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Executives

David Jaffe – President and Chief Executive Officer

Armand Correia – Chief Financial Officer

Keith Fulsher - Chief Merchandising Officer for Dress Barn stores

Lisa Rhodes - Chief Merchandising Officer for Maurices stores

Analysts

Mark Montagna – C. L. King and Associates

Steve Kernkraut - Berman Capital

Unknown Analyst – Raymond James

Robin Murchison – SunTrust

Gary Giblen – Goldsmith & Harris

Brian Ronnick - BLR Capital Partners

Dress Barn, Inc. (DBRN) F3Q08 Earnings Call May 28, 2008 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the Dress Barn, Inc., Third Quarter Fiscal Year 2008 Financial Results Conference Call. (Operator Instructions) I would now like to turn the conference call over to Mr. David Jaffe, President and CEO of Dress Barn, Inc.

David Jaffe

With me on the call today are Armand Correia, CFO, Keith Fulsher and Lisa Rhodes, Chief Merchandising Officers for Dress Barn stores and Maurices stores. Before our prepared remarks today, Armand will make a few introductory comments.

Armand Correia

Thank you, David. I’d like to remind everyone that during this conference call, members of management will make certain forward-looking statements which are subject to risks and uncertainties that could cause the company’s actual results to differ materially from the expectations and assumptions discussed. Due to a variety of factors that affect the company including the risks, specified in the company’s most recently files annual report on Form 10-K and in other documents filed by the company with the Securities & Exchange Commission. The company disclaims any intent or obligation to update forward-looking statements. No recording or re-broadcast of this call is permitted without the company’s expressed written permission.

Additionally, while we have approved the publishing of a transcript of this conference call, we take no responsibility for inaccuracies that might appear in that transcript. Today, after the close of the market, the company issued a press release outlining its financial and operating results for the fiscal third quarter ended April 26, 2008. Announcement of this call was previously issued across the newswire services, and this call is being simulcast on the Dress Barn, Inc. website www.dressbarn.com. A recording of this call will be made available shortly after its conclusion and until June 27th of 2008. Information on accessing the recording is available on today’s issued press release.

I’d now like to turn the call back to David Jaffe.

David Jaffe 

Thanks Armand. Dress Barn, Inc’s business in the third quarter continued the same trend we saw in the fall. Overall DB Inc’s comp sales were off 3% for the quarter, but we again had divergent performance between our two divisions, as Maurices was up 4% and Dress Barn was off 6%. We are pleased with our operating earnings for the quarter, which reflected strong control over both inventories and costs. Our EPS growth was also favorably impacted by several unusual factors as Armand will describe.

The weak economy continues to impact spending on consumer discretionary goods, especially women’s apparel. We all follow the industry results with much concern. It seems the only way to drive business is through a special coupon or unique offer. This is particularly apparent at Dress Barn with our forty-something customer who has pulled back her spending and is focused on getting the most for her money. As Keith will address, we’re refocusing our strategies to take our customer’s shopping behavior into account.

Maurices with the twenty-something customers fared much better. We’re continuing to benefit from the fashion tendencies of young customers, our small market real estate strategy, and the maturation of several merchandising initiatives as we will hear from Lisa. Before I turn the call back to Armand for a review of our financial performance, I’d just like to say that while the environment sure posts challenges for us, we are adjusting our business wherever possible to compensate. We’re working hard to achieve cost savings and to limit our inventory exposure. These along with our mission of providing great fashion at compelling values with outstanding customer service are our operational priorities. Armand?

Armand Correia

Thank you, David. As David indicated, we are pleased with our ability to control inventories and expenses and thereby delivered solid operating earnings for the quarter. That said, our third quarter was challenging from a sales standpoint, and overall quarterly sales results were mixed by division.

Total sales for the quarter increased 1% to $352.6 million, versus $347.9 million last year, while comparable store sales decreased 3% during this period. Dress Barn stores decreased 5% overall to $216.8 million, versus $228.6 million last year, while comparable store sales decreased 6%. By region, the Northeast performed the best, while the Southeast including Florida and the West Coast had the weaker performances.

Regarding some of the key store sales components, Dress Barn stores do not monitor consumer traffic. However, sales transactions during the quarter decreased 6%, while average unit retail and units per transaction were flat to the prior year, resulting in average dollars the same as last year at $68.68.

In contrast, Maurices quarterly sales increased a solid 14% to $135.8 million, versus $119.3 million last year. The increase was primarily driven from new store growth of approximately 12% year over year but also came from a comparable store sales increase of 4%, driven in part by our new plus size business. Comparable store sales increased in all regions with the Northeast and the Midwest the strongest performers.

Reviewing some of Maurices key sales components, average unit retail increased 6% and units per transaction increased 2.5%, resulting in an 8.5% increase in the average dollar sales to $48.54. These improvements more than offset the 7% traffic decline during the quarter.

Moving on, our gross profit rate for the quarter was 41.4%, up approximately 40 basis points from last year. The improvement versus last year was primarily due to good inventory management as we went into the third quarter with lean inventories in both divisions. By division, gross profit for Dress Barn stores was 39.3%, down approximately 70 basis points from last year’s 40%. The decrease was primarily due to deleverage on buying and occupancy costs with the sales decline. Of this 70 basis points, 50 basis points was due to deleverage on buying and occupancy costs and 20 basis points was due to merchandise margin. Maurices stores came in at a strong 44.8%, up 190 basis points from last year’s 42.9%. The increase was primarily driven by an increase in merchandise margins, a slightly higher mark-on and lower markdowns. Of the 190 basis point improvement, 150 were related to merchandise margin and 40 basis points leverage on buying and occupancy costs.

We were pleased with our ability to control SG&A given the deleverage of the 3% comparable store sales decrease. SG&A for the quarter was 27.6%, only 10 basis points up from last year’s 27.5%. In absolute dollars to last year, SG&A increased 1.5% despite an increase of 6% in the number of stores between Dress Barn stores and Maurices stores. Specific areas of good management included payroll costs by reacting to lower sales, reducing incentive costs, and reducing healthcare costs from the implementation of a new healthcare plan and a new service provider. Our store payroll levels continue to be well managed and maintain a positive in-store customer experience in our efforts to please our customers.

Depreciation expense for the quarter was $12.4 million, or 3.4% of sales, as expected and primarily due to store growth and accelerated depreciation relating to store remodels and the write-off of obsolete IT hardware and software.

Operating income as a gauge of our quarterly year-over-year performance was $36.2 million, or 10.3% of sales, above last year’s $35.7 million, or the same 10.3% of sales. Operating income by division: Dress Barn decreased 24% to $15.5 million or 7.1% of sales versus last year’s $20.4 million, or 8.9% of sales, while Maurices stores’ percentage on the other hand was $20.8 million, or a strong 15.3% of sales, versus last year’s $15.4 million, or 12.9% of sales.

Net interest income and expense came in more favorably than expected versus last year due to increased rates and levels of marketable securities. Our quarterly effective tax rate was 33.8%, compared to 36.4% last year. This reduction in the rate was due to the release of certain estimated tax liabilities previously established under 1048 for uncertain tax positions, which we did not anticipate coming into the quarter. We believe a 38.5% rate is more appropriate on a normalized basis going forward.

Net earnings for the quarter increased 8% to $24.9 million, or 7.1% of sales, compared to $23.1 million last year, or 6.6% of sales, while earnings per diluted share were $0.39 versus last year’s $0.33. This year’s earnings per diluted shares were favorably impacted by approximately $0.05 primarily due to a decrease in the number of diluted shares from the share conversion feature of our 2.50% Convertible Senior Notes due 2024, and the repurchase of approximately 2.6 million shares in the open market during 2007. In addition, earnings were also favorably impacted by a reduction to the effective tax rate as previously discussed. For the fiscal fourth quarter, we are assuming no benefit on EPS from the dilution impact of our 2.5% Convertible Senior Notes.

Our weighted average diluted share count at the end of the quarter was 63.2 million shares, compared with 69.6 million shares last year. The decrease from last year was primarily due to 3.5 million less shares from share conversion feature of the 2.50% Convertible Senior Note and the repurchase of 2.6 million shares during 2007.

Moving on, our balance ending the quarter continued to strengthen. Cash and marketable securities increased $40 million to $256 million. During the quarter, we reclassified approximately $62 million of auction rate securities from short-term investments to long-term investments. We also recorded a temporary mark-to-market adjustment of $3.7 million through equity.

Total inventories at cost ending the quarter increased 3.5% to $175 million primarily due to Maurices’ store growth. The overall seasonality was comparable to last year in both divisions. By division, Dress Barn stores’ total inventory was $120 million, slightly above last years’ $119 million. Dress Barn’s average store inventories ending the quarter was down 1%, but higher than our previous guidance of down mid single digits per store. On a per square foot basis, inventory for Dress Barn stores was down 2%.

Despite good control throughout the quarter, reacting to the shortfall in sales has become increasingly more challenging for our Dress Barn stores. Sales results for our Dress Barn stores have been particularly weak during May. Despite this, Dress Barn stores’ average store inventories remain flat to last year at the end of May. However, should this weak sales trend continue, it will put added pressure on increased markdowns in Q4 to keep inventories in line heading into the new fall season.

Maurices stores’ total inventory was $55 million, an increase of 11%, which supports the net store growth of 12%. Average store inventory levels for stores in operation at the end of the quarter were approximately the same as the prior year; however, with new 29 new stores scheduled to open during Q4 this quarter and the inventory dollars already included in the total ending quarter, average store inventories were actually down approximately 3%. On a per square foot basis, inventories were flat, but again lower if you include the 29 additional new stores. We were comfortable with these levels ending the quarter and given Maurices sales performance.

Moving on to fixed assets, year to date CapEx was approximately $44 million and is estimated at approximately $60 million for the fiscal 2008 year, well below our previous guidance of $73 million. The $13 million decrease represents the timing of key IT projects from fiscal 2008 to 2009.

Reviewing some key financial highlights for the 9-month period, net sales increased to $1.062 billion, an increase of 1% over $1.047 billion for the same period last year, while comparable store sales decreased 3% with Dress Barn stores’ comparable store sales down 7% and Maurices stores up 4%. Nine-month operating margin was approximately $76 million, or 7.2% of sales, compared to $103.1 million, or 9.9% of sales last year, while by division, Dress Barn stores operating income was 3.6% compared to 8.7% last year, with Maurices stores’ operating income increasing to 12.8% of sales compared to 12.1% of sales last year. Net earnings for the 9-month period were $52 million, or 4.9% of sales, compared to $67.6 million, or 6.5% sales last year. Earnings per diluted share were $0.81 versus $0.97 last year for the same 9-month period.

Considering the current tone of business and the uncertain economic and retail environment, we continue to manage our business conservatively with focus on keeping our inventories and costs in line.

I would now like to introduce Keith Fulcher, Dress Barn stores’ Chief Merchandising Officer.

Keith Fulcher

As David and Armand have stated, business has been tough for Dress Barn stores during the third quarter. That said, we were able to achieve a healthy gross margin in a very difficult environment by controlling our inventory levels and flow of new products. Looking at our apparel merchandise from 4 categories—dresses, wear to work, casual, and special occasion, special occasions had a nice increase versus last year for the quarter. Wear to work was off plan, but is trending fairly well with strength in blouses, fashion knitwear and jackets. Dress, which had a record performance in the year-ago quarter, was off substantially to plan than last year. Our casual sportswear business was also weak with summer staples such as capris, shorts, tees, and casual wovens all trending below plan. Finally, the jewelry and accessory business achieved modest increases versus last year.

Looking forward to fall, we have several key initiatives in place to improve the business. The first is to further leverage our focus on special occasional apparel under the Dress Barn collection label. This is destination category for our customer and serves to differentiate us from our competition. During a tough spring, this category is still trending nicely ahead of last year and represents significant growth opportunity for us. We are making an incremental investment in this category to create the desired impact in the stores. Second, we are stepping up our focus on casual sportswear, anchored by denim. Denim is a key business that trended well for us last fall, and addressing it more aggressively is important for our results as a whole. We will position his business in the front of the store starting in the month of August with a focus on new washes and novelty details in denim, merchandise back to fashion knit tops and novelty jackets. In addition, we are directing our marketing to reflect our commitment to this business, as our opening inventory in denim will be 50% greater than last year. This increase in inventory is funded through cut backs in underperforming categories.

Third, in wear to work, in an effort to trade up on our assortments and appeal to a more fashion customer, we have added a new proprietary collection to the store. The line is called YVOS, an acronym for Your Very Own Style. This merchandise is more contemporary in feeling, uses better fabrications and constructions, and retails for approximately 25% more than the core Dress Barn assortments, which should help us in our goal of to drive up our average unit retail. We are currently testing the concept for spring and are pleased with the results. For fall ’08, the line will be at 150 stores and will be further expanded for spring ’09 including adding YVOS to the Dress Barn limited assortment.

Additionally, in wear to work, we are launching suit separates in 100 stores for fall based upon extensive spring tests. We see this as a contemporary and more relevant alternative to the down-trending traditional suit business.

On the IT side, we successfully went live with our new Oracle retail merchandising system in July ‘07. This coming fall, we’ll be implementing the planning module followed by the allocation module later in the fiscal year. To support these efforts, we are beefing up our organization in order to leverage the enhanced information to impact our business. Although we think we can get some limited benefits during the fall season, this is a long-term project which we expect will pay increasing dividends over the next two to three years.

With respect to sourcing and inflation, we are beginning to see some price increases out of the Far East, but we don’t feel there will be any meaningful impact until 2009. Even then, we feel we can mitigate any increases by working with our vendor partners to move production. Our manufacturers are experts in their categories and as a result have production in many other countries other than China. In addition, by continuing to enhance product value through the use of novelty prints, unique details, and great prints, we are able to charge slightly more for our products.

To sum it up, although we are confident in our strategic merchandising initiatives, we remain focused on execution. We also remain cautious due to the economic environment. Our number one focus remains inventory control, buying closer to need, tweaking the flow of product to ensure freshness, and keeping overall inventories in line with our sales trends. In addition, we remain true to our value message—novelty fashion, good prices, presented in a lifestyle environment with an emphasis on customer service.

I’d now like to turn it over to Lisa Rhodes, Chief Merchandising Officer of Maurices.

Lisa Rhodes

Thank you, Keith. At Maurices, we are pleased with the 4% comp increase we delivered for the third quarter - this in light of a difficult economic environment. Essential to these results has been the continued enhancement of creating lifestyle concept shops. The differentiation of color and style with each shop has allowed us to satisfy more guests. Our positive third quarter results were spurred by the continued maturation of our new initiative businesses—Plus, Wear at Work, Lounge Apparel, and Handbags which compensated for the weaker trends experienced in woven tops, shorts, and dresses.

Disappointments during the quarter included many of the more weather-influenced categories. Our well-developed denim and knit classifications remain a strong foundation of our business achieving consistent increases. Key details in tops have crochet trends, smocking, and framing. Solid layering pieces continue to be strong with solid fashion tops growing in importance. Multistripes, medallions, and geometrics have been important patterns. As mentioned earlier, color is a key differentiator for Maurices. Deep vegetable colors, summer brights, and mid tone pastels have all been strong. Brown, black, and white continue to balance the assortment.

In bottoms, side pocket jeans as well as tailored pants were very strong throughout the quarter. Last June’s entrance into the plus size business has proven to be successful, and the new division is on track to achieve our target. This business has outperformed in all key matrix relative to the men’s business. For the quarter, the new plus business continues to strength contributing a significant portion of the quarter’s comp results. Sales drivers for this shop have been fashion knit tops, five-pocket jeans, and casual bottoms.

As Armand mentioned, our inventories are well positioned heading into fourth quarter. We enter the quarter with roughly 6% less women’s inventory on a per square foot basis. This number does exclude the plus size inventory. This tight inventory management affords us adequate inventory to meet our sales expectations while ensuring a timely transition. As evidenced by our strong May performance, two strategic changes have resonated with our customer while delivering strong financial results. These changes include increasing our speed to market via shorter lead times and offer a more frequent and timely floor set changes, and the continued development our initiative businesses complemented by our traditionally strong causal businesses. Also, the addition of an early June floor set will give the customer a new reason to buy. We are optimistic that executing these strategies will result in a solid upcoming quarter.

I’d now turn the call back to David Jaffe.

David R. Jaffe

Turning to marketing at Dress Barn, our primary initiative this quarter is to focus on driving traffic and sales and protecting market share through direct mail and in-store promotions. Two key direct mail pieces—our spring sale postcard and the spring fashion book with a supplemental postcard and gift book purchase incorporated all the variables we tested in Q2—increased distribution up to 2 million pieces, multiple new offers, and supplemental formats. Our direct mail pieces continue to deliver strong results. In store, bolder promotions using color and stronger messaging created greater impact on the windows. These were coupled with aggressive e-mail blasts each week highlighting our promotions. Additionally, we distributed 5 bounce-backs to encourage repeat business.

In the fourth quarter, due to the challenging economic climate, we will continue to reallocate dollars to support direct mail and in-store promotions to help drive traffic and sales. We increased quantities of our two key direct mail pieces, Mother’s Day scratch-off postcards at 3.2 million pieces generating strong results, and our July private sale postcards at 1.7 million pieces utilizing most compelling offers and formats in order to generate the greatest response. During these high-traffic periods, we will distribute bounce-backs to drive incremental visits. We are also learning more and different in-store promotions to create greater impact with bolder graphic designs and stronger value messages.

At Maurices in the third quarter, we have one 1.7-million piece mailer. This mailer drew strong responses in sales—stronger than any previous mailer. Additionally, we distributed three bounce-backs during this quarter to help drive traffic response rate and conversion. For the fourth quarter, we have two mailers—the first one just completed in May with a distribution of 1.6 million pieces. Results across all metrics were very strong. The second in July celebrates back to school, also approximately 1.6 million pieces. We also have a scratch and instant win in-store handout beginning the last week in May that historically has garnered positive results.

Turning to real estate, Dress Barn opened 16 stores in the spring season and we project closing 9, for a net square foot increase of 1% for the fiscal year. Maurices has opened 10 stores in the third quarter, with an additional 29 projected for the fourth quarter, giving us a total of 70 new stores and 3 closings for the fiscal year, with a net square footage growth of 11%. This does not include 22 relocations primarily out of malls and into strip centers.

Wrapping up, I’d like to say given the comp sales trends through the first four months of spring, including May’s results with Maurices +4 again, but Dress Barn deteriorating to -12, we are reducing our comp sales projection for the remainder of our fiscal year to down mid single digits. Because we’ve taken a cautious approach with planning all spring, we’re comfortable with the high end of our previously released guidance of $1.05 to $1.10. We will be discussing our fiscal ’09 guidance on our year-end call in September. Our balance sheet gives us comfort in this difficult economy. We will also continue to use our cash flow to thoughtfully invest in our company’s future through new stores, remodels, merchandising software and upgrading our POS systems. Our cash position continues to build, providing a war chest for potential acquisition, or if we are unable to find the right opportunity, possibly a share repurchase program. The board is maintaining our no-dividend policy.

Planning for fall we’ve done in the same conservative manner with which we approached the spring. We have yet to see any indication that our customer is regaining her confidence, will begin shopping at the same level she did several years ago. If the business does pick up, we will be well positioned to chase it.

Thank you for your continued interest in Dress Barn, Inc. and I will now open it up for questions.

Question-And-Answer Session

Operator

(Instructions). Your first question comes from the line of Mark Montagna with C.L. King. Please proceed.

Mark Montagna – C. L. King and Associates

Hi. Just a few questions. Regarding the reduced tax rate, how much did that contribute for the quarter? I calculated it at $0.03.

David Jaffe

The actual conversion of the lower tax rate is like a penny and a half. The rate last year was 36.4%, and this year’s rate is 33.8, so it was roughly a little more than a penny and may have rounded to a penny instead of two.

Mark Montagna – C. L. King and Associates

Okay, and then with the guidance for the year still at $1.05 to $1.10, is that factoring in a $0.39 estimate for the third quarter?

Armand Correia

Well, I think if you do your math Mark, you’ve got $0.81 in, and at $1.10, that would factor in $0.29 as David indicated for the fourth quarter.

Mark Montagna – C. L. King and Associates

I am talking third quarter…

Armand Correia

Yes, it does Mark.

Mark Montagna – C. L. King and Associates

Okay, alright, because then if you back it out, it comes to $0.24 to $0.29 for the fourth quarter. So it sounds like your key issue here just a lot heavier markdowns more at the Dress Barn division as opposed to the Maurices division?

David Jaffe

That’s correct.

Mark Montagna – C. L. King and Associates

I might have missed it – where do you expect inventories to be by the end of the fourth quarter then? What percent down?

Armand Correia

At this point, I would think that it’s really very difficult to get any visibility. Given what we’ve just seen in May, with particularly Dress Barn stores, obviously we’d like to be down in the low single digits with Dress Barn stores, but again if we continue to see these types of drops, it’s going to make it very, very difficult. As far as Maurices, I would also say that we’re looking to be down in the low single digits on an average store basis by the end of the year.

David Jaffe

But I would add, Mark, if you look back to our fall which was a really challenging season for Dress Barn as well, if you remember then, we bit the bullet, and by the end of the second quarter, we were pretty clean. It was expensive, but we didn’t want to go into spring with too much inventory, and the same thing here. We don’t want to go to fall with too much inventory, so we’ll do what we need to do.

Mark Montagna – C. L. King and Associates

Alright. Yes, because that typically seems to be a pattern to just come out as clean as possible. So then, I think I missed it, what was your operating margin for the Dress Barn division at the end of the third quarter—actually through the three months for the Dress Barn division and three months for the Maurices division?

Armand Correia

As far as operating margins for Dress Barn stores for the Q3 quarter, it was 7.1% of sales, and Maurices, it was 15.3% of sales.

Mark Montagna – C. L. King and Associates

Okay, and then what about through nine months for both of them?

Armand Correia

For nine months, at Dress Barns stores, operating margin through nine months was 3.6% sales, while Maurices stores’ operating margin was 12.8% of sales.

Mark Montagna – C. L. King and Associates

Okay. Do you have a projection for the year end for them, because usually you give us projection on the quarterly calls?

Armand Correia

I can give you kind of a range. I am looking at probably Maurices from the operating margin standpoint coming in the range of 12.0 to 12.4 as far as percent of sales.

Mark Montagna – C. L. King and Associates

Okay, and then how about the Dress Barn division?

Armand Correia

Dress Barn division, I’d be looking at somewhere in the neighborhood of just slightly below 4.5% of sales to slightly above 4.5% of sales.

Mark Montagna – C. L. King and Associates

Okay, alright. Those were all the questions I had. Thanks.

Operator

Your next question comes from the line of Steve Kernkraut with Berman Capital. Please proceed.

Steve Kernkraut - Berman Capital

Hi, David. I just had a couple of quick questions. First of all, can you talk about Maurices which did really well. Obviously the large size instruction is working well, but are there any other projects like that that you have on the backburner that you see to be able to add to the merchandise that should help Maurice sustain its real strong growth even in this difficult period?

David Jaffe

Lisa mentioned a few of the merchandising initiatives in passing in her comments. Lisa, if you just want to take a second and describe a couple of those key ones for Steve?

Lisa Rhodes

Sure. In addition to plus size, we have introduced approximately wear at work, which is a lifestyle concept that caters more to the working woman, bank teller, etc., and it really complements all her fashion needs for going to work, and that has become a larger percentage. We also introduced lounge apparel, and that is a combination of both comfort wear as well as this month we’ll be delivering our first deliveries of Yoga in that shop, and additionally we’ve revamped our handbag assortment introducing higher priced products, better quality, and merchandising it to complement each of the lifestyles.

Steve Kernkraut - Berman Capital

Okay, and this gets rolled out, it gets rolled out to every store, or is it just rolled out to some test stores?

Lisa Rhodes

All of these businesses are in the chain.

Steve Kernkraut - Berman Capital

Okay. And could you also comment on how some of the new markets you’ve opened stores in over the last year, how those are tracking versus your expectation?

David Jaffe

Steve, overall I say we’re very close to our expectations. Some of them - as we’ve gone into places like California, we’ve opened up our first couple of stores; Texas, we’ve opened up first handful of stores last year; and Florida, we’re just about to open – have been a little slower to get started, and a lot of that is simply due to our name not being known, so it’s a more of an education process. We kid that the only company with the worst name in Dress Barn is Maurices selling women’s clothes, so it’s not an obvious drive in when you see the name Maurices on the store front, but what we’ve been pleased with as we’ve gone further and further from our Midwestern roots, we see the comps continue to build, so for the most part, those stores that are outside of our core markets do ramp up and perform as our expectations after several years.

Steve Kernkraut - Berman Capital

Okay. Let me just slip back to the Dress Barn business. It sounds like you’re committed to do whatever it takes to get your inventory in balance even tough, I think, you quoted you’re down 12% on the sales basis, so we could be sure the Kohl’s, Macy’s, and Penney’s, and all the rest will be very promotional as well, so you’re going to be in the fray and make sure that you end up with as clean an inventory as you can by the beginning of August?

David Jaffe

I’m not sure beginning of August, but certainly as we transition into fall—we don’t have a back to school business at Dress Barn, Steve—so we’ll certainly use August as a sell-down time, and I’m confident that by the time we start really getting into fall in a big way in September and October, we will be in fine shape. It may cost us, as you saw in the second quarter, but we’ll do what we need to do, because the last thing we want to do going into what we think will be a challenging fall is having any excess inventory lying around.

Steve Kernkraut - Berman Capital

Given the environment though, you would end up planning for a fall season, and until you saw a significant consumer comeback and that seems to be the prudent thing to do.

David Jaffe

Well, we haven’t given any guidance or thoughts on fiscal ’09, and as you know, we are a July year, so fall is our ’09, so come September in our call, we will give you more insights on what we’ll be planning for fall, but I would acknowledge that it will be a conservative plan.

Steve Kernkraut - Berman Capital

Okay, thanks very and good luck.

Operator

Your next question comes from the line of Sam Piniella with Raymond James. Please proceed.

Unknown Analyst – Raymond James

Hi, good afternoon everyone! When talking about the guidance of $1.05 to $1.10, now does that include having to take greater than expected markdowns at Dress Barn?

David Jaffe

We’ve put everything into. Knowing what we know now, we’ve taken down our plan for June and July, and we think we should still be at the high end of that $1.05 to $1.10 given what’ve seen so far.

Unknown Analyst – Raymond James

Okay, and then Keith, you had mentioned about the denim inventory expected to be up 50% year over year. What is the timing of that and what kind of rates are looking at?

Keith Fulsher

You’re looking at the beginning of August, so versus that timeframe last year, we’re going to open up with a much stronger presentation.

Unknown Analyst – Raymond James

Okay, and taking away from underperforming categories. You would sense that it would not impact total inventory?

David Jaffe

No, it’s not incremental inventory.

Unknown Analyst – Raymond James

Okay, and then lastly, I just missed that, what tax rate did you say that we should use going forward?

Armand Correia

38.5%.

Unknown Analyst – Raymond James

38.5%. Okay, great, and good luck with the rest of the year.

Operator

You next question comes from the line Robin Murchison with SunTrust. Please proceed.

Robin Murchison - SunTrust

One, David, just to be clear – I think you said spring season to date were done 12, so you’re incorporating…

David Jaffe

No, no. Just to slow down, the May Dress Barn division results are down 12%.

Robin Murchison - SunTrust

Okay, May standalone Dress Barn, yeah.

David Jaffe

And Maurices for May were up 4%.

Robin Murchison - SunTrust

And then what share count would you be using in the fourth quarter?

Armand Correia

The share count out estimate at this point for year-end would probably be approximately 64.3 million shares, and I think last year, if you recall I think it was about 70 million.

Robin Murchison - SunTrust

Okay, alright, and then I wanted to ask you about the acquisition market, and also just to be clear—before I get to that, the third quarter, $0.39 and then back our $0.015 from the tax rate and then the nickel from the conversion…

David Jaffe

Let me just correct you. The entire $0.05 is due to all three factors. Approximately 2 sets of that 5 is due to less shares from the conversion feature of the 2.5% convertible note, and then two cents is approximately as a result of the share repurchase last year of $2.6 million, and the reduced effect of tax rate accounted for the other penny, so in total it’s 5 cents.

Robin Murchison - SunTrust

Alright, so then $0.39 minus $0.05 is $0.34, versus I think the street was at $0.26 or so.

David Jaffe

Right.

Robin Murchison - SunTrust

And then, I know there is a lot of important consideration going on right now, so maybe the acquisition market is not on the tope of your list, can you just sort of tell us what you’re seeing out there?

David Jaffe

We continue to look, and as we’ve had a chance to get a little closer to certain companies, we’ve really been narrowing down our list for various reasons, so we have a very, very short list of companies that we maintain an active interest in. Unclear if any of those will become actionable. We’re going to keep an eye on them, both in terms of their performance as well as any potential opportunity where we would have to get involved with them. There is nothing imminent at any stretch, so I don’t want to talk to long shot, but it’s not something that we’re planning on our counting on happening here.

Operator

(Instructions), and you have a question from the line of John [inaudible].

Unknown Analyst

It was what’s the potential for additional markdowns on the auction rate securities, and/or how quickly might those be redeemed or matured?

Armand Correia

First question, we’ve taken a very cautious approach – conservative approach in the mark down of the auction rate securities. Keeping mind that, I would day, the majority probably 60 to 62 million is student-backed auction securities, we have had a few redeemed, but those that have been redeemed have had high rates, and we probably have a couple left, so I think as we understand the auction rate securities market in the past, it is nearly dead now. We have been in touch with our investment bankers constantly to get an update on how the market is going, but I think it’s fair to say that, as we knew the market then, it will not exist going forward, so at this point, the issue is liquidity from those $62 million, but obviously as we indicated with cash and marketable securities of $255 to $256 million, and we are getting above average returns on those auction rate securities, at this point, I have nothing new to tell. Obviously, we are keeping in touch with various brokers, but at this point, I’m not optimistic that anything soon will come down the pipe.

Operator

And you have a question from the line of Gary Giblen. Please proceed.

Gary Giblen – Goldsmith & Harris

Hi David! Hi Armand! Hi everybody else that’s concerned!

Armand Correia

Hi Gary.

Gary Giblen – Goldsmith & Harris

You mentioned in the release and on the call that you fully expect some promotional activity by competitors, so my question would be how specifically observed are that comment? In other words, there has obviously been huge things going on, in fact, from the upscale department stores, but that’s not your market, so in your overlap competitors, do see specific things that lead you to believe that it is going to be extremely promotional?

David Jaffe

I think it’s already happening Gary. Whether it’s the mailers that we all get or the SSIs or we all shop our competition, and the tenure of the promotions and the depth, the breadth of them throughout the store just feels more intensive as we get further and further into the season than it did last year, so we are not panicking and saying, ‘oh my God, we’ve got to match everybody and go a step further.’ We just realize that to move goods in this market, you’ve got to make sure that everybody understands you are offering a great value, and so some of the things we talked about speak to that point specifically. I think all our competition, probably, virtually every women’s apparel retailer today is thinking about how to get that message across because that’s what the customer wants to see.

Gary Giblen – Goldsmith & Harris

Sure. And is the competitive intensity, has it leveled out or is it seeming to getting more intense?

David Jaffe

I think it’s a judgment call. Right now, I’d say it seems like it’s leveling off as we approach the end of the season, but you know, we are going to watch it. Just to go back to our May results, a month ago, we thought we had everything under control and then the bottom fell out a little bit, and we dropped from a trend of down five to down twelve, so, I can’t explain that. We can say it was weather, we can say it was this or that, but the customer as gas goes up, I think there is an inverse relationship to her spending on discretionary items like apparel, and many of you may have seen the newspaper this morning about consumer confidence. It’s now at a 16-year low. That’s not good for business, especially the older, more financially responsible and fiscally prudent missy customer at Dress Barn.

Gary Giblen – Goldsmith & Harris

And finally, have accessories picked up not just as a percent because dresses might be down, but I mean are absolute levels of accessory sales going up?

David Jaffe

Yes, definitely. Accessories business has been very good at Dress Barn. It did show for the quarter an increase over the last year. Our handbag business has been very strong. In addition, our sleepwear category has been strong also. Our jewelry as a total is also increasing over last year, so you would expect in tough times for those businesses to pop up a little bit, and they have.

Gary Giblen – Goldsmith & Harris

Yeah. Good thing you are emphasis those categories frequently. Okay, thank you very much.

David Jaffe

Thank you.

Operator

And you have a question from the line of Brian Ronnick with BLR Capital Partners. Please proceed.

Brian Ronnick - BLR Capital Partners

Could you please review the various matrices you gave regarding the inventories at the end of the quarter and where they stand now?

Armand Correia

I could. Specifically, what are your looking for?

Brian Ronnick - BLR Capital Partners

By division. I think I heard your say Dress Barn down one at the end of the quarter per square foot, but I thought I heard you say down two or three.

Armand Correia

Yes. I’ve given a couple of stats on the merchandise at the end of the quarter. Again, by division, Dress Barn stores was slightly above last year overall, but on an average store basis ending the quarter, Dress Barn stores were down 1%, and on a square footage basis Dress Barn stores were down 2%. As far as Maurices, overall, they were up 11%, but again that’s supported pretty much by the 12% store growth. Average store inventory levels were approximately flat to the prior year. However, keep in mind that that included 29 stores that are going to be open in Q4, so when you take that into consideration, average store inventories for Maurices’ stores were actually down approximately 3%, and on a square footage basis, they were flat, but again lower if you take into account the 29 stores.

Brian Ronnick - BLR Capital Partners

So on a dollar basis, Maurices’ inventory at the end of the quarter comp store inventory…

Armand Correia

Well, the overall inventory was up 11%.

Brian Ronnick - BLR Capital Partners

Understood, but if you looked at same stores open this year versus last year, those…

Armand Correia

On a same store basis, I would say they were flat to down one.

Brian Ronnick - BLR Capital Partners

Okay, great! Regarding the auction rate securities, you say you are getting higher rates. Are you referring to higher rates than like an institutional money market that’s paying around 1.7% or are you talking about like default rates that would be in the 12% to 15% range.

Armand Correia

Those default rates securities that are paying that high are the ones that are being called in. We’ve had a couple called in but very few. Right now, our portfolio ranges anywhere from 3% to over 6%. Some of them do include penalty causes but they are on a case by case basis, so on an average of basis, we are very pleased with the kind of yields we are getting, and again they are certainly above market, and they are all again AAA securities, student-backed by the US government, but the issue right now is there is no market in them right now.

Brian Ronnick - BLR Capital Partners

And that’s relative to the $58 or so million that you have recorded as marketable security investments under long term.

Armand Correia

No. Actually, it’s 62.

Brian Ronnick - BLR Capital Partners

It’s 62? I thought you took a markdown on those.

Armand Correia

Yes, we’ve taken about a $3 to $3.7 million markdown on that, so you are in the range of 58 plus net.

Brian Ronnick - BLR Capital Partners

Which is the way it’s listed on the balance sheet, correct?

Armand Correia

That is correct.

Operator

At this time, we do not have any more questions in the queue, and I would like to turn the presentation back to management for closing remarks.

David Jaffe

Thank you, operator. I’d like to thank you all for your interest in Dress Barn and look forward to speaking to you on our year-end call in September. Thank you.

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Source: Dress Barn, Inc. F3Q08 (Qtr End 04/26/08) Earnings Call Transcript
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