Charming Shoppes, Inc. (CHRS)
F1Q09 Earnings Call
May 21, 2008 9:15 am ET
Executives
Gayle Coolick – Vice President Investor Relations
Dorrit Bern – Chairman, Chief Executive Officer, President
Eric Specter – Chief Financial Officer, Executive Vice President
Analysts
Jeff Stein – Soleil Securities
Liz Dunn – Thomas Weisel
Holly Guthrie – Janney Montgomery Scott
Tom Filandro - SIG
[Margot Murtoch] – Schneider Capital
Operator
Good morning ladies and gentlemen and welcome to the Charming Shoppes first quarter sales and earnings conference call. (Operator instructions) With us today are Dorrit Bern, Chairman, CEO and President of Charming Shoppes, Eric Specter, CFO and Executive Vice President, Steven Wishner, Senior Vice President of Finance and Gayle Coolick, Vice President of Investor Relations. I’ll now turn the call over to the host of this call, Gayle Coolick. Ms. Coolick, you may now begin.
Gayle Coolick
Thank you all for joining us this morning. Today’s discussion will contain certain forward-looking statements concerning the company’s operations, performance and financial condition, including sales, expenses, gross margin, capital expenditures, earnings per share, store openings and closings and other matters.
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those indicated. Information regarding risks and uncertainties are detailed in the company’s filings with the Securities & Exchange Commission, including the company’s annual report on form 10-K for the fiscal year ended February 2, 2008. Our complete Safe Harbor statement and today’s prepared remarks are available at CharmingShoppes.com.
Our first quarter income statement along with our balance sheet and cash flow statement are provided with today’s press release. Our first quarter results for the current and prior year periods exclude the income statement impact of our noncore misses apparel catalog titles as we have designated them as a discontinued operation.
This relates to our April 25, 2008 announcement that we are exploring operating and strategies alternatives and this is expected to result in the sale of our noncore misses apparel catalog titles.
As you review our financial statements, please keep in mind that this year’s and last year’s financial statements have been adjusted to reflect the effect of the discontinued operation.
For the thirteen weeks ended May 3, 2008, we reported income from continuing operations of $0.7 million or $0.01 per diluted share. This compares to income from continuing operations of $26.5 million or $0.20 per diluted share for the thirteen weeks ended May 5, 2007.
For the first quarter ended May 3, 2008, income from continuing operations includes after tax charges of $2.2 million or $0.02 per diluted share related to previously announced consolidating and streamlining initiatives and $2.4 million or $0.02 per diluted share for advisory and legal fees arising out of the proxy contest which was settled on May 8, 2008.
Net sales from continuing operations for the thirteen weeks ended May 3, 2008 decreased 8% to $641.3 million compared to net sales from continuing operations of $696.6 million for the thirteen weeks ended May 5, 2007. Net sales from continuing operations for both this year and last year exclude sales related to the company’s noncore misses catalogues.
The operating results for the discontinued operation are accounted for in the loss from operations of discontinued components section of our income statement. Net sales for our retail stores segment were $614.9 million during the thirteen weeks ended May 3, 2008, a decrease of 10% compared to $686.7 million during the thirteen weeks ended May 5, 2007.
Consolidated comparable store sales for our retail stores segment decreased 13% during the thirteen weeks ended May 3, 2008 compared to flat comparable store sales during the thirteen weeks ended May 5, 2007. Comparable store sales data by core brand are detailed in our press release and on our corporate website.
Net sales from continuing operations for our direct to consumer segment were $26.9 million during the thirteen weeks ended May 3, 2008 compared to $10.3 million during the thirteen weeks ended May 5, 2007. The year over year difference is primarily related to the addition of sales volume from our new Lane Bryant catalogue which was launched during the fourth quarter of last fiscal year and is currently in startup mode.
Consolidated gross margin from continuing operations for the quarter was 30.3%, a 180 basis point decrease compared to 32.1% in the year ago period. The consolidated merchandise margin improved by 140 basis points and consolidated buying and occupancy expenses as a percent of total sales increased by 180 basis points compared to a year ago.
The consolidated catalogue advertising expense ratio as a percentage of total sales increased year over year. On a dollar basis, cost of goods sold, buying, catalogue and occupancy expenses declined year over year.
For the retail stores segment, the gross margin declined by 150 basis points for the quarter, primarily related to negative leverage of occupancy expense on declining sales and partially offset by improvement in the merchandise margin related to strong inventory management, a higher percentage of current spring merchandise and less clearance inventory versus a year ago.
The gross margin from continuing operations for the direct to consumer segment declined related to higher catalogue advertising expenses as we continue to invest in customer acquisition during the startup year of the Lane Bryant catalogue.
Consolidated SG&A expenses from continuing operations represented 29.1% of sales for the quarter compared to 25.9% in the year ago period. Admin expenses as a percent of total sales increased by 160 basis points and selling expenses as a percent of sales increased by 160 basis points, both related to negative expense leverage on lower sales.
On a dollar basis, SG&A expenses were consistent with a year ago. For the retail stores segment, SG&A expense increased by 230 basis points related to lack of leverage of selling expense on lower sales. Beginning with the first quarter, we have adopted EITF 06-4, accounting for deferred compensation and post retirement benefit aspects of endorsement split dollar life insurance arrangements.
EITF 06-4 addresses accounting for separate agreements that split life insurance policy benefits between and employer and an employee and requires employees to recognize a liability for future payments payable to the employee under such agreements. Charming Shoppes agreements for split life insurance policy benefits applies only to former executive officers and is not related to current executives.
We have adopted the provisions of EITF 06-4 and expect to recognize a liability in the range of $10-$15 million through a cumulative effect adjustment to retained earnings. Our balance sheet and cash flow statement are included with today’s press release and are subject to adjustment pending our completion of the filing of our 10-Q.
Total cash, cash equivalents and available for sales securities were approximately $86 million at the end of the period compared to approximately $75 million at February 2, 2008. We continue to maintain a healthy cash balance, strong liquidity and a committed revolving line of credit.
Our long term debt at the end of the quarter is $315 million and primarily relates to our $275 million convertible debt due 2014 as well as a small amount of mortgages and capital lease obligations. Total inventory for continuing operations at the end of the period was approximately $371 million compared to $406 million a year ago, a decrease of 9%.
On a same store basis, year over year inventories decreased by 13%. Capital expenditures were approximately $22 million for the quarter, a decrease of 41% compared to $38 million in the year ago quarter.
D&A for the quarter was approximately $27 million. The company generated free cash flow of approximately $22 million for the quarter. On our corporate website, CharmingShoppes.com, we have posted a GAAP to non-GAAP reconciliation defining our calculation of free cash flow.
Given the continuing uncertain economic climate and the company’s expectations for continuing weak traffic trends, the company has taken a conservative approach in planning for the second quarter of fiscal year 2009. The company expects that the difficult retail environment will continue and in response the company will maintain lean inventories and carefully control operating expenses in an effort to continue to generate positive free cash flow.
For the three month period ending August 2, 2008, the company has projected diluted earnings per share from continuing operations in the range of a loss of $0.02 to break even, zero, compared to diluted earnings per share from continuing operations of $0.16 for the corresponding period ended August 4, 2007.
The company’s projection for the quarter assumes net sales from continuing operations in the range of $625 to $640 million compared to net sales from continuing operations of $694 million for the period ended August 4, 2007.
The company’s projection assumes high single digit percentage decreases in consolidated comparable store sales for the company’s retail stores segment compared to a 3% decrease in consolidated comparable store sales in the prior year. Our store openings in fiscal year 2009 are mainly focused on our largest core brand, Lane Bryant.
Overall we plan on opening approximately 45 to 50 new stores primarily at Lane Bryant and Lane Bryant Outlet, relocating approximately 40 stores and closing approximately 160-170 stores during the fiscal year 09.
Gross cap ex before construction allowances of approximately $24 million are projected at approximately $75 million for the year, significantly below last fiscal year’s gross expenditures of $137 million. D&A is projected in a range of $90 to $95 million for fiscal year 2009.
This completes our prepared remarks. I’d like to turn the call over to our CEO, Dorrit Bern who would like to make a few comments.
Dorrit Bern
Thank you, thank you our new Vice President Gayle Coolick. Good morning everybody. Typically as you know what I do at this time, I walk through product and what kind of product is performing, unfortunately it won’t be a long conversation because what we are seeing is, we’re still experiencing double digit traffic decreases in all of our brands.
So when she does walk across the threshold, she’s looking for newness, she’s looking for something that she doesn’t have in her closet. It could be a new jacket silhouette, it could be a new [IT] wide top, the career portion of our assortments are holding up kind of sort of okay. Suits are selling, dresses are selling, but certainly not enough when it comes to the big volume knit programs, capris programs that we have on particularly the casual side of the floor.
What we are seeing, you know you may ask well Dorrit why is it that all the divisions are having a rough go of it and as we’ve pulled back and look at Catherines for example, we have never seen in the years that we’ve had the opportunity to own this great company, our extended size customer not coming into the store.
And when you peel back the covers you realize that as we do, we have a very large for example African American population that shops with us in both our Catherines and our Lane Bryant brand, it’s 10% of the population but somewhere between 14-22% of our consumer base.
37% of those consumers make less than $25,000 a year, 54% make less than $50,000 a year. But as we all know, over the years there’s always a very consumer minded, product minded, apparel minded consumer that will always seem to find a way to be able to make an apparel purchase.
Right now that doesn’t seem to be the case, these consumers and their socioeconomic position are feeling the brunt in a much greater degree than what is happening to other Americans. So we’re just going to have to ride it out and watch those inventory levels, watch in terms of the fashion assortment, we don’t want to put too much risk in terms of the amount of fashion and newness that we do put into our stores but we have to continue to be cautious until we get these consumers back in our stores.
Conversion ,when she comes in, she’s making the transaction but again double digit decreases in traffic to all of our brands. So on that note, let me pass some comments over to Eric Specter.
Eric Specter
Good morning everyone. I just want to add and give a little bit more visibility to some of our key business units performance. But before I do that I just wanted to comment that we are currently in a sale process for our missy apparel catalogues.
At this time, due to the sensitivity and the activity we’re seeing in that process, we can’t comment further relative to timing or value at this point, but the process is active and we are confident that we will be able to get a transaction completed here in the near term over the next several months.
I also want to make the comment that this is the only business that is up for sale and I just want to leave it at that. As it relates to some of the other performance for the company for the first quarter, our credit card operations had a very strong quarter. Their contribution, which again as I commented at the fourth quarter call, the contribution to the company’s earnings flows through as a set off against our selling, general and administrative expenses.
The bank earned on a pretax basis approximately $9 million for the quarter, up 25% a year ago. Of course we’ve got the benefit here in the first quarter of now managing for a full quarter the Lane Bryant credit card receivables that were acquired at the beginning of the fourth quarter of last fiscal year and we are hitting on all the plans that we set out.
Part of the benefit that we’re seeing in the credit card profitability is that although our overall sales comps were disappointing at down 13 as Gayle commented in the prepared remarks, we are seeing some improvement relative to targeting and marketing to our core credit card customers.
And we are seeing much better results from that core customer that we have a wealth of data on and clearly they did come into the store and our overall credit card sales were down in the single digits as opposed to the 13 comp store drop we reported.
As far as the first full quarter of operation for now the Lane Bryant catalogue, I’ll comment on a few key metrics. First of all the sales were on plan as well as the gross margin and the operating results came in on plan. We’re seeing good response rates to the catalogues that were circulated during the first quarter, response rates were on plan.
We are seeing very good penetration which has been a strategy since we launched LaneBryantCatalogue.com, our ecommerce penetration during the first quarter was approximately 34% of sales.
This is key to the success over the years of Lane Bryant, we anticipate a very healthy ecommerce penetration that over time we believe will approach 45-50% as we are able to acquire customers and the Lane Bryant customers are much more accustomed to shopping online than our comparable missy apparel catalogue customers which in prior quarters we have said that one of the struggles for that model has been a very low ecommerce penetration.
We also were very pleased with our customer acquisition in our Lane Bryant catalogue. We ended the quarter with almost 350,000 customers. We acquired over 200,000 customers so our prospecting efforts were very successful with Lane Bryant and we are at this point as I mentioned is well under plan and we are seeing much better response across the house file, the ecommerce marketing as well as the prospecting effort.
So with that I will turn it back and open up for questions and answers.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from Jeff Stein – Soleil Securities.
Jeff Stein – Soleil Securities
Eric, a question on your comments relating to the catalogue, I guess I was a little bit confused, and I was wondering first of all can you differentiate between what’s going on with the catalogue versus the ecommerce site.
You mentioned that you’re getting a roughly 34% penetration at Lane Bryant, I think you were referring to LaneBryant.com and I just want a clarification, are you referring to the fact that roughly one-third of those customers have bought in the stores, is that what you mean?
Eric Specter
Let me just preface this, this was metrics that I was commenting on for the Lane Bryant catalogue. Not to be confused with the Lane Bryant retail business. So our Lane Bryant catalogue business during the first quarter, we saw an ecommerce penetration as compared to the sales that were recorded off of the catalogues that were distributed, we had a 34% ecommerce penetration which was above our plans and a very healthy start considering that our ecommerce site has only been up for five months.
Jeff Stein – Soleil Securities
So in other words, the catalogue is driving people to the website, is that correct?
Eric Specter
That is correct.
Jeff Stein – Soleil Securities
Is it not true though that your merchandise in your catalogue is different from your ecommerce site?
Eric Specter
I think there is a defined LaneBryantCatalogue.com site that is in sync with the paper catalogue in terms of the merchandising offerings. That is completely separate from the LaneBryant.com site that has been operating for a number of years that complements the retail stores. So Jeff when we say there’s a 34% ecommerce penetration, we’re talking about a penetration to the LaneBryantCatalogue.com site.
Jeff Stein – Soleil Securities
Given the fact that you’re putting the assets of most of your direct to consumer businesses up for sale, can you talk a little bit how you intend to service this customer and who you would intend to have oversee this business once the businesses are ultimately disposed of?
Eric Specter
I’ll comment on the fact that we will retain the executives that we had brought in to run Lane Bryant Catalogue as well as have overall responsibility over the other missy apparel catalogue. That individual and the staff that has been put together that is running the Lane Bryant Catalogue will stay in place.
And depending on the final negotiations and how we contemplate the transaction is that we will retain the rights to be able to run the Lane Bryant Catalogue on the catalogue technology platform that’s now been integrated with the overall business of the company as well as making provisions for the fulfillment of that business, of the Lane Bryant Catalogue as we today fulfill all of our retail ecommerce sites.
So that has all been strategized well out ahead of us putting these missy apparel catalogues up for sale. So there will be a current staff, complete continuity of staff that will stay in place with us to drive and run our Lane Bryant Catalogue as well as be responsible as the direct arm for the company which will be really re-strategized to focus on our core retail brands of Lane Bryant retail as well as Catherines and Fashion Bug Plus.
Dorrit Bern
Right, so what you’ll see is first of all there’s going to be a transition period. We have a plan in place of how we are going to be transitioning inventory out of those facilities into our own facilities, that’s number one, obviously that’ll take us a little time. But there is a plan in place.
And then the president of our catalogue division and her team are already in the process of putting together their thoughts in terms of launching a Catherines catalogue, a Fashion Bug Plus catalogue and moving ahead with our support at the bricks and mortar and ecommerce business by being in the catalogue business.
Jeff Stein – Soleil Securities
Eric, first of all, was the catalogue and I assume the catalogue was dilutive to earnings in the first quarter and I’m wondering if you could just roughly tell us by how much?
Eric Specter
Well as I commented at year end, we would be significantly reducing the investment, particularly now that we’ve built a customer file that is approximately 350,000 customers now. It did have a slight operating loss because again as I commented at year end, the investment in customer acquisition under the current accounting rules has to flow through the P&L, that is what flows through our catalogue expenses and ends up netting into our gross margin. So it had a slight loss for the quarter but not material.
Jeff Stein – Soleil Securities
Is Figgy’s included in the contemplated sale and if not, why not?
Eric Specter
No it is not. Again we were very clear that in both today’s release as well as our previously release on April 25 is that at the this time it’s only the eight missy apparel catalogues that make up that group that we acquired with the Crosstown acquisition in 2005.
The potential buyers and interest we have been receiving and again we have had a lot of inbound interest in those missy apparel catalogues, that group of potential buyers is interested in those apparel catalogues only. So at this point, Figgy’s is not a business that is included in that nor is it up for sale.
Operator
Your next question comes from Liz Dunn – Thomas Weisel.
Liz Dunn – Thomas Weisel
Obviously the comp was disappointing but looking at the earnings result, it was a little bit better even if we back the charges and add back the discontinued operations, it was better than you originally expected.
So I guess I understand your tone that you’re disappointed with the sales result but can you talk about some of the things that you were really pleased with the way that they went in the quarter because I’m kind of confused at the beat and yet your tone is not so upbeat really.
Eric Specter
I think that we recognized, let me just, because I want to answer that, I’m glad you brought that up, I want to answer that directly is that if you recall at the fourth quarter earnings call, what you’re seeing now is the benefit of all the initiatives that we have outlined since January and I’ll just comment on the two significant ones that have contributed to the better earnings EPS on a continuing ops basis as compared to the guidance we have given.
And although our top line fell short, slightly of our guidance, we did make the improvements in our margin that we strategized and that was due to the changes and the reductions in our forward inventory plans that we had talked about during the fourth quarter and at our year end conference call.
And we did see the benefit of the fact that with lower inventory levels coming into the spring season, significantly lower clearance inventories, significantly lower spring product, we did not need to be as aggressive in promoting the spring product and we were able to rebound substantially off of the run rate that we were experiencing in the third and fourth quarter.
And in fact we’re pleased that we were able to accomplish in a very challenging climate better gross margins across the retail brands than we did a year ago. That was all done by the very aggressive and tight inventory management as well as the mix within those inventories.
We are seeing, our issue right now, the key metric that is behind plan is the traffic metric that we track across the 2,400 stores. As Dorrit mentioned, our traffic metric is down double digit, we are adjusting forward marketing plans, analyzing the database. But what I do want to say is that the customers that are coming into the store, the other key metrics that we track were all positive.
In terms of, we were able to convert customers in the store at a higher rate, we were able to see a higher average dollar sale, we got more out of a unit that was sold and our units per customer sold were about where they were a year ago.
So we were pleased overall if you look at the customers, they did come in the store, they did buy at a higher rate than last year, we did not have to promote as heavily, we didn’t have the carryover clearance inventory levels of a year ago due to the cleanup of that inventory.
So that is really what contributed, that was the most significant component to the better EPS results than what we had guided. The other was, were very well managed expenses. Although we had, the rate of course is up due to the fact we ran a negative 13 comp, we did strategize and execute on our plan to hold the dollars constant.
And almost across all buckets of expenses, the selling expenses across the stores were held flat, so we had very good management of store payrolls. Our occupancy expenses were held flat against, buying and occupancy were actually in dollars were flat against a year ago. Of course we had negative leverage on the sales line but we were very pleased with our overall expense control.
And we haven’t really seen the full impact of a number of our key initiatives because a lot of what we were anticipating to flow through on an annualized basis, we’ll only be starting to recognize here at the end of the first quarter and now going forward.
So, for example, one of the major expense reductions of our consolidation of our Memphis facilities, our Catherines business up here in Benton-Salem was the fact that that was not completed until the end of March so that we had those expenses for those associates until that was shut down at the end of March.
That ran through the first quarter P&L. But well managed expenses, very strong inventory and category management across all the brands with very good and disciplined approach to how we promoted and took mark downs. That was the catalyst that contributed to the better overall earnings results.
Liz Dunn – Thomas Weisel
Did you happen to give the year over year inventory decline on an apples-to-apples basis excluding the discontinued ops from last year? I know we got the yearend balance sheet in the press release but last year’s first quarter?
Eric Specter
Correct. On a comp store basis, the number is down 13. On an absolute dollar basis it was down 9. And of course that’s all been now, reflects the inventories from continuing operations.
Liz Dunn – Thomas Weisel
So for the balance of the year you’re saying that we may see a little bit more expense control even than the result we saw in the first quarter, so we should be looking for expenses to be flat and maybe even better than that for the balance of the year?
Eric Specter
Yes.
Operator
Your next question comes from Holly Guthrie – Janney Montgomery Scott.
Holly Guthrie – Janney Montgomery Scott
Could you talk more about traffic trends, any recent changes and also traffic as it differs from region to region and anything, maybe we can think about that might affect future business.
Dorrit Bern
I wish I could. Certainly in the past when times get a little more difficult, when you’ve asked me that question Holly I’ve said you know Holly the Southeast is holding up and the West Coast is holding up and the Northeast is holding up but we’re experiencing this that or whatever. And the Midwest and I throw the weather comment in.
But we’re finding, I’m looking at all of my selling reports, every single region is in the same situation. We’re just seeing decreases in traffic across the board. And it doesn’t seem to be any different than any portion of the United States. And it doesn’t seem to be any different in any brand.
And it absolutely covers the United States and the lack of traffic. And when she does come into the store, she is buying the same items throughout the United States as well. I wish I could give you more.
Holly Guthrie – Janney Montgomery Scott
Did you see any sort of positive change at the end of the quarter going into the second quarter? Because the comp guidance is for negative high single versus a negative 13, so that would imply, I know the comparison is a little bit easier from last year but I didn’t know if you are seeing a slight improvement in traffic?
Dorrit Bern
The only thing we saw is when there was a response to weather. When we got a couple of good weeks and got a little breeze into our sales, we did see an increase in traffic and an increase in footsteps into the store.
Holly Guthrie – Janney Montgomery Scott
So that gives you a little bit of a positive, where you think you can get to the negative high single digit versus the negative 13 as you had some better response to weather early on?
Dorrit Bern
I’ve got my fingers crossed.
Eric Specter
I’ll just give a little more insight on the first quarter. Again to your comment, did we see any kind of pickup in the tail end of the quarter? I’ll first comment that March was a miserable month. I think that I can say that in our businesses, I know a lot of the retailers that report monthly of course everyone’s got insight into those numbers.
Effectively, Easter was a yawn. There was no Easter selling season. We had called this out at our fourth quarter call that the earlier Easter, it’s the earliest it ever can be in the calendar and without cooperation with weather which again March seems to be an eternity ago, but if we recall we were still in the tail end of winter.
And there was absolutely no build for the Easter selling season. So March was the main catalyst for our negative comps for the quarter. We did see, as the weather, to Dorrit’s comment, as the weather improved we did see a very significant turn to the business, for a two to three week period in April when there was much more seasonal weather, there may have been a little bit of pent up demand from the lack of customers coming out in the March and Easter selling season.
So it was a very erratic quarter and unfortunately for an apparel retailer such as ours, the key to a good strong first quarter is the selling we’re doing leading up to Easter and it clearly did not, as if the holiday did not show up and the customers didn’t show up.
And I know a lot of other retailers have said that, things did pickup in April and we’re hopeful as we move into the second quarter with the stimulus checks going out that there will be some improvement to these traffic trends as we get into the core part of the summer season here in the next several weeks.
Holly Guthrie – Janney Montgomery Scott
On to promotions in the first quarter f lowing into the second quarter, it seemed like when you guys exited the first quarter that the promotions abated as you went through the quarter and they seem even less now than they were early in the quarter, much more focused now in just a few key categories. Is that the plan for the second quarter to continue to drive on more focus than promoting the whole store overall?
Dorrit Bern
Yes, because with the reduction that we have in inventory which is good news, the reduction that we have in clearance which is good news, we want to make sure that we don’t give away the jewels that she’s walking into the store looking for. So the important classifications that you’re paying regular price for, we’re absolutely making sure that we’re not promoting it and we’re not discounting those.
Certainly where we’ve got a lot of initial markup built into our knits and into our capris and we have the opportunity to give her a great promotion there and still make money. So yes, we spend more time on individual items as to how to protect it not promote it and then a really key driver in terms of protecting our business.
Holly Guthrie – Janney Montgomery Scott
On the discontinued operations and the impact on the balance sheet, it looks like at least some portion, maybe even all of it was reflected in the equity line. Is that the case and is the equity down based on that and is there more to come with the eventual sale?
Eric Specter
We did enclose a preliminary balance sheet with the release this morning. The impact of the loss from the discontinued component that’s reported on the face of the income statement below income from continuing operations flows through the equity section of retained earnings.
But I will point to the fact that you’ll see that again as required by the discontinued ops accounting standards, you’ll see that we now have a new caption on our balance sheet in both current assets of discontinued ops as well as in the liabilities section.
So what we’ve done now is reflected the assets and liabilities of that discontinued operation appropriately on the face of the balance sheet. It’s also been restated for the periods that are on the balance sheet at year end. And so that, you see the impact of the discontinued ops from a balance sheet perspective recorded properly under the assets, liabilities as well as the equity section.
Operator
Your next question comes from Tom Filandro – SIG.
Tom Filandro - SIG
For Eric, the comments that you made on the comp metrics, were they similar across all of the brands?
Eric Specter
Yes they were very similar. When we reported the comps, the 13 comp, we ran double digit comps across all three businesses. And again our inventory management across all three businesses was very comparable.
The key metrics that you’re referring to, I mean there’s always slight differences across the brands but the common theme of double digit drops in traffic, the fact that we were able to improve the margins through the average dollar sale, the average unit retail due to both less promotional posture relative to clearance as well as comments Dorrit was making that we’re being much more strategic and selective on the products that are not moving.
We do have a lot of good things going on in the business in terms of spring selling, just not enough to overcome some of the core seasonal products that we have sold year over year that just is not, the demand for those products is just not where it was a year ago.
But we’re seeing very good strong metrics in our intimate apparel businesses across Lane Bryant, Cacique as well as Fashion Bug, intimate apparel at a category which is an important category for both Lane Bryant and Fashion Bug had positive comps for the quarter.
So where the real hurt came was our core seasonal apparel products, particularly on the casuals side, Dorrit mentioned a lot of the key categories, knits, capris, we just did not get the kind. Now we didn’t have the inventory levels of a year ago, so let me start with that comment.
But we did not see anywhere near the sell throughs that we saw a year ago. But many individual classifications, we’re seeing some good response to new fashion that the merchants are bringing in. This is again across all three brands, it’s just not able to make up for the heavy seasonal drivers that we relied on first quarter. And as I mentioned, what contributed to that was the fact that the Easter selling season just never came.
Tom Filandro - SIG
To expand on that, maybe this question is for Dorrit, I think you highlighted the right fit program has been successful, can you tell us how that’s performing by brand, what kind of penetration is that into the mix, how does it rollout and then I guess this is a question I understand the right fit program is more related to a pant fit and having the right pant fit, is there any possibility that you can build a similar marketing program into the core tops category, in particular the weakness in those knits.
Dorrit Bern
We do strategically talk a lot to our consumer about we’re the fit authority and that no one certainly understands this consumer better than we do because we live with, we have 75 million of these ladies that we have their names and their purchasing habits and we’ve measured them and talked to them and we see them.
The top area probably not because we don’t have the issue of shape that you do in the bottom area. And as we’ve rolled out right fit, we’re not, it’s been as you know very successful at Lane Bryant and you would say even with these difficult sales trends, it’s hard to believe that you’ve got a major program that’s been successful but it is.
We’re not moving right fit into the wear to work classification at Lane Bryant as well as Catherines. And then the Bug for fall gets right fit in casual. So it’s been a great business, it’s a great business for us but overall we’re calling oursel0ves the experts, the fit authority. But in the top area we really can’t translate it instead of just having a great quality top that fits here.
Tom Filandro - SIG
Would those right fit categories, did they comp positive similar to the intimate apparel and how big are they? What penetration of the overall mix is right fit currently?
Eric Specter
Let me just give you the most significant opportunity is at Lane Bryant and the reason for that and we’ve talked about this in the past, Lane Bryant is a market leader in the Venezia denim private label program across the stores.
Denim in the Lane Bryant stores, again not necessarily by quarter, but overall 10-11% business and the right fit program which impacts the most significant assortment within denim because it covers all the core categories of washes, of our program whether it’s the boot cut flair, that core program could be 60-65% of the denim business.
So that’s where it’s most pronounced. Now we are seeing success as we not roll that program from core denim into the core wear to work pant program at Lane Bryant. That has only been, we started rolling that at the tail end of the fourth quarter and we have now started building those inventories in the first quarter and we are seeing very similar response to those core pant programs in wear to work which again is a very significant business for Lane Bryant.
It’s not quite where denim is at 11% of their business but again what we’re trying to do is attract that customer in and not only are they paying regular price, we’re getting a higher average dollar sale for this program. You’re winning them over as a customer and what we’re ultimately looking to do is have them be buying other products, tops and intimate apparel in the stores.
So it has been a very successful program, it has been absolutely fantastic on the web where we are doing a lot of marketing of this program and it does give us a, we are a differentiator as opposed to our competition with this.
Dorrit Bern
And what we have done with, off the top of my head, I’m pretty sure we’ve sold about 600,000 units season to date and we as Eric said moved it over to, we’ve got it in the Lafayette wear to work but we also for the first time have tried it in capris, so we’re seeing how it now translates into different lengths, different length stories, so we don’t know yet.
The capris have just come in but we are now testing both in capris in Lane Bryant as well as Catherines. So we’ll know more probably in the next five or six weeks how it translates out of denim and wear to work into a different length.
Tom Filandro - SIG
I know the process is underway for the closing of these 150 underperforming stores and I think you highlighted a few handful are already closed.
I’m just kind of curious, what if any impact, do the stores that are being closed, do the landlords know which stores are being closed at this point and what if any impact is it having on lease negotiations, either obviously not just the stores that you’re closing but outside of that I would think it would have an impact to some degree. And if you could, could you just tell us, in your strip centers what the average rents currently look like?
Eric Specter
In terms of giving an update on the store closing program, we did start that program and closed 23 stores first quarter. We are well underway with our negotiations with the landlords to complete as we reported back in February, to complete that store closing program by the end of the fiscal year.
To answer the couple questions at the front end Tom, the strategy is up front for a lot of reasons in terms of our negotiation is not to go out and select, let each landlord know which store is to be closed. We obviously want to make sure the store personnel who run the stores, a going concern store and until such time that you need to start going into a closing mode, you don’t want to alert the stores.
But you also don’t want to lose your negotiating leverage with landlords. So we have been very successful, we will close these stores within the restructuring charge that we had announced back in January, that is a percentage of the overall lease liability which is very low due to our lease structure and yes the answer is, yes it is benefitting us as landlords are making inbound calls to us that helps us to address some of the ongoing stores.
And we are finally seeing some benefit to this slowing economy is for the first time in years we’re starting to see not quite what’s going on in the residential real estate market, but it is translating into the commercial real estate market as rents are starting to soften both as we renegotiate current leases as well as for the few stores we are opening, we’re finally seeing an abatement of those escalating rents that we have seen in the past, for the entire decade.
Tom Filandro - SIG
And the average strip rents, what are they currently running at?
Eric Specter
It varies by business, because again, if I look at our most efficient cost structure is in our Fashion Bug operation. Again, for the benefit of everybody on the call, the Fashion Bug stores tend to be in more rural, suburban markets, not necessarily the suburban markets, the top, although we do have representation in the top end of that space, a substantial amount of the store base is in rural suburban areas where we are in a 2-300,000 foot center anchored by one of the mass discounters, Wal-Mart, Target, with a food market typically in the center.
And all in, our Fashion Bug occupancy structure is in there and this is rents and the extras at about $10-$11 a square foot. Now that’s not necessarily representative of what new strip center leases would run in the current, even with the current environment, we’re seeing a slowdown in the rate of increase. The new rents could be in the mid to mid to high teens.
Tom Filandro - SIG
Can you fast forward fall season, obviously you’re cutting inventory but you still are talking about the fashion, she wants newness, that’s what she’s looking for. Can you give us a sense of how we should look at the brands in terms of newness for fall? You guys are continuing to try to fix this and maximize what you can as traffic declines, what are you putting into those stores that will be new this year versus a year ago?
Dorrit Bern
We’re working hard at two things. First and foremost we’re spending a lot of time on the file. And we’re sitting down and segmenting the customer to understand what kind of customer she is. Is she a clearance customer, well if she is we’re not going to even bother to talk to her until clearance times of the year.
Does she have a wear to work, a career focus, does she have a casual focus, is she an extended size customer, is she a plus size customer, is she a bridge customer, 14, 16 customer. So we’re laying out our customers.
And then we’re saying, okay, we have a very strong point of view this year for example in wear to work in suiting, more structured apparel, more jackets are going to be an important, continue to be an important classification and then we’re putting together direct mail pieces in a much more targeted way than we ever have before to really talk to that customer about that specific need, look and item that she wants so that we can spend our marketing dollars better.
We are much more targeted in terms of our offers kind of going back to what Holly and Liz had asked, not giving away the farm but really address what her needs are. And it’ll continue to be intimate apparel, again another strong classification, sleepwear is holding up very well.
Wear to work, suiting, jackets, right fit for the Bug will be a new launch. But right fit in all the brands will be important and then we’re having some fun for example with the junior plus launch called the Scene which has been tested in a couple hundred stores that’ll be rolled out to over 500 stores for the fall.
So still a lot of newness and a lot of fun but we’re really watching those inventories and really making sure that we don’t give away the item that we could actually get full price for.
Tom Filandro - SIG
Similar to the rents, you guys are cutting inventories, many specialty retailers are cutting inventories, has that had any impact on unit costing at all?
Eric Specter
Not with our scale Tom. The scale we have and the benefits we have with having our direct sourcing organization based in Hong Kong, the scale across the retail brands is significant to not have. That volume differential is not at all impacting costing.
Operator
Your next question comes from [Margot Murtoch] – Schneider Capital.
[Margot Murtoch] – Schneider Capital
Could you review the cost savings that you’re looking at for this year and I guess you’re saying that very little was recognized in the first quarter, so I just wanted to verify that.
Eric Specter
Yes, that’s correct. If I go back to our previously and again we’re executing on all those initiatives on the timeframes that we had outline. There are three really significant components that will impact our expense structure going forward. On an annualized basis, that number is in the $28 million on a pretax basis.
And it’s coming really from three components, the benefits we’re getting from the closing of our Memphis facility and the fact that we have gotten synergies, we obviously don’t have the same number of associated that we had down there to support a standalone business, you don’t have all the occupancy and facility expenses and so on.
So there’s a fair amount of the $28 million that’s made up now and as I mentioned we really didn’t see the benefits of that in the first quarter since we only closed the facility at the tail end of the quarter. So that will benefit us going forward.
The elimination of approximately 13% of our corporate and field management staff, that started to trickle in, we made that announcement at the end of January, that started to benefit us in the first quarter, it’ll be more significant as we move through the rest of the year.
And then the benefit of the closed store program which again when we reported that on February 5, we mentioned the fact that those stores that we are closing are losing on an EBIT basis and therefore will benefit the operating cost structure and earnings of the company.
So on an annualized basis, the number will obviously not be realized fully in this fiscal year until all those initiatives are complete, but we will start to see that, a proportionate amount of those savings start to run through the P&L as we move through the second quarter and it will accelerate as we get into the fourth quarter.
[Margot Murtoch] – Schneider Capital
Okay, so very little was realized in the first quarter?
Eric Specter
Yes, that is correct on those specific initiatives.
[Margot Murtoch] – Schneider Capital
And are you also looking at any real estate [inaudible].
Eric Specter
Well again, other than what we have previously announced relative to looking at refinancing our more significant real estate which is our corporate office building and our retail distribution centers, the only other item that I’ll mentioned because we haven’t really talked about it is with the closing, we did talk about it last November.
With the closing now of our Memphis facility, we do have real estate to divest both in the fact that we still have our distribution center as well as the office facility there. So that now is being actively marketed to be sold and that’s the most significant part of the real estate portfolio that would be divested from the company.
[Margot Murtoch] – Schneider Capital
And I guess now you’re breaking out the loss from catalogues, retail from catalogue operations, right? I’m wondering how much the catalogue operation lost in the first quarter.
Eric Specter
What we did, I’ll just give you what you’ll find in the release this morning where we’ve now broken out the missy apparel catalogues since they are now up for sale as a discontinued operation.
There are two components to that line item and we have disclosed it in the release that the loss from the operations piece that’s imbedded in the loss from discontinued component is $6.7 million on an after tax basis for the quarter. So you’re correct in that you have the visibility of what those business, how those businesses performed during the first quarter of the year.
[Margot Murtoch] – Schneider Capital
Any thoughts on the Lane Bryant Catalogue for the year [inaudible].
Eric Specter
Other than what I commented on, we are again very pleased with what we’re seeing in the key metric that I reported on and those again we’re seeing the kind of metrics that we need which is increasing and growth in penetration of ecommerce. The customer acquisition is going ahead of plan as well as we’re very pleased with the credit card acquisition of the Lane Bryant catalogue.
And we’ll just continue building on that. We’ve got tremendous brand equity in the Lane Bryant name and we continue to look at data mining and other opportunities to attract those former Lane Bryant customers that were Redcat’s customers prior to the trademark coming back to us to get them onto the Lane Bryant woman catalogue business. So we’ll have more to say as we progress through the year on that.
Operator
Due to our timeframe I would like to turn the call back over to management for closing comments.
Dorrit Bern
And we’d like to thank you Latonia for being a Lane Bryant customer, so thank you very much.
Gayle Coolick
And thank you all for joining us today. Eric, Steve and I will be available on the telephone to handle follow up questions and we hope you all have a great day. Take care.
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