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The Bon-Ton Stores, Inc. (NASDAQ:BONT)

Q1 2008 Earnings Call Transcript

May 22, 2008 10:00 am ET

Executives

Jean Fontana – IR, ICR, Inc.

Bud Bergren – President and CEO

Keith Plowman – EVP, CFO and Principal Accounting Officer

Tony Buccina – Vice Chairman and President – Merchandising, Private Brand, Planning & Allocation and Internet Marketing

Analysts

Reade Kem – Merrill Lynch

David Glick – Buckingham Research

Michael Exstein – Credit Suisse

Jason Trujillo – Lehman Brothers

Kerry McInerney – Banc of America Securities

Grant Jordan – Wachovia

Karru Martinson – Deutsche Bank

Carla Casella – JPMorgan

Robert Raiff – Centurion Investment Group

John Lahman – KDP Investment Advisors

Rishi Parekh – KBC Financial

Leah Hartman – CRT Capital

Chris Dechiario – ISI Capital

Pamela Wilson – WL Ross

Paul Lucaziski [ph] – Brownstone Asset Management

Karru Martinson – Deutsche Bank

Colleen Burns [ph] – Oppenheimer

Operator

Good morning everyone and welcome to today's Bon-Ton Stores Incorporated first quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded.

And now, I would like to turn the conference over to Jean Fontana. Please go ahead.

Jean Fontana

Thank you. Good morning and welcome to Bon-Ton's first quarter fiscal 2008 conference call. Mr. Bud Bergren, President and CEO; Mr. Tony Buccina, Vice Chairman and President, Merchandising; and Mr. Keith Plowman, Executive Vice President, Chief Financial Officer and Principal Accounting Officer will host today's call.

You may access a copy of the earnings release on the company's Web site at www.bonton.com. You may also obtain a copy of the earning's release by calling 203-682-8200.

Before we get started, I would like to remind you of the company's Safe Harbor language. The statements contained in this conference call which are not historical facts may constitute forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which is described in the company's fillings with the SEC. As a reminder, this call is being recorded, Thursday, May 22, 2008.

And at this time, I would like to turn the call over to Mr. Bud Bergren, President and CEO.

Bud Bergren

Good morning and thank you for joining us this morning. I will begin with my comments on the first quarter 2008 and my outlook for the remainder of the year. Keith will then provide details of the first quarter financial results and review the financial guidance and assumptions for the year. Tony will outline the first quarter merchandise results and discuss the merchandising initiatives. I will make closing remarks and then we will be available to address your questions.

First quarter of fiscal 2008 financial results continue to be impacted by the macroeconomic environment. Despite the softer retail environment, I am proud of how our management team executed in the first quarter. The gross margin rate increased over first quarter in 2007 and was driven by improved inventory levels as we continue to manage our inventory receipts. Through disciplined management, our comparable store inventories were 8.7% below last year's levels.

We continue to review our expenses and are pleased that during the first quarter, we reduced $4.6 million in our selling, general and administrative expenses. In addition, when comparing our performance to the first quarter of last year, our excess borrowing capacity under our credit facility increased and we reduced our debt levels.

During the first quarter, we were encouraged by significant improvement in several key merchandise categories, including Missy outerwear, better and special size sportswear, cosmetics, children's and shoes. Tony will go into more detail on this later in the call.

We opened a new furniture gallery on March 26, Orland Square in the Chicago metro area adjacent to our Carson Pirie Scott store in the Orland Mall, and the gallery is posting terrific results. E-commerce is on plan and we continue to increase our assortment offerings. Currently, our three strongest categories are soft home, hard home, and shoes.

Our fall opportunities are in direct vendor fulfillment to our customer. We will have completed the expansion of our DC fulfillment area allowing us to house additional products. Our growth in the fall will come from the combination of direct vendor fulfillment and expanded online assortment offerings.

Private brand continues to grow as evidenced by our continued penetration to total sales and an increase in sales of plus 2.7% to plan with good margin improvement. Regional results, Detroit and Buffalo were our best regions, followed by Minnesota and Chicago. Our worst performing regions were central and southeastern Pennsylvania and central Ohio. Ohio and Michigan continue to be impacted by the auto industry, but Detroit area is not. Parisian stores in our Detroit area including our new Partridge Creek location are doing very well.

Looking ahead to the remainder of 2008, as we said before, we will manage our business under the assumption that the difficult macroeconomic environment will continue. We will continue to adjust our operating plan based on what we see in the marketplace. We're making every effort to capture sales opportunities and are remaining intentionally focused on controlling inventory and expenses. We will continue to plan conservatively while still offering our customer appear exciting differentiated merchandise assortment and providing excellent customer service and maximizing market opportunities.

Now more than ever, our customer recognizes Bon-Ton as the right place for fashion at great value and they appreciate the convenience of our locations in their communities. This is the foundation of our company, our niche in the marketplace, and nobody knows this customer better than we do.

We're looking forward to the opening of our new store in Blaine Minnesota in September and our new furniture gallery in Muskegon, Michigan in July. We will have completed the remodel of our Lancaster Pennsylvania Park City store in September, and the expansion and remodel of our Okemos, Michigan store in October. We believe we have great opportunities to enhance the total shopping experience for our customers in these markets.

One of the ways we will continue to excite our existing customers and we believe attract new customers is with our new and exclusive collection from the acclaimed fashion designer Victor Alfaro. We're enthusiastic about the opportunity to increase top line growth with this partnership and we believe this distinctive styling, quality and value of this exclusive line will strengthen our position as a designation for fashionable exclusive apparel and accessories. The collection will have a broad appeal as it crosses a wide range of age groups and demographics and we will – it will be a great complement to our existing portfolio of private brand and national brands.

We are also excited about additional merchandise initiatives we have in store coming in the fall and Tony will go over that in more detail during his discussion. We remain confident that we have a solid strategic plan in place and we will benefit from our efforts once we begin to see the market improve. We will continue to look for additional opportunities to offset difficult environment as we capitalize on the benefits of our first year as a fully integrated company.

Furthermore, we believe that our efforts in merchandising and inventory management will benefit our merchandise margins. These initiatives combined with tight expenses and capital controls will maximize our earnings and cash flow potential during this challenging period and benefit us as the macro environment improves. I remain confident in management's ability to execute in the current challenging retail environment.

I would now like to turn the call over to Keith.

Keith Plowman

Thank you, Bud, and good morning everyone. I will review the income statement and balance sheet components and then update our fiscal 2008 guidance and the assumptions reflected in this guidance. Before reviewing the financial details for the quarter, I want to emphasize our strong financial position and that despite the weakness in sales, we maintained a strong balance sheet that reflects lower inventories, and going forward, we have the flexibility to invest in short and long term initiatives and opportunities to benefit and grow our business.

We have an appropriate debt structure in place and our excess borrowing capacity was $273.8 million at the end of the first quarter of fiscal 2008, an increase to the prior year level of $191.2 million for the comparable period and approximately $199 million above our covenant of $75 million, reflecting the prudent management of our inventory and capital investments, which permitted us to reduce our debt level below the prior year first quarter level.

Moving to a discussion of the first quarter fiscal 2008 financial results, the net loss for the 13-week period ended May 3, 2008 was $34.1 million or $2.03 loss per diluted share compared to a net loss of $29.3 million or $1.78 loss per diluted share for the 13-week period ended May 5, 2007. For the first quarter of fiscal 2008, comparable store sales decreased 4.6% compared to the prior-year period. Total sales for the first quarter of 2008 decreased 5.1% to $700.2 million compared to $737.6 million for the first quarter of fiscal 2007.

Other income in the first quarter of fiscal 2008 decreased slightly to $22.8 million compared to $22.9 million in the first quarter of fiscal 2007. Our gross margin dollars in the first quarter of fiscal 2008 decreased $9.1 million compared to the first quarter of fiscal 2007 reflecting the decrease in sales volume. The first quarter fiscal 2008 gross margin rate increased 0.5% to 34% of net sales compared to 33.5% in the prior year period, primarily reflecting our inventory management efforts and resultant reduced markdown impact.

SG&A expenses in the first quarter of 2008 decreased $4.6 million to $255.8 million compared to $260.3 million in the first quarter of fiscal 2007. The first quarter of fiscal 2007 expense rate – of 2008 expense rate was 36.5% compared to 35.3% for the prior year period, reflecting the reduced sales volume in fiscal 2008 compared to 2007.

EBITDA defined as net income or loss before interest, taxes, depreciation and amortization decreased $4.7 million in the first quarter of fiscal 2008 to $4.7 million compared to $9.4 million in the first quarter of fiscal 2007. EBITDA is a non-GAAP term. For a reconciliation of EBITDA to net loss, please refer to our earnings press release.

Depreciation and amortization expense, including amortization of lease related interest in the first quarter of fiscal 2008 increased $2 million to $30.2 million compared to $28.2 million in the first quarter of fiscal 2007 primarily reflecting the increased expense associated with the prior-year capital expenditures.

Interest expense net in the first quarter of fiscal 2008 decreased $3.1 million to $24.4 million compared to the first quarter of fiscal 2007. This reflects reduced borrowings and reduced interest rates.

Moving to some key ratios and balance sheet amounts, we have a strong balance sheet and we believe we will generate cash flow in 2008 to invest in our business and continue to pay down debt enabling us to achieve our objective of increasing shareholder value.

Our working capital decreased to approximately $464 million compared to $534 million last year, a reduction of 13% or $70 million. Merchandise inventories at cost decreased in excess of $50 million or 6% compared to last year, primarily reflecting the reductions in inventory and response to the macro environment. Our retail inventory for comparable stores decreased 8.7%.

Total debt to total capitalization including capital leases was 78.6% at May 3, 2008 compared to 80.6% in the prior year period. Our total debt including capital leases was $1,217.6 million at May 3, 2008 compared to $1,323.2 million at the end of the first quarter of fiscal 2007, a reduction of $105.7 million or 8%. We are committed to pay down our debt with free cash flow generated by the business and moving to achieve our long term goal of 2.5 to 3.0 times debt-to-EBITDA ratio.

We have $100 million of swaps on our fixed rate debt and funded debt was 77.4%. Our excess borrowing capacity at the end of the first quarter of fiscal 2008 was $273.8 million compared to $191.3 million at the end of the first quarter of 2007.

In the first quarter of fiscal 2008, there were approximately $15 million in letters of credit as compared to the prior year's $75 million. Book value per share was $18.69 this year vs. $18.56 in the prior year. And capital expenditures net of landlord contributions were approximately $25.5 million, which was above the prior year spending reflecting our investment in our new POS registers for the Carson stores.

Our full year revised fiscal 2008 guidance is as follows; EBITDA in the range of $224 million to $232 million and earnings per share in the range of $0.00 to $0.30 per share. The underlying assumptions reflecting the revised fiscal 2008 guidance include comparable store sales decrease in the range of 2.5% to 3.5%, gross margin rate flat to the fiscal 2007 rate, SG&A dollars decrease to the prior year, and capital expenditures at $80 million net of landlord contributions.

Our weighted average diluted shares outstanding at the end of fiscal 2008 year end are to approximate $17.3 million to $17.5 million and we're targeting $40 million to $50 million of cash generated to pay down long term debt. We are continuing to operate under the assumption that the retail environment will be challenging for the remainder of fiscal 2008 and we're focusing on strengthening our company through additional operating efficiencies. We're confident we are well positioned to take advantage of opportunities when the economy shows signs of recovery. Our Form 10-Q for the first quarter of fiscal 2008 will be available by June 12.

At this time, I would like to turn the call over to Tony.

Tony Buccina

Thank you, Keith, and good morning. As Bud stated, we were encouraged by the momentum that started to build in March and into early April, but it wasn't maintained with any consistency due to a customer who is still pressured by economic headwinds. While we believe we provided our customer with great merchandise offerings, the macro economic conditions combined with the cooler weather, made spring selling challenging, as evidenced by the fact that outerwear was one of our stronger performing categories.

We successfully navigated through the turbulent quarter and were able to generate an improved gross margin rate and managed our inventories to end the first quarter down 8.7% year-over-year on a comparable store basis. We will continue to execute disciplined inventory management and understand the importance of remaining lean, so that we are able to consistently offer our customers newness, differentiation, and great value in the assortment.

I would like to share with you the highlights of our first quarter results. Our franchise businesses grew in percent to total sales and outperformed total company sales but missed plan. However, we did see a strong recovery in our cosmetics business after a difficult fourth quarter. Our store-wide key item initiative that provides higher than total store margins penetrated at slightly over 20% a store, but missed plan. Within our key item initiative, our incredible value program, which is our most profitable key item program, beat its planned penetration. Product differentiation, both from national and private brands, penetrated at 31%, down 0.4% versus last year. Our private brand, which now does more than the domestic exclusive product, grew to 18% of total company from 17.5% at gross margins that are higher than the company average.

Our biggest increases in private brand penetration came in moderate sportswear, special sized sportswear of petites and large sizes, our soft home and ladies shoes. Our e-commerce business, new to us and a small piece of our business at this time, made plan for the first quarter. We continue to increase the assortment offerings online and will continue to do so going into the fall. We're executing to maximize our opportunities with this initiative.

Our transactions during the first quarter were slightly down from the prior year and the average retail was down 0.9%. While we are being conservative with our 2008 sales and inventory plans, our focus is all about executing, executing, and executing our merchandise strategy. For the balance of 2008, we will continue to grow our franchise businesses faster than total store.

We said in our last conference call that we were adding three businesses to focus on starting in 2008 that we feel will have a big initial impact and then build over time into franchise businesses. We believe hand bags, men's casual outdoor apparel will drive total store traffic, and our furniture galleries will contribute to total company sales and profitability.

We will continue to strengthen our key items strategy to 20% to 25% penetration with a focus on newness and flawless execution. We will continue to differentiate our merchandise assortment from our competition by growing private brands, exclusive brands, and exclusive product from competitive domestic brands to mid-30% of our assortments. As Bud mentioned, now more than ever, our customers recognize Bon-Ton as the right place to shop for fashion, and in our trading area, nobody knows our customer better than we do.

I am really excited about the new product launches we have for fall. In private brands, as you know, we signed an agreement with Victor Alfaro. The Victor by Victor Alfaro line will launch in September 2008 in 153 stores in Missy and 50 stores in Petites and Women's. We are going to expand this to all stores in spring 2009. This launch is being supported by media and marketing program, in-store visuals and personal appearances by Victor himself. But most importantly, the collection addresses the style needs of the modern confident woman with a classic touch, quality and value. We're extremely excited about this collection and believe our Bon-Ton existing customer will appreciate this superior styling and quality of the assortment. We also believe this will attract a new customer to Bon-Ton.

We launched our new Relativity career brand in moderate sportswear to complement our already successful Relativity sportswear casual brand. Relativity Career will offer affordable, fashionable work clothes that are in need in all of our markets. This will build a stronger life style offering in our moderate sportswear zone and build Relativity into a life style brand.

In Men's, we launched Kenneth Roberts sportswear, our most successful brand in Men's (inaudible) will now be rolled out to 100 locations. In our home store, we have expanded our offerings in Laura Ashley, Karen Neuberger and Ruff Hewn.

And in Kid's, we launched Ruff Hewn in all boys size ranges and completed our rollout of Cuddle Bear in infants and newborn. And from the domestic market, we will launch in our Moderate Update zone, Evan Picone exclusively for us in our markets produced by Jones apparel and J.H. Collectibles produced exclusively for us in our markets by Li & Fung. Both of these brands fill the void created last fall in fashionable and affordable career clothes that are in need in all of our markets.

And in Men's, we will introduce Timberland into our Northern Lodge assortment to support our casual outdoor lifestyle focused business.

As I stated before, I will state again, people make the business happen. I couldn't be more proud of our team of merchant stores and marketing, seasoned executives with years of successful experience, passion to be winners, who have been in this type of economy before and know how to navigate through it. This team at Bon-Ton is focused on execution and winning. We remain confident in our strategy and confident in our people to execute it. We are enthusiastic about the many private and exclusive brands that we are launching to our assortment and look forward to capitalizing on these introductions, particularly as the retail environment improves.

And I will now turn the call back over to Bud.

Bud Bergren

Thanks Tony. During what we expect will be a challenging 2008, we will continue to adjust our business plan accordingly. And as I said before and Tony said, we are confident in our overall strategic plan as well as our team's ability to execute it.

At this time, we will open the discussion to questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Reade Kem from Merrill Lynch.

Reade Kem – Merrill Lynch

Good morning everyone. I just wanted to follow up on the SG&A that was a much better result than I was looking for based on your previous guidance comments. So, I was just wondering, are the reductions in that line item found more in the store side or the corporate side, and going forward, would we expect to see a little bit of decline each quarter for the rest of the year?

Keith Plowman

Good morning, Reade, this is Keith. Yes, we do expect that we will continue to see the reduction in the expenses as we good forward. There is a mixture between stores and corporate. When we did the expense initiatives, the original $33 million we talked about and we had talked at the fourth quarter of last year that our trend was running above $9 million in that quarter, that we would exceed those savings. The majority of those costs initially were pulled out on the corporate side, the eliminations of private brand and merchandising stats as we consolidated operations and things like that, the marketing end, and brought the operations together. Now, we are realizing the savings also on the store side. So, we are getting some benefit there and getting some increased dollars in those savings. And as I stated earlier, we do expect that to continue. In the first quarter, inflation costs would have approximated somewhere between $6 million and $8 million. So, when you look at the decrease we have here, as you can see through the initiatives that essentially we offset that and brought ourselves to a net reduction in our SG&A expenses.

Reade Kem – Merrill Lynch

That's great. And the inflation costs that you referenced, that would be mostly areas like shipping and utilities and maybe some waiver.

Keith Plowman

Yes, that would be correct, Reade.

Reade Kem – Merrill Lynch

Okay. And then, I also wanted to ask you about inflation since that is obviously so topical these days just in terms of your sourcing programs, the time with which they may update you in terms of what prices they want to see. Is that something that might become an issue later in the year or are those prices for your in-house brands more or less set early on? Do you have a lot of visibility?

Tony Buccina

I think we are not going to see price increases for the balance of '08 because we already placed those orders. We are starting to see pressure for '09 because our people just came back from the orient. However, most of our companies, most of our sources are in Hong Kong and they are starting to source in Vietnam and Cambodia and in India. So, although we're seeing price – we are hearing about, we haven't experienced that yet.

Reade Kem – Merrill Lynch

Okay. Two more, Tony, while I have you. I was curious if you saw any impact in the relevant categories from JC Penney's American Living intro, did that impact you?

Tony Buccina

No, I think it has impacted them negatively.

Reade Kem – Merrill Lynch

Okay. And then – just the other one, just in terms of your behavior of your consumer I was curious. I think you have about four different credit card tiers and I was wondering if you noticed anything interesting amongst those different spending patterns of your most loyal customers, anything you could comment on there. Thanks a lot.

Bud Bergren

We still have a lot of support from our loyalty group. We are noticing that in different age groups within the loyalty that there is more impact because of the pricing and inflation pressures that are out there. And certainly, on the credit card itself, we are seeing some approval rate decreases because of what is happening out in the economy. HSBC is being very diligent in managing that process and we are seeing like American Express, Visa MasterCard that there are more pressures and the approval rate is decreasing because of that.

Reade Kem – Merrill Lynch

Okay. Thanks a lot.

Bud Bergren

Thank you, Reade.

Operator

And next we will go to David Glick from Buckingham Research.

David Glick – Buckingham Research

That was impressive in a tough quarter. As you see the year unfold, I know obviously, Keith, you don't give quarterly guidance but can you kind of highlight where you see the opportunities and jeopardies as the year unfolds from the perspective of sales and gross margins? I mean you guys have done a nice job managing SG&A. And kind of how the year unfolds from an earnings standpoint obviously is driven by, number one, sales and number two, gross margin, but some color on that would be helpful?

Keith Plowman

Okay, David, and good morning. We believe we have some opportunities on the sales line from the standpoint of some of the line – the Evan Picone and the Victor Alfaro, J.H. Collectibles, things that Tony had brought up that will be new offerings as well as there will be offerings that will fill holes that were there last year. We also believe that private brands are going to give us support and we feel that we have better comps to compare against in the second half of the year. So, we believe that we will get some benefit on the sales line.

From the standpoint of gross margin, Bud had mentioned the management of the inventory, the levels that we have being 8.7% below the prior year on a comp store basis is helping us. As we have mentioned in the past, we look at our inventory every quarter and try and write the fair value. When you have less inventory that is aging through and it is aging well for us, that does support that you do not have to have a stronger markdown impact or as much of a reserve for the markdowns going forward. So, we're seeing benefit on the sales and gross margin line as we go forward. We did realize those benefits in the first quarter. We did take our guidance down because we saw also negative response from the consumer in general in the whole industry and we are anticipating in our numbers that there will be pressure as we go forward the remainder of the year.

David Glick – Buckingham Research

It looks like Q2 obviously you have a tougher gross margin compared. Is Q3 kind of the quarter you circled among the remaining three that looks like the biggest gross margin opportunity?

Keith Plowman

I think that is fair to say yes. Q2 will be tougher. As you know, we strengthened up what our offerings were and comparatively to the prior year, which would have been 2006, as you are going back two years ago. We had all the liquidation sales which would have been at low margin. So, last year is more comparable, but as you stated, it was a stronger quarter for us.

David Glick – Buckingham Research

So, Q2 from a sales perspective seems like the easiest for you guys and Q3 on the margin line, would you say those are the two biggest opportunities?

Keith Plowman

I don't know that I would say – I am sorry, Bud?

Bud Bergren

Let me take that, David, this is Bud. It is hard to predict right now what is going forward. 90 days ago, I told you February and March would be difficult, and April would be good. And even though April was better than February and March, it wasn't necessarily as good as we thought it would be. So, it is getting harder to predict. We would think going forward that May is going to be our most difficult month of the three coming up.

David Glick – Buckingham Research

Okay.

Bud Bergren

And then, we also think September and October should be opportunity months for us.

David Glick – Buckingham Research

Okay, that's helpful. Thanks a lot and good luck to you.

Bud Bergren

Thank you.

Operator

Our next question will come from Michael Exstein from Credit Suisse.

Michael Exstein – Credit Suisse

Good morning everyone.

Bud Bergren

Good morning, Michael.

Michael Exstein – Credit Suisse

You listed all those significant number of very impressive new brand introductions going forward, which sort of gets me thinking about advertising expenses and promotional expenses and how you're planning those and how you will support that without cannibalizing potentially the rest of your business. So, can you talk about your promotional strategy going forward? Thanks.

Bud Bergren

Promotionally, we're keeping advertising rates and dollars the same as last year. So, you really won't see any increase or decrease we think is the prudent thing to do. Right now, even though we're cutting expenses as you saw, we're really not cutting advertising dollars of any magnitude. And so, we are looking at also new ways of bringing the customer into the store. And we think by advertising these new lines that are coming in and showing them something new, plus the excitement of some of the other new stores and remodels that we have coming will also be a plus.

Michael Exstein – Credit Suisse

Okay. Thank you very much.

Operator

And next we will hear from Emily Shanks from Lehman Brothers.

Jason Trujillo – Lehman Brothers

Hi, good morning, this is actually Jason Trujillo in place of Emily.

Bud Bergren

Good morning.

Jason Trujillo – Lehman Brothers

My first question relates to the much discussed stimulus checks. Could you say whether you have seen any boost at all in May from those checks, now that they have gone out, or you expect any boost in the next few months?

Bud Bergren

We haven't seen anything from those checks that would – we would contribute to helping our business and we really don't anticipate or haven't planned that as a plus. If we do get anything, it will be on top of – but we don't anticipate any benefit.

Jason Trujillo – Lehman Brothers

All right, thank you. And then, also it looks like private brand is doing quite well. Do you have a target for what your long term private brand penetration goal is?

Tony Buccina

This year, we had a tough penetration of 19 and we think that we will get there. We might not make our plan in the fall. And you will see that go to 20% to 21% in the next couple of years.

Jason Trujillo – Lehman Brothers

All right. Great, thank you. And then, lastly just relating to promotions and the competitive environment, obviously it has been really promotional and competitive over the last several months among department stores. Have you seen that ease up at all during May, or do you think it would ease up at all going into the rest of the year?

Tony Buccina

No, we see it – we look at our competitors' advertising on a weekly basis and we don't see any slowdown in the promotional activity at all from any of our competitors.

Bud Bergren

I mean, this is a highly promotional business and it has been that way for quite a while.

Jason Trujillo – Lehman Brothers

Great, thank you very much.

Operator

And we will take our next question from Kerry McInerney from Banc of America Securities.

Kerry McInerney – Banc of America Securities

Hi guys, you talked about, May being the toughest month in Q2, is that purely on a comparison basis or are there any event shifts that are going to affect the cadence of the quarter?

Bud Bergren

No, there is no event switches at all. It's – actually this year is kind of nice. Everything is apples to apples.

Kerry McInerney – Banc of America Securities

Okay, great, thanks.

Operator

Moving on, we will hear from Grant Jordan from Wachovia.

Grant Jordan – Wachovia

Most of mine have been asked. Can you tell us what the revolver borrowings were at the end of the quarter? I think you gave us the availability, but just not what was borrowed.

Keith Plowman

It would have been close to $400 million. I'd have to pull out the exact number here.

Grant Jordan – Wachovia

Okay. I can follow-up with you on that. Then on the POS system, can you tell us what the timing of that, when that should be completed?

Bud Bergren

That will be completed by the latter part of July and then we will have the entire Chicago market in the new POS system.

Grant Jordan – Wachovia

And then, will there be other markets to roll out after that?

Bud Bergren

Yes, next year, we will finish it which is more the smaller markets west of Minneapolis and west of Chicago.

Grant Jordan – Wachovia

And what are benefits from that?

Bud Bergren

The transactions are a lot quicker. It's easier to open charge accounts. You can look up information on where product is located. So it really helps the transaction and productivity at the store level.

Grant Jordan – Wachovia

Great, thank you.

Keith Plowman

And Grant, the amount of borrowings was around $376 million.

Grant Jordan – Wachovia

$376 million, great. Thanks, Keith.

Keith Plowman

You're welcome.

Operator

(Operator instructions) We will take our next question from Karru Martinson from Deutsche Bank.

Karru Martinson – Deutsche Bank

Good morning. As it is getting harder to predict here, what is your comfort level with the guidance given the low visibility?

Keith Plowman

I think from the standpoint of what we can control, we feel very comfortable. Obviously, we're in the same scenario that I think you have heard from all the retailers over the last couple of days. It depends on what happens and all the factors out there. I believe this morning, oil just went above $135 a barrel. As those impacts come out and negative news continues to hit the consumer, it is going to be how they react. So we're giving our best estimate based on what we have seen in the first quarter and what we expect going forward, but certainly there is factors out there that we can't control that will impact what happens.

Bud Bergren

Sales is the unknown. We have a higher level of confidence in controlling our inventories and controlling our expenses and capital expenditures.

Operator

Our next question comes from Carla Casella from JPMorgan.

Carla Casella – JPMorgan

Hi,

Bud Bergren

Good morning, Carla.

Carla Casella – JPMorgan

How are you?

Bud Bergren

Good, how are you?

Carla Casella – JPMorgan

Good. One question on the inventory levels, you made good progress. You have got a lot of new products coming in the back half. Should we continue to see it down on a year-over-year basis or will that change in third quarter as you start bringing in the new lines?

Keith Plowman

No, I think you are going to see it down. You will see it down, you may not see it down to the extent that we ended the first quarter, and again our plan wasn't really to end down 8.7% comp in the first quarter. We managed our business to trend. And as we see the trend come up, if we see increased sales or opportunities, we will react to that and fund it. And if it is not happening, then we will pull it back to what a reasonable trend is.

Carla Casella – JPMorgan

And on the private brands and the exclusives, is your lead time any different, is it harder to reactor, or do you have similar lead times so you can reorder if you see the trends pick up or slow down?

Keith Plowman

I think you will see that we have reacted to trapeze jackets that were really good in the first quarter that we were able to get back into in the second quarter. You will see that we also reacted to trapeze knits that were a new silhouette in Women's. And it is fair – we actually were able to reduce backup on order of seasonal categories from private brands. So, it is getting easier to manage that closer to domestic market, but it is still not as easy to manage that with the domestic market.

Bud Bergren

Our cycle times in private brand from regular product placement is about 18 weeks until we order to we get it. In our reorder, we get it in 6 to 8 weeks.

Carla Casella – JPMorgan

Okay, great. And then one question on the – what were the LCs, letters of credit outstanding?

Keith Plowman

$15 million.

Carla Casella – JPMorgan

Okay. You mentioned your cosmetics business was up significantly. Do you think you're taking share there or – ?

Bud Bergren

In our markets, we're seeing that we are taking share.

Carla Casella – JPMorgan

Okay, great. That's all I have, thank you.

Bud Bergren

Thank you.

Operator

Our next question is from Robert Raiff from Centurion Investment Group.

Robert Raiff – Centurion Investment Group

My question has been answered, thank you.

Operator

We will move on to John Lahman from KDP Investment Advisors.

John Lahman – KDP Investment Advisors

Hi, good morning gentlemen. Quick question. It's kind of a tough question to ask you, but how do you justify continuing to open up furniture galleries in light of the housing downturn? Are these scheduled openings – were they already prescheduled and you couldn't back out of them or do you actually see some opportunity here?

Tony Buccina

Our furniture business in the galleries was actually – performed better than the store and was actually up on comp store basis. Our furniture gallery business is about 75% of our furniture businesses done in galleries which has a higher GM ROI, has higher gross margin, has a higher dollars per square foot hand than the total company. And in Chicago, we like what we see because, as you know, there have been several competitors mostly (inaudible) that has gone out of business basically in Chicago, and we see ourselves in Chicago picking up market share.

John Lahman – KDP Investment Advisors

Okay. And as far as SG&A, as far as percent of sales, what kind of comp sales are we looking forward to giving some positive leverage on fixed costs?

Keith Plowman

If you're looking from the standpoint of getting variable expense coverage as you go forward and keeping the rate flat, it requires somewhere around 1.7% comp store sales.

John Lahman – KDP Investment Advisors

Okay. That's good color. Thank you very much gentlemen and good success for the rest of the year.

Keith Plowman

Thank you.

Operator

And we will take our next question from Rishi Parekh from KBC Financial.

Rishi Parekh – KBC Financial

How are you doing?

Bud Bergren

Good morning.

Rishi Parekh – KBC Financial

On your April same-store sales release, you had stated traffic was inconsistent during the month. Did that trend continue into May or did you see an improvement in traffic?

Bud Bergren

I think you're still seeing it inconsistent. Some days are better than others.

Rishi Parekh – KBC Financial

Okay. Now, with reference to your gross margin rate guidance, I apologize because I have been jumping on and off the call. But, I am not getting to a flat GM rate even on lower inventories. I was just wondering if you can walk me through on how you're getting that. Is it primarily cost savings that you're pulling out SG&A? Do you see SG&A or these cost savings offsetting inflation through the year?

Keith Plowman

I'm sorry, you started off with gross margin and you jumped into SG&A.

Rishi Parekh – KBC Financial

Taking the gross margins side of it and then also looking at the EBITDA margins, trying to go see where it is going, but when you look as your SG&A and in general just your gross margin rates, how are you getting to flat GM or gross margins based upon, I guess, just going off your guidance?

Keith Plowman

If you look at what we did in the first quarter, we actually had a higher gross margin rate this year compared to last year. We were at 34% versus 33.5% in the first quarter of the prior year, which reflects some of the efficiencies that we were able to gain on having lower inventory levels. We essentially put in an accrual [ph] at the end of every quarter to estimate what the write-down would be on inventory based on it rolling to being aged and having to be marked down and moved out of the sales system. So, we take inventories down, we get some benefit there on our gross margin. However, we do expect that going forward, there is going to be continued pressures from the macro environment. So right now, we're forecasting that we will be flat, not up, on our gross margin rate. At 36.1%, it is what the rate was for last year, we normally operate up in the 37% range and above. So right now, we're saying that will continue to be down at that rate, this year, due to the macro pressures.

Rishi Parekh – KBC Financial

Okay. And you stated Pennsylvania was weak. Can you give us an idea, was it weather, was it just the general economic environment in Pennsylvania?

Bud Bergren

I think it has a lot to do with the environment in Pennsylvania. I don't think Pennsylvania was so much weather-related. That and central part of Ohio is hurting us.

Rishi Parekh – KBC Financial

Okay, great, thank you.

Keith Plowman

Thank you.

Operator

Our next question today will come from Leah Hartman from CRT Capital.

Leah Hartman – CRT Capital

Good morning. Thanks for taking my question. A few follow-ups please gentlemen. Could you just finish off the liability side, the balance outstanding under the mortgage facility?

Keith Plowman

You mean talking about the outstanding balances?

Leah Hartman – CRT Capital

Yes, please.

Keith Plowman

Okay. You would have your $510 million of senior notes outstanding. Mortgage facility in round terms is around $250 million.

Leah Hartman – CRT Capital

Okay.

Keith Plowman

And another $12 million toward the loans and mortgages that are out there.

Leah Hartman – CRT Capital

Okay. That's what I was missing. Thank you for that. And just more housekeeping items. The share-based compensation for the quarter?

Keith Plowman

We don't disclose that number. That's reported up in SG&A; it's not an amortization.

Leah Hartman – CRT Capital

Okay. And then focusing on the furniture stores, are you seeing a change in the credit quality? Do you sell those receivables? How does that work for the furniture gallery receivables generated?

Keith Plowman

Receivables are all handled the same way. Essentially, we have our proprietary card that I handled by HSBC. There is no recourse, so it is their receivables. And then we would have your Visa, MasterCard, American Express, Discover, so forth, or it is cash. So we really have no receivables that we carry anywhere.

Leah Hartman – CRT Capital

Okay. And then turning to your credit card loyalty program, you noted that there are some changes within the age group as to how they are spending. Are you seeing notable changes in what the consumer is buying year-over-year in a more pressured economic environment? Are they shifting from apparel to you cosmetics as you're picking up market share? Any notable changes coming through?

Tony Buccina

All the apparel areas have actually been down. I mean our best apparel areas is, as Bud stated, was really our better sportswear, our large-sized sportswear. And as far as apparel, I think it is economic-related as well as weather-related. I mean, right now, we have – a lot of stores right now live in apparel off of selling shorts and Ts and summer categories. And we have those businesses – we're experiencing difficulty there.

Leah Hartman – CRT Capital

Understood. And then you may have stated this, but I missed it. When are you launching the Relativity, Career [ph]?

Bud Bergren

All of those will be launched in August, start to ship in August for September in-store.

Leah Hartman – CRT Capital

Okay. And then one final question on the specialty sizes. And I am a fan pursuing those items. Is there a target goal for greater penetration or greater mix within the merchandise mix?

Bud Bergren

In special sizes?

Leah Hartman – CRT Capital

Yes, particularly ladies.

Bud Bergren

I am not sure I understand the question.

Leah Hartman – CRT Capital

So, what percent is special sizes today and is there a goal to increase that as part of a mix, either broaden the offerings, or will we see special size pop-up within Relativity, Career?

Bud Bergren

Yes, you will. You will see that expanded to both special size areas. Our special sizes are franchise business. That's where we overinvest and try to expand anything that we want to make them bigger. You're going to see that they are heavily penetrated in private brand and heavily penetrated from the domestic brands. We invest our best talent in there. That's where we put our capital. That's where we put our marketing.

Leah Hartman – CRT Capital

That was the line of my questioning. Thank you and good luck this quarter.

Bud Bergren

Thank you.

Operator

(Operator instructions) Our next question will had come from Chris Dechiario from ISI Capital.

Chris Dechiario – ISI Capital

Good morning.

Bud Bergren

Good morning.

Chris Dechiario – ISI Capital

Most of my questions have been answered. I just have a couple left. I think you had mentioned, if I was listening closely at that point, that the approval rates on the credit card loyalty program were down or were expected to be down? I noticed that your other income was roughly flat. Are you assuming in your guidance that other income is going to start to trend down or comp materially negatively for the rest of the year?

Keith Plowman

We have taken a look at that and we have appropriately put in there the factors for the approval rate being pressured as well as the sales because, as we lose sales in the top line, it impacts the other income from the sales to the credit card.

Chris Dechiario – ISI Capital

Right, okay. And then, overall, I think you talked a little bit about your market share related to cosmetics. But, overall, can you gauge or do you know how you're doing in terms of market share versus Macy's or then versus JC Penny and Kohl's.

Bud Bergren

We really have no total store market share, but we do know the markets are the best for us. As I said before, our Detroit, Minneapolis, and Chicago and Buffalo, New York, where we do have the competition with Penney's, Kohl's and Macy's in all those markets and that's where our best increases are coming from.

Chris Dechiario – ISI Capital

Great. My last housekeeping item here. What was cash used by operating activities in the quarter?

Keith Plowman

We didn't disclose that yet.

Chris Dechiario – ISI Capital

All right. Okay, just wait for the Q then.

Bud Bergren

Yes. Thanks, Chris.

Chris Dechiario – ISI Capital

All right. Thank you.

Bud Bergren

Thank you.

Operator

Our next question is from Pamela Wilson from WL Ross.

Pamela Wilson – WL Ross

Could you give us a little color on why Detroit is one of your best markets when it seems to be a very depressed –?

Bud Bergren

That is interesting because we opened a new store there last October and that store has over-plan for us right now. So we have three stores in that market, all under the Parisian nameplate. The Parisian stores have always had a good reputation in that market. I think we've helped it by expanding the assortments and making the product a little more desirable before the Parisian stores were being bought out of Alabama. And I don't think they understood the northern customer (inaudible), so I think our merchandise team has helped bringing better product into that market.

Pamela Wilson – WL Ross

Okay. Could you give us estimate for taxes paid for this year?

Keith Plowman

Right now, we are in a loss position, so we do not have any taxes paid.

Pamela Wilson – WL Ross

Okay.

Operator

Anything further Ms. Wilson?

Pamela Wilson – WL Ross

No, thank you.

Operator

We will move on to Paul Lucaziski [ph] from Brownstone Asset Management.

Paul Lucaziski – Brownstone Asset Management

Hi, just one question for you on your vendors, just given all this destocking that is happening at retail and the general top line pressure, are you seeing vendors start to push you to sort of tighten terms to collect cash more quickly, any of those sorts of pressures?

Tony Buccina

We deal with our vendors fairly. We deal with our vendors – they understand our merchandise strategy and they support us.

Paul Lucaziski – Brownstone Asset Management

Okay. Thank you.

Operator

We have a follow-up question from Karru Martinson from Deutsche Bank.

Karru Martinson – Deutsche Bank

Hi. I was wondering in terms of your paying down debt, what is your ability to reach down and pay off some of the bonds here, given where they are trading currently and your appetite for doing so.

Keith Plowman

We certainly have the right to do so per the terms of the agreements. It is not something we discuss. We look at all options and determine what we feel is best for the business. At this point, we do recognize that they are trading substantially below their par and we just consider all opportunities.

Karru Martinson – Deutsche Bank

And just lastly in terms of the housekeeping, maybe you give us the CapEx for the quarter? I think I missed it.

Keith Plowman

CapEx was just a little over $25 million for the quarter.

Karru Martinson – Deutsche Bank

Thank you very much, guys.

Keith Plowman

Thank you.

Operator

We will take another follow-up question from Reade Kem from Merrill Lynch.

Reade Kem – Merrill Lynch

Thanks. It is Reade actually.

Keith Plowman

Hi, Reade.

Reade Kem – Merrill Lynch

I wanted to ask you if you could give us the average selling price at the Bon-Ton versus the Carson's, how that progressed.

Bud Bergren

We really don't track that. We really look at our company as one company right now. We don't look at it east/west any more. We look at it by regions.

Reade Kem – Merrill Lynch

Okay. And then the other follow-up was just on the real estate front, given the economy we're in, is this an opportunistic time to maybe revisit some of your leases with landlords and maybe even find some concessions and – I don't know how many renewals you face this year, but is that an opportunity to maybe adjust cost downward as well?

Bud Bergren

As we manage our real estate portfolio, not just in this environment but all environments, we always look at that stuff.

Reade Kem – Merrill Lynch

Okay. How many lease renewals do you have this year?

Bud Bergren

I don't know off the top of my head, do you Keith?

Keith Plowman

I don't. I believe that 20 to 30 sounds like the right number, but I don't know specifically.

Reade Kem – Merrill Lynch

Okay. All right, good luck, thanks.

Bud Bergren

Thank you.

Operator

Our next question comes from John Lahman from KDP Investment Advisors.

John Lahman – KDP Investment Advisors

Gentlemen, circling back to what the previous caller said about debt repayment. I think earlier in this call, you made mention that you had targeted cash flow of about $40 m or $50 million this year for reduction in long-term debt.

Keith Plowman

That's correct.

John Lahman – KDP Investment Advisors

Are you talking about the revolver that you're aiming to pay down?

Keith Plowman

Yes, that is where the monies automatically go. They go to the revolver.

John Lahman – KDP Investment Advisors

Okay, thank you.

Keith Plowman

Thank you.

Operator

And we have a question from Colleen Burns [ph] from Oppenheimer.

Colleen Burns – Oppenheimer

Thanks. Most of mine have been answered. I just wanted to see if you're starting to see any changes with the new Macy's strategy and maybe any color on what your expectations are there, timing of the rollout, if you expect that you will have to be more promotional to match them.

Bud Bergren

We haven't seen any effect and we run our own business.

Colleen Burns – Oppenheimer

Okay. Thank you.

Operator

And that does conclude the question-and-answer today. Mr. Bergren, I will turn the conference back to you for additional or closing remarks.

Bud Bergren

Thank you for your interest in Bon-Ton. We look forward to speaking with you about the second quarter 2008 results on our conference call in August. We will be presenting on June 10 at the Piper Jaffray Consumer Conference in New York. So, thank you for joining us this morning.

Operator

That does conclude our conference call today. Thank you all for your participation.

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Source: The Bon-Ton Stores, Inc. Q1 2008 Earnings Call Transcript
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