Tween Brands Inc. F1Q08 (Qtr End 05/03/08) Earnings Call Transcript

Tween Brands Inc. (TWB)

F1Q08 Earnings Call

May 21, 2008 9:00 am ET

Executives

Robert Atkinson - Vice President, Investor Relations

Mike Rayden - Chairman and Chief Executive Officer

[Joe Hipler] - Vice President and Controller

[Eric Kirkhoff] - Vice President Finance

Analysts

Richard Jaffe – Stifel Nicolaus

Sasha Kostadinov – Shaker Investments

Tracy Kogan – Credit Suisse

John Morris – Wachovia

Dana Telsey – Telsey Advisory Group

Adrienne Tennant – Friedman, Billings Ramsey

Lorraine Maikis – Merrill Lynch

Barbara Wyckoff – Buckingham Research

Kimberly Greenberger – Citigroup

Marni Shapiro – Retail Tracker

Howard Tubin – RBC Capital Markets

Brian Tunick – JP Morgan

Linda Tsai – MKM Partners

Frank Alonso – T. Rowe Price

Presentation

Operator

(Operator Instructions) Welcome to the Tween Brands First Quarter Earnings Conference Call and Webcast. It is now my pleasure to introduce your host Mr. Robert Atkinson, Vice President of Investor Relations for Tween Brands.

Robert Atkinson

With me this morning are Mike Rayden, Chairman and Chief Executive Officer, [Joe Hipler], Vice President and Controller and [Eric Kirkhoff], Vice President Finance. Ken Stevens’ father passed away and he is unable to be on this call.

Earlier this morning we issued a press release, a company income statement for the three months ended May 3^rd, balance sheets, as well as other financial and store operating information. Copies of the release are available at our corporate website TweenBrands.com. Before I begin the review of the quarterly results please note that various remarks that we may make this morning about future expectations, plans, and prospects for the company constitute forward looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors including those listed in today’s press release and in our SEC Form 10-K. With that I’ll begin our review of the operating results for the quarter.

Tween Brands net sales for the first quarter 2008 increased 13% to $251.7 million compared to $223.2 million for the 2007 period. This increase is largely attributable to the increase in the number of Justice Stores partially offset by a 1% decrease in comparable store sales. The 1% decrease in quarterly comparable store sales came from a 22% increase for the 184 Justice stores and their comp base and a 7% decrease for Limited Too stores.

Although we don’t provide month to month detail on comps it can be noted that Limited Too’s comp trend was consistent across all three months while Justice saw an acceleration in comp performance in April compared to the February, March period. Justice store sales in April benefited from a spring sale mini catazine mailing in week two, an incremental book for 2008.

Examining sales on a regional basis Justice saw relative consistent performance across their region with the Pacific region below company average. I mention this because while all Limited Too regions experienced negative comps their specific region showed a low teen negative comp. Looking at quality of sale for Justice on a comp store basis transactions were up 34%. Justice’s small dollar transaction, those under $20 increased 33% quarter over quarter while their transactions over $50 were up 9%.

Justice’s stores average unit retail was down 7%, units per transaction were down 2% netting a 9% decrease in average dollar sales. For Limited Too on a comp store basis transactions were up 10%, their small dollar transactions were up nearly 31% while transactions above $50 were down 11%. Limited Too’s average unit retail was down 12%. Units per transaction were down 4% resulting in a 16% decrease in average dollar sale.

Justice’s best performing merchandise categories were lifestyles, cotton sewn casual tops and swimwear. Active bottoms and tops were below plan. At Limited Too all of the branded apparel categories experienced average store sale decreases. Lifestyles and licensed accessories and apparel had increases. That completes my look at sales in the various sales metrics.

Moving down the statement of operations gross income as a percent of sales decreased 360 basis points reflecting a higher mark down rate at Limited Too along with the inability to de-leverage occupancy costs given a negative seven comp against a flat comp from a year ago. Expenses connected with store operating, general and administration as a percent of sales de-leveraged 110 basis points, principally as a result of Limited Too’s de-leverage in its stores payroll and related expenses given the negative seven comp.

Net interest expense for the first quarter 2008 was $1.8 million versus net interest income of $1 million in the prior year. Last September we incurred $175 million in debt to finance the accelerated share repurchase program and additional share buy back during the third quarter 2007. Tween Brands effective tax rate for the latest quarter was 35.8%, 120 basis points higher than first quarter 2007. The 2007 rate benefited from favorable tax settlements concluded during that quarter along with higher tax exempt investment income.

Earnings per diluted share were $0.17 including a $0.04 charge for the executive separation cost recognized in the quarter. Weighted average shares outstanding on a diluted basis were 21% lower for the 2008 quarter largely as a result of our aggressive share repurchase during 2007. That completes my review of income statement and brief mention of inventories.

Tween Brands total balance sheet inventory at the end of the first quarter was down 11% on a per square foot basis at cost compared to 2007. In store inventory was down 15% per square foot a cost in line with the target provided in February.

Turning to real estate growth Justice opened 21 new stores during the quarter ending the period at 281 stores an increase of 97 stores from the end of first quarter 2007. Limited Too opened seven stores during the first quarter remodeled four and closed three ending the quarter at 586. Tween Brands total square footage at quarter end was 3,621,000 square feet or 15% more than quarter end 2007.

With that I’ll turn it over to Mike for his comments on our first quarter results and outlook on second quarter.

Mike Rayden

It’s clear that we failed to deliver on the first quarter results that we had expected in our February earnings release and call. More specifically we failed to deliver the top line and bottom line results at Limited Too. While poor early spring weather and a sluggish economy could serve at a convenient excuses Justice faced the same weather and economy and delivered stellar results.

In our April pre-release I said that we failed to deliver the right colors within Limited Too’s sportswear assortment. That failure was exacerbated the fact that we missed on color it goes across multiple categories within our casual as well as active assortments. It impairs our outfitting strategy whereby we guide tweens and their Moms in putting color coordinated tops and bottoms together.

If there’s one consolation here we did identify this problem early on and were able to make organizational as well as merchandise changes in order to mitigate the impact on the quarter and spring season. What were those changes? First, in February we appointed Lece Lohr as EVP and interim general manager of Limited Too.

Prior to that she had been working with Limited Too’s design group. Lece rejoined the company last July having been with Limited Too from ’98 to 2004. During those six years she had positions of increasing responsibility for merchandising Limited Too sportswear and was intimately involved in product development from concept to stores.

What Lece and her Limited Too team were able to do was introduce a more colorful assortment with Limited Too’s summer one floor set beginning March 24^th. The theme in the windows for that floor set was coincidentally color and the cover of the summer one catazine that dropped March 31^st also carries the theme in love with color.

As we said on April 10^th we saw an improvement in Limited Too’s business with this new floor set and that improvement continued throughout April. Beyond near term Lece and her team have reintroduced the product development process at Limited Too something that candidly we had drifted away from. Did I fail to detect that departure from our proven process? Absolutely. I make no excuses here but I believe that Lece has put the brand back on track and that the improvements are already being reflected in Limited Too’s business.

Look at the current quarter our outlook remains appropriately cautious. This is a time of year when Mom’s are looking for value in tweens clothes and this summer probably more than ever. Both of our brands begin their scheduled summer sales tomorrow in advance of the Memorial Day weekend. Our second quarter is always our smallest earnings quarter and in many respects the most difficult to forecast.

That said we currently expect second quarter 2008 to be in the range of break even to earnings per share of $0.04 compared to the $0.07 we reported for the like quarter last year. This range is based on these assumptions; a net sales percentage increase in the mid teens primarily as a result of the addition of 100 Justice stores from second quarter 2007.

A comparable store sales percentage increase for Tween Brands in the mid single digits comparable store sales for Limited Too are expected to be flat while Justice stores are expected to deliver a comparable store sales percentage increase in the mid to high teens. Gross income as a percent of sales flat with second quarter 2007. Store operating, general and administrative expenses as a percentage of sales up slightly to last year.

Operating income as a percentage of sales down slightly from first quarter 2007. Interest expense of approximately $1.8 million compared to the interest income of $600,000 for the second quarter of 2007. Beyond these specific assumptions it is also our plan to control inventories, refine our direct and in store marketing, enhance the customers experience in stores and online and strive to provide her the hottest fashion in the right quantities when she’s ready to buy.

With that I’ll turn it back to Bob to introduce the Q&A.

Robert Atkinson

I would ask that each questioner limit themselves to one question and one follow on the first go round. You will be placed in listen only mode after your follow up in this way we will have a better chance in getting to each questioner in the time allotted. You are welcome to get back in queue in the same way you did originally.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Jaffe – Stifel Nicolaus.

Richard Jaffe – Stifel Nicolaus

A question about the Limited Too business and the change you saw in April. How impactful was Lece, how much of the product was she able to touch to have impact in terms of switching color assortment and how should we view her impact May, June, July going forward, when will it be 100% hers, she’s only been on board four months now.

Mike Rayden

Lece’s first real line that she’s had the most impact on will be our back to school lines setting on July 23^rd. Even though Lece joined the company last July she really only joined the Limited Too design team in the November, December period. At that point we were able to effect styles, flow etc. but surely not the major assortments. As the seasons progress beyond March she’s had more and more impact on it but her first full season really is July 23^rd and we are sort of back to what we historically have been successful doing in relation to color and surely the process has improved greatly.

Operator

Your next question comes from Sasha Kostadinov – Shaker Investments.

Sasha Kostadinov – Shaker Investments

You guys have taken a pretty good amount of working capital out of the business and I’m wondering how much further that could continue with the cash flow from operations were in the quarter?

Mike Rayden

At this point we have taken working capital out to give it to our shareholders which we think was the right move in the period that we did it last year. In the current environment we constantly are looking at the same opportunities but at this point we have no real major plans to continue to take big chunks of working capital out as opposed to fueling our store growth.

Sasha Kostadinov – Shaker Investments

I guess I meant mainly in terms of the declines in inventory that we’re seeing per square foot.

Mike Rayden

That’s going to continue if you’re talking about inventory. Clearly we are playing our inventory extremely cautiously especially in Limited Too on the apparel side waiting to see the whites of their eyes. Justice we are also cautious but obviously there with our positive comp store increases and average store increases we are increasing inventory slightly but the overall mix will have our inventory down.

Sasha Kostadinov – Shaker Investments

What was the cash flow from operations in the quarter?

Mike Rayden

We don’t have that handy; you’ll have to follow up with Bob.

Robert Atkinson

For the benefit of the rest of the audience the cash flow statement is not included in today’s financial statements. We do file that with the 10-Q so we’ll have to defer response to that question until that time.

Operator

Your next question comes from Tracy Kogan – Credit Suisse.

Tracy Kogan – Credit Suisse

Could you guys break down the gross margin decline between the occupancy de-leverage and the increase in markdowns and then could you also tell us a little bit about the license business in the Middle East how much did that add in ’07 and what do you think the potential for that business is going forward?

Mike Rayden

On the margin side of the business you really need to look at the tale of two cities here pretty much. There was wonderful occupancy leveraging in the Justice business and was wonderful payroll leveraging, stores payroll in the Justice business and a slight increase in markdowns versus last year with a slight increase in IMU.

On the Limited Too side IMU was basically flat up slightly. Markdowns were a major negative. On the de-leverage side we lost on occupancy 200 some odd basis points and stores payroll lost something like 170 basis points.

Robert Atkinson

Regarding the Middle East stores I think we can all agree that that’s not really material to our business at this point. For the benefit of the rest of the audience these are franchise arrangements we share with our partner Alshaya out of Kuwait and we’ve just started a similar franchise arrangement in Scandinavia.

Operator

Your next question comes from John Morris – Wachovia.

John Morris – Wachovia

On the Too Bucks double promo that you did clearly that did what you wanted it to do in April, in terms of redemption. I’m wondering what your thoughts are in terms of employing that on a go forward basis could that be part of your regular arsenal or would it be something that you just go to occasionally and broaden that out to maybe discuss any other initiatives that are new that you’re planning from a strategic marketing standpoint. Quick second question is tax rebate checks are you all seeing any benefit from some of the tax rebate or marketing to that?

Mike Rayden

We got the results that we wanted out of the Too Bucks double distribution and just to remind everybody it really is a pay to play game. It really doesn’t cost us anything to distribute Double Too Bucks because they must redeem still $50 after the discount when them can’t come back in order to get that opportunity.

I don’t want to discuss fall’s marketing plans in specifics for either brand but leave it to say that we have ramped up both brands in a very major way for the back to school and holiday season in what we think is appropriate for the environment and appropriate for both brands. Rather than reveal it I think you’ll see an incredibly much stronger marking both point of sale and direct than we’ve done before.

Rebates, who can tell.

Operator

Your next question comes from Dana Telsey – Telsey Advisory Group.

Dana Telsey – Telsey Advisory Group

Can you talk a little bit about the impact of the lifestyle products what it had on the gross margin and also drivers of strength in Justice what are you seeing there product wise that’s leading to the strength there and product plans for go forward. On the expense reduction how much of an impact did the restructuring program have on the expense reduction?

[Eric Kirkhoff]

It was in line with our expectations about $700,000 to $800,000 primarily to payroll.

Mike Rayden

The balance of that we’ll start to pick up in the second, third, and fourth quarters and we can go over that offline.

On the lifestyle product in both businesses predominantly dominated by the Webkinz performance and the promotions we’ve had there. That business grew almost 10 percentage points of penetration. The percentage of apparel business in both brands is about the same one compared to the other but that 10 points of growth in the Webkinz sort of area, web based products and some license products basically was the difference in that mix of apparel versus non-apparel.

We’ve seen no abatement in the Webkinz performance either at regular price or promotional price and are currently planning to utilize that aspect of hottest fashion you can see to drive traffic into the stores to get the opportunity to convert them to apparel. Even after the promotions in the slower period now that business is robust and our partner at Webkinz continues to devise new and interesting products and new areas that seems to continue to push that growth.

Lifestyles in the biggest its ever been, it did almost 15% of our business in that category, it’s not purely Webkinz but we’ve never done anywhere near that kind of percentage in a first quarter versus about 5% or 6% last year. The margin on that is outstanding, it’s a lower IMU in the businesses in Limited Too it’s a lower IMU than its apparel portion greater than it is in Justice but since there’s zero markdowns the MMU on that product is outstanding both promotionally and at regular price.

Dana Telsey – Telsey Advisory Group

On Justice, in terms of product assortment there, the drivers?

Mike Rayden

They’ve had an excellent season in what I would call core basics. Justice has always been a business that has had a much greater strength in core basics than Limited Too and in this environment we always seem to find the core basics accelerate as a percent of the total business. That has been extraordinary in that area so it’s solid tanks, solid tees, our core promotional shorts, etc. Justice was in a much stronger inventory position in those categories and has always been price appreciably sharper there.

We are seeing the same sort of trend towards core basics away from fashion or at least away from anything that would be called forward fashion in both brands and are sorting the inventories we believe appropriately in Limited Too now to correlate with that as well.

Operator

Your next question comes from Adrienne Tennant – Friedman, Billings Ramsey.

Adrienne Tennant – Friedman, Billings Ramsey

My question is about the comp, this is a clarification first. You said that Limited Too was consistent at the negative seven across the three quarters but in the press release it looked like it got better to the point of maybe flat to slightly negative. If you can clarify that first.

Robert Atkinson

As we prefaced that comment as always we do not provide individual monthly comps. It’s certainly worth noting that given the Easter shift this year in particular that March was the most important month of all and I guess you could say that’s where we had our biggest disappointment at Limited Too in terms of comp sales.

Adrienne Tennant – Friedman, Billings Ramsey

My question would be if it was consistent there’s a pretty big step up in terms of trend rate to get to a flat comp for the second quarter so what would be driving that?

Mike Rayden

In second quarter in Limited Too we’re up against a negative four comp. In the first quarter of last year we were up against a flat comp and the way the marketing falls which we haven’t mentioned very much Limited Too was unable with the earlier Easter to repeat the same amount of catazine offerings that we had last year and we were forced to actually drop catazine. The good news in the second quarter is that Limited Too was able to pick up the catazine and a half.

Part of the rationale for the improvement in comps in the second quarter is an increase in catazines one and a half equivalent books where in the first quarter we actually dropped a book. That’s the predominate change in trends is marketing, the merchandise is also performing much better with the color and the weather, even though its not what we would love it to be everywhere it is more seasonably appropriate than it was in February and March when there was no reason to buy.

Adrienne Tennant – Friedman, Billings Ramsey

Do you have a non-apparel comp for the quarter?

Mike Rayden

Non-apparel comps in both businesses were up big numbers. Almost 10 percentage points in both businesses on the non-apparel side, non-apparel was up somewhere at Limited Too in the 40% comp store range and in Justice even higher.

Operator

Your next question comes from Lorraine Maikis – Merrill Lynch.

Lorraine Maikis – Merrill Lynch

A question on gross margin and your expectation that they flatten out in the second quarter, can you comment specifically on what’s driving that obviously a big sequential increase. What are the factors that give you confidence that things will get materially better there?

Robert Atkinson

The gross margin in the second quarter is greatly affected by Limited Too. We had a difficult markdown second quarter last year and with our inventories in the Limited Too brand running down greater than what we mentioned as a negative 15 for the total company in store we don’t have the inventories to spend on carry over markdowns.

I think the fact that we have such a clean inventory is going to change the shift of markdowns in essence the distortion went to the first quarter as opposed to the second quarter last year and since that’s such a large portion of our business and a major factor in the gross margin. With a relatively flat comp instead of a negative seven comp we also have externally reported gross margin looking better on the occupancy line as well.

Justice we expect to sort of remain relatively constant they had a good first quarter, as a matter of fact their merchandise margin was higher than Limited Too, we don’t expect it to be higher than Limited Too in the second quarter but its predominantly due to incredibly good inventory control and not having the inventory to take the markdowns on this year.

Operator

Your next question comes from Barbara Wyckoff – Buckingham Research.

Barbara Wyckoff – Buckingham Research

Are there just too many Limited Too stores, you’re still opening a few and there are some closings but it occurred to me that this division has been stagnant for a while and could you give us a qualitative sense of the four wall operating margins of a mature Justice store versus a Limited Too store.

Mike Rayden

I can give you a general relationship for the first quarter the Justice stores had for the first time a couple hundred basis points better performance on four wall contribution than Limited Too. The average volume per stores on a comp store was 184 stores in Justice versus the 550 in Limited Too. Limited Too’s average store volume on that bigger base is slightly higher. Their sales per square foot are slightly higher but overall due to the occupancy rate off mall versus mall you’ll find the four wall contribution is better.

I think we’ve been predicting that all along and I actually see it continuing to grow in relation to Limited Too. However, Limited Too is still in the mid 20% four wall contribution we’re still pleased with that and as leases come due we’re planning to continue to shut down underperforming stores and at this point we’re only opening a handful of Limited Too stores in what we believe to be the best real estate available. We are remodeling our best stores which in essence keeps the business flowing.

Barbara Wyckoff – Buckingham Research

Do you see any opportunity in accessories since clothes has gone away from the fashion accessory business back to the basics?

Mike Rayden

We’d love to say the accessory business is a big opportunity here. In our business even with our high average household incomes there’s still a limited amount of disposable income with everything else going on. Mom is getting the ability to satisfy her daughter with a Webkinz today which gives her not only the instant gratification of a stuffed animal but the play aspects on the web with the codes etc. I think she’s moving in that direction today as opposed to buying the other accessory categories to the degree that we might see.

Operator

Your next question comes from Kimberly Greenberger – Citigroup.

Kimberly Greenberger – Citigroup

We’re trying to get comfortable with your second quarter guidance from a comp perspective can you comment on whether or not so far here in the second quarter you’re running in line with your plan?

Robert Atkinson

I think we can confirm that we are performing in line with the plan that we outlined in Mike’s presentation.

Kimberly Greenberger – Citigroup

On second quarter gross margin you’re looking for a flat gross margin, on the mid single digit comp increase do you get occupancy leverage at that point? Clearly you’re getting occupancy leverage out of Justice but I would guess that Limited Too the flat comp there would cause some pressure in occupancy can you comment divisionally as well?

Mike Rayden

We’ve had to we believe relatively flat as opposed to a de-leveraging. A big, obviously increase in Justice and obviously not the big decline in Limited Too. Limited Too still does de-leverage a little bit.

Operator

Your next question comes from Marni Shapiro – Retail Tracker.

Marni Shapiro – Retail Tracker

If you could talk a little bit about Limited Too in comparison to Justice and I guess if you could take us back a step or two as to how or where you think you got off track at Limited Too. When you think about Limited Too in the setting of the competition out there JC Penney and Kohl’s Department Stores really were no where this season in their tween assortment.

When you look forward you commented that Justice was doing better with basics as was Limited Too you said Limited Too was getting back to its heritage which to me seems very similar to where Justice is today. Competitively how do you keep those brands separate thinking about where you went wrong on Limited Too in the first place.

Mike Rayden

I think there’s a lot of things going on we don’t share market data. Look at the NTD information Tween Brands grew market share in the first quarter very nicely and it was against Kohl’s and Penney’s, Macy’s, etc. As difficult as the business was we only had a negative one comp but we had a 13% overall increase. The data that I got from NTD was that the first quarter tween apparel business was down about 10%. Growing 13% and then going down 10% we actually gained share of market in a very difficult marketplace.

I think what’s happening right now which is becoming pretty evident to me is that the customer is trading down. I think that Justice is clearly starting to get the benefit of that trading down. As you can see the transactions at Limited Too in the low dollar transactions even if you looked at under $50 instead of under $20 are actually way up, it’s the transactions over $100. Transactions in Justice over $100 are up and with that same $100 our customer gets a lot more merchandise in their hands and in the shopping bag at Justice than they do at Limited Too.

I think that this entire trading down is what’s effecting clearly the mass market guys as well. I don’t think its permanent, I don’t think its permanently disabling but we’ve got a differentiate ourselves on the fashion merchandise and how those assortments come together at Limited Too and the merchandise at its price point must be a little more special than it is at Justice in order to make it relevant.

Marni Shapiro – Retail Tracker

Do you feel the guard rails are in place today?

Mike Rayden

I think that the merchandise is looking quite different, even though much more on trend. We are doing less goods in Limited Too, we started to get a little bit off track with using some market goods in our cut and sewn area that we have cut that drastically and going back to internal design for a greater proportion so that the line looks more cohesive.

We’ve added in styles and choices in order to make a more cohesive presentation. I believe we’ve improved our marketing as we move forward in Limited Too so I think the apparel business in Justice even though its running ahead on a comp store basis honestly is not as robust as we would like it either even though business overall is performing very well.

I think we’re in a tough apparel cycle, no compelling new trends at this point. We’re hoping casual bottoms come back for back to school. Skinny leg denim has been selling all spring which is an unusual phenomenon after you get out of the January, February period. We think that might help the business a little bit and we’ll see.

Operator

Your next question comes from Howard Tubin – RBC Capital Markets.

Howard Tubin – RBC Capital Markets

Can you talk just a little bit about anything new you’re seeing in the non-apparel or licensed categories for fall? Do you think Webkinz and Hannah Montana will still be strong or do you see anything new emerging in that category?

Mike Rayden

You’re asking about what successful in there?

Howard Tubin – RBC Capital Markets

What’s successful now, what you see, do you see that success continuing for fall?

Mike Rayden

Webkinz has become a huge part of our non-apparel business and they have done a great job and they have truly found something that resonates with our girl as well as young boys believe it or not. His program today is constantly an introduction of new animals and new plush on a monthly basis. There’s about six or seven new releases every month. He also offers animals of the month on his website and those always rise to the surface.

Without me sharing any of his future plans I do know that he’s a smart guy and they’re an excellent company and they continue to innovate. There will be new things on his website and there will be a whole new category for the kids to continue to build their collections and I don’t see any drop off in that business. We track it every week and as an individual category in both brands and it continues to be extremely robust.

It is really a very reasonable way financially for Mom to satisfy the Mom’s greatest need which is the happiness of her daughter. The girls are quite happy to get these and it’s become a phenomenon collection as well as this whole virtual social network that Webkinz has become as they say they’ve got something like 12 million unique visitors each month and that continues actually to grow.

I see it continuing actually all the way through the balance of the year with new introductions and if you follow us at all we’ve been very fortunate to have some wonderful promotions that were afforded us with Webkinz and they’ll be some new promotions moving forward in back to school and in the pre-holiday period as well in both brands.

Operator

Your next question comes from Brian Tunick – JP Morgan.

Brian Tunick – JP Morgan

Over the past couple of quarters you guys seem to have really tough time hitting initial guidance that you’ve laid out. I was wondering with the new CFO announcement yesterday maybe just share with us maybe some new thoughts of how you and the new CFO are going to work together maybe to put out guidance that’s achievable and then the second question maybe talk about how Justice’s new store productivity might be trending and what you’re seeing from real estate developers out there in some of the newer strip centers.

Mike Rayden

On the development front ICST is going on right now in Las Vegas. Deals have been easier to negotiate to somewhat better terms however the amount of new developments off mall and mall has greatly decreased. The opportunities in new real estate have slowed down. What will pick up in the real estate area is with store closures such as Linens-N-Things maybe Borders on the edge of bankruptcy etc. That would be more having gone out there is more real estate that exists that is becoming available.

Less new developments and more opportunity within existing real estate and slightly better opportunity on turns of the deals. Justice’s new store productivity has been outstanding. It continues to improve along with the name recognition now that we’re up to something like 280 some odd stores and along with the increased marketing and the word of mouth of that brand.

New store productivity at Justice is excellent and by the way the new store productivity at Limited Too both last year and this year albeit there aren’t a lot of new stores we opened 20 some odd last year in Limited Too have also been very good. It’s not the new stores in either brand that have been the issue the issue in occupancy in Limited Too has been the remodels where we’re getting increases but not increases large enough to offset the rent that has changed in the last 10 years to get them to market rate.

We are looking at Limited Too real estate very cautiously, we are looking at it in a very conservative basis and not trying to force that brand to grow at all, we’re happy to let it grow and take on this square footage growth with Justice at this point. I don’t know if I’ve answered all your questions.

Brian Tunick – JP Morgan

That was about the Justice now as far as how you’re going to be working with the new CFO to give guidance that’s achievable. You guided here this second quarter above the street and you said it’s a hard quarter to predict. Could you talk about how you think about giving guidance and how you might work with the new CFO?

Mike Rayden

The new CFO hasn’t started yet so on a series of interviews we had surely gone after experience. We’ve gone after someone who has done this job before in big companies and understands how to deal with the forecasting. I think his experience is going to make us maybe look a little deeper and be a little more cautious on where we’re going here. Clearly we’re not giving guidance beyond second quarter. The market is incredibly difficult to understand what’s going to happen. We’d like to see the whites of the eyes.

We try to give the best guidance possible based on the information that we have on hand at the time we give the guidance. When we gave first quarter guidance we were in the first two weeks of February and did not understand what was going to happen with the weather and how the gas prices etc. and whatever else was happening was going to accelerate that. The second quarter we’ve looked at it every which way from Sunday, we’ve giving a fair view of where we really think it will be and hopefully that’s what will happen.

Operator

Your next question comes from Linda Tsai – MKM Partners.

Linda Tsai – MKM Partners

Could you give us an update on direct sourcing initiatives if that helped the IMU during the quarter and could we see any benefit for the rest of the year? Are you still expecting square footage growth of 11% to 12% for 2008? What was the breakdown of geographical performance for the two concepts?

Mike Rayden

On the direct sourcing we continue to grow that as a portion of our business and continue to develop some internal profitability based on the way we load and charge our internal brands vis-à-vis the way an agent would do it for us. It continues to grow and actually that income grew somewhere in the 50% to 70% range in the first quarter. Its penetration of the total business has accelerated and we expect it to continue to. A major reason for that is the dilemma with mass because part of Limited and that business being in limbo with our relationships with Li Fung continue to grow and we’re very excited about that partnership.

Robert Atkinson

In terms of regional performance you may have joined us late but as part of my script I indicated that Limited Too had negative comps in each of its regions with the Pacific region notably more negative than the balance of company. At Justice there was very little standard deviation among the comp performance in their regions with the slight exception of their Pacific region but still a mid teen positive comp for Justice in that region.

Linda Tsai – MKM Partners

Then square footage growth is that still the same from what you articulated on your last call?

Robert Atkinson

Absolutely, we’re still looking at 90 to 100 Justice Stores and that’s really going to be the key square footage driver for us.

Operator

Your next question comes from Adrienne Tennant – Friedman, Billings Ramsey.

Adrienne Tennant – Friedman, Billings Ramsey

When we look into the back half, I know you haven’t talked it. Where should we be thinking about this cost production effort in terms of SG&A break even?

Robert Atkinson

We really can’t provide that kind of specific metric because I think that comes up to the line of looking at guidance for the back half of the year which we obviously have not provided.

Adrienne Tennant – Friedman, Billings Ramsey

My other question is the one and a half incremental catazines for Limited Too when are they dropping?

Mike Rayden

They’re dropping the second quarter. The one for Memorial Day sale event is the biggest one of that group and that is dropping this week. We did not do a mini last year for Limited Too during the Memorial Day period we did do one for Justice. Justice’s was incredibly successful and Limited Too is dropping that this week at 2.5 million circulation and there was a half plus one that overlapped between April and May that sort of the half one that I mentioned appeared in both quarters.

Operator

Your next question comes from Kimberly Greenberger – Citigroup.

Kimberly Greenberger – Citigroup

Why not consider a more aggressive store closing plan for the Limited Too division and get that chain down to maybe a 400 or 450 store size instead of its current size?

Mike Rayden

First of all, we are actually quite positive on a four wall profit basis on the vast majority of our stores. I don’t think that closing 180 stores where the vast majority of those are extremely profitable makes a lot of sense. I think it’s a gradual process I don’t think we have 100 stores as other people have decided they need to shut. That’s just not where our store base is. They’re still highly profitable and Limited Too is still in the mid 20s on four wall contributions. It’d be greatly difficult to find 180 stores to shut to get to 400 and I’m not sure if it would do us any benefit.

Kimberly Greenberger – Citigroup

I hear all of your points but it’s possible that you’re spreading a somewhat fixed sales revenue base over too many stores and that the existing profitability of whatever 400 or 450 stores might be left could be greatly enhanced by consolidating that revenue in fewer stores and lower costs.

Mike Rayden

That’s assuming that you get the revergent for it but I don’t find that my competitors who are Kohl’s and Penney’s even though they’re slowing down store growth are not continuing to rollout stores. I don’t just cannibalize and compete against myself I compete against Old Navy, Kohl’s, Penney’s, Target and Wal-Mart. That’s where the share of market is but I think right now the name of this game is growing my top line and my share of market.

The stores are profitable and I like having a 13% sales increase when between apparel market in the first quarter is down 10%. Those competitors are not winning in this pace. They may be having positive comps in food and other categories but they’re not gaining share of market against us in this marketplace and I think when this thing and this bubble changes even if Limited Too is a slightly smaller business I don’t think it will ever be 400 stores.

I think it’s a much better way to let Justice continue to evolve, see how this cannibalization goes and even with some difficult business its really the first quarter that Limited Too has been down in probably three years of this magnitude where its been up 3%, down 1% or flat so its showing that we can actually do both businesses. We’ve got to figure out how to control of this occupancy issue on the remodels more than on closing many more stores.

Operator

Your next question comes from Frank Alonso – T. Rowe Price.

Frank Alonso – T. Rowe Price

Assuming that you hit the profit projections you’ve put out there for the second quarter can you just comment on what the incentive compensation payout factor would be for senior management for the first half? I know you guys pay bonuses I think twice a year.

Mike Rayden

I would say it doesn’t matter what happens in the second quarter based on what happened in the first quarter we will not see incentive compensation payout to any of us.

Operator

There are no further questions at this time I will turn the conference back to management for closing comments.

Robert Atkinson

Thanks to everyone for participating in this call today. It’s worth noting that we expect to report our second quarter 2008 operating results on Wednesday morning August 20^th. We all appreciate your participation on this call and webcast and you’re continued interest in Tween Brands. Have a good day.

Operator

This concludes today’s teleconference you may disconnect your lines at this time. Thank you all for your participation.

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