the demographic shifts, we really looked at the competitive set but most importantly, we really focused on the changing boomer, which I call really the modern boomer who I would be remiss not to say the past management -- you know, it’s why we’re so late to the party on e-commerce because I think they underestimated where that consumer is going.

So I think I have a different perspective and I think the consumer continues to evolve pretty quickly.

Phase two of working with this consultant is really getting some more current market research and really talking directly to our consumers. We are in the process right now of initiating those so I’ll be able to update you on our progress in upcoming calls, but certainly continuing to understand what’s important to this consumer is one of the most important things we can do and we do admit and we already see that even our core customer who we might have thought was a very, very traditional lady is embracing newness and I think it really is refreshing to see how the merchants are really embracing that change and we are going to really get some more relevant and current research so that we can really refresh and go from there.

So stay tuned for more updates and we’ll keep you posted.

Barbara Wyckoff - Buckingham Research

Okay, thanks and then just the last question, I guess -- when do you think you’ll be able to provide an outlook for the full year 2009?

Andrew K. Moller

I think what we had indicated in a past press release that we were going to do guidance on a one quarter at a time basis. Certainly we did make some comments in this call regarding the full year in regard to our expectations for interest and tax rate to help out those of you who are maintaining models, but our real intent going forward is just to talk to one quarter at a time.

Barbara Wyckoff - Buckingham Research

Okay. Thank you.

Operator

Thank you. We’ll go next to Christopher Kim with J.P. Morgan.

Christopher Kim - J.P. Morgan

It seems like traffic has been one of the bigger culprits in your comp decline in the fourth quarter. Could you kind of talk about how traffic trended throughout the quarter and maybe give us some color as to how traffic was the beginning of the second quarter for you guys -- excuse me, first quarter for you guys?

Monica L. Dahl

The traffic patterns were really quite consistent during the fourth quarter in terms of being double-digit declines, and I’ll remind you the only way we have indication of true traffic is as of the end of the fourth quarter, we had a little over 200 stores that were year over year past the customer count, so we saw mid to high double-digit declines in each month in the fourth quarter.

You have to remember when we shifted to March as our new fiscal year, we had the Easter shift, so that was a benefit to comparability from a year ago. But it was still double-digit declines from a percentage standpoint.

Obviously as Lorna talked about, we don’t anticipate that traffic trend changing, which is why we are so focused and encouraged by our units per transaction, which helped to drive up the ADS as well as an increase in our average retail selling price. Obviously a function of the customers’ acceptance of our product and a reduction in the carry-over of our inventory that we were able to come into the year with.

Christopher Kim - J.P. Morgan

Also, I guess Andy, it doesn’t look like you guys repurchased any shares in the quarter. Could you kind of talk to that, how much you have remaining on the current program and how you are looking at that from a use of cash perspective for the remainder of the year?

Andrew K. Moller

Yes, what we have is a $20 million program that is authorized currently. To date, we’ve made $12.1 million in purchases. We do report updates on our progress, either in our SEC filings or in our press releases. The authorization that we put in place was put in place last May. It runs for one year.

As a company, we do have to make purchases in our trading windows or under 10B51 plans, which are put in place in a trading window. So again, there’s $12.1 million of purchases, approximately $8 million open, and again we provide updates on any purchases that we’ve made in any future press releases.

Christopher Kim - J.P. Morgan

Okay. Thanks very much, guys, and best of luck.

Operator

Thank you. We have time for one final question. We’ll go back to Robin Murchison with Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

Thanks. So we got the share repurchasing -- Monica, I just wanted to ask you the date of -- do you have any comments regarding the build in database and number of entries in there on a year-over-year basis?

Monica L. Dahl

I won’t speak to the year over year but I’ll give you a couple of other pieces of information, Robin. The database growth obviously continues to be something that we are very interested in and focused on. We’ve continued to see an increase garnered off of that concentration on how do we get more customers in the database. The fall friends and family event was a big contributor to that last year and we spoke about that, as well as the concentration for how to get more names when we open new stores.

The real emphasis and the considerable growth is coming out of our e-mail capture and I think it’s in two-fold -- reasons are two-fold; the stores are really getting behind that as a viable means and an easier way to get that information from the customer and second of all, now that we’ve got some cadence on communicating with her from an e-mail standpoint, she’s seeing and understanding and it’s easier to tell her about the value of giving that.

So we continue to be encouraged by our customers’ willingness but there’s a little bit of a shift in terms of trying to get more e-mails from a capture standpoint.

Robin Murchison - Suntrust Robinson Humphrey

Thank you.

Operator

Thank you. At this time, I would like to turn the program back over to Ms. Nagler for any additional or closing comments.

Lorna Nagler

Great. Well, I just want to thank everybody for the time on the call today and we look forward to updating you on our next call. Thanks, everybody.

Operator

That does conclude today’s conference. You may disconnect your lines at this time.

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Source: Christopher and Banks Q4F08 (Qtr End 03/01/08) Earnings Call Transcript
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