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

F2Q08 Earnings Call

August 21, 2008 10:00 am ET

Executives

Jean Fontana - Investor Relations

Bud Bergren - President and Chief Executive Officer

Keith Plowman - Executive Vice President, Chief Financial Officer and Principal Accounting Officer

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

Analysts

Kerry McInerney - Banc of America Securities

Emily Shanks - Lehman Brothers

Grant Jordan - Wachovia

Reade Kem - Merrill Lynch

Karru Martinson - Deutsche Bank

Colleen Burns - Oppenheimer

David Glick - Buckingham Research

Michael Exstein - Credit Suisse

Greg Gore - Kimco

Operator

Welcome to today’s Bon-Ton Stores Inc. second quarter 2008 earnings conference call. (Operator Instructions) I would like to turn the conference over to Jean Fontana, of ICR..

Jean Fontana

Welcome to Bon-Ton’s second quarter of fiscal 2008 conference call. Bud Bergren, President and CEO; Tony Buccina, Vice Chairman and President, Merchandising; and 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 website 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 that 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 are described in the company’s fillings with the SEC. As a reminder, this call is being recorded, Thursday, August 21, 2008, and at this time, I would like to turn the call over to Mr. Bud Bergren, President and CEO.

Bud Bergren

I will begin with my comments on the second quarter 2008 and my outlook for the second half of the year. Keith will then provide details of the second quarter 2008, financial results and review the revised financial guidance and assumptions for 2008. Tony will outline the second quarter merchandise result and discuss the merchandising initiatives as we head in to the fall and holidays selling fees. I will make closing remarks and then we will be available to address your questions.

In a difficult retail environment we played good defense, here are some of highlights. To discipline management we reduced our comparable store inventory by approximately 9%. Our clearance level decreased approximately 10% compare with prior year period. We continue to review our expenses and are pleased that during the second quarter we realized a net reduction of $9.3 million in our SG&A expenses and $13.8 last year-to-date.

In addition when comparing our performance with the second quarter of last year our excess borrowing capacity under our credit facility increased to $238 million a $9 million increased, plus we reduced our debt levels by $80 million over prior year period. We have cut our capital expenditures by $10 million to $70 million for 2008. In eCommerce we continue to increase our assortment offering. Currently, our three strongest categories continue to be soft home, hard home and shoes.

Our growth in fall will come from a combination of direct vendor fulfillment and expanded online assortment offerings. We also opened our 12th furniture gallery on July 23, Muskegon, Michigan. We look forward to the opening of our new store in Blaine, Minnesota in September and to our newly expanded and remodel stores one in Lancaster, Pennsylvania and the other in Okemos, Michigan, both will be celebrating grand re-openings in October. We believe we have great opportunities to enhance the total shopping experience for our customers in these markets.

Our private brand continues to grow as evidenced by its continued penetration to total sales, almost 19% versus last year’s 18%. Our regional results reflect Detroit, Buffalo and Minneapolis and Omega as our best regions. Our worst performing regions were Central Pennsylvania and our markets in Ohio, Michigan and Indiana continue to be impacted by the auto industry.

The Detroit market area does not impact at all to our business, mater of fact our Carson’s stores are doing very well there. Last week, we introduced our new own credit card loyalty program to our customers, YOUR REWARDS. That card gives our customers more rewards with fewer restrictions. We now have a universal credit card program across all of our nameplates.

A key step in finalizing integration of Bon-Ton and Carson’s which provides one clear and consistent program and message to our customers across all the eight nameplates. The new program offers our customers new features based on their shopping behavior, as we strengthen our relationship with our customers. In addition we believe this will drive profitable sales growth by increasing the use of our own credit cards.

We will annualize and use the data we captured from our point-of-sale to communicate more effectively with our customers. We are benefiting from an increase in average transaction size driven by a slight increase in the average retail price per unit. Transactions and sales were down due to lack of traffic. Our customer continues to be event and value-driven. In the second half of the year, we expect a favorable response to newer reductions in our merchandizing assortment, marketing initiatives and YOUR REWARDS credit card royalty program.

Looking ahead to the remainder of 2008, we will continue to manage our business assuming that the difficult macro economic environment does not improved. We continue to adjust our operating plans based on what we are seen in the marketplace and are making every effort to capture sales opportunities while remaining entirely focused on controlling inventory, expenses and capital expenditures.

We have many opportunities as we entered the important fall and holiday seasons such as new merchandise offerings, expanded eCommerce, fresh marketing initiatives and a new credit card loyalty program. We remain confident these actions will benefit both the short and long-term growth of our company.

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

Keith Plowman

I will review the income statement and balance sheet component and then update our fiscal 2008 guidance and the assumption underlying this guidance.

Before reviewing the financial details, I want to emphasis some key strength of our financial position that despite the weakness in sales we maintained a strong balance sheet that reflects lower inventories and reduced debt and going forward we have the flexibility to invest in short and long-term initiative to growth the company.

We have an appropriate debt structure in place and our excess borrowing capacity with $238 million at the end of the second quarter of fiscal 2008, approximately $163 million above our credit facility covenant of $75 million. This reflects the prudent management of our inventory, expenses in capital investments, which permitted us to reduce our debt level below the prior year second quarter level. We expect our excess borrowing capacity will increase as we move forward through the second half of fiscal 2008.

Moving to a discussion of the second quarter and year-to-date financial results of fiscal 2008; the net loss for the 13 week period ended August 2, 2008 was $33.8 million or $2.01 per diluted share including a non-cash pretax goodwill impairment charge of $17.8 million or $0.72 per share. This is compared with a net loss of $15 million or $0.91 per diluted share for the 13 week period ended August 4, 2007. For the 26 week period ended August 2, 2008, the net loss was $67.9 million or $4.04 per diluted share, compared with the net loss of $44.3 million or $2.68 per diluted share reported in the 26 week period of fiscal 2007. The year-to-date fiscal 2008 will also reflects the impact of the goodwill impairment charge of $0.72 per share or unadjusted for the goodwill will be done $3.32 per share.

For the second quarter fiscal 2008 comparable store sales decreased 5.7% compared with the prior year period. Total sales for the second quarter of 2008 decreased 5% to $673.4 million compared with $708.6 million for the second quarter of fiscal 2007. Year-to-date comparable store sales decreased 5.1% and year-to-date total sales decreased 5% to $1,373.6 million compared with $1,446.2 million for the same period last year.

Other income in the second quarter of fiscal 2008 decreased $21.5 million decreased to $21.5 million compared to $22.3 million in the second quarter of fiscal 2007. For the six month period ended August 2, 2008 other income was $44.3 million compared with $45.1 million for the prior year period. The decrease in both periods reflect the reduce in sales volume. Gross margin dollars in the second quarter of fiscal 2008, decreased $28 million compared with the second quarter of fiscal 2007 reflecting the current year decrease in sales volume and a lower gross margin rate.

The second quarter fiscal 2008 gross margin rate decreased 2.2 percentage points to 35.9% of net sales compared with 38% of net sales in our prior year period primarily reflecting increased markdowns. Year-to-date gross margin dollars decreased $37.1 million compared with the prior year period. The year-to-date gross margin rate decreased 0.8 percentage point to 34.9% of net sales compared with 35.7% in the prior year period.

SG&A expenses in the second quarter of 2008 decreased $9.3 million to $246.4 million compared with $255.7 million in the second quarter of fiscal 2007. The second quarter of fiscal 2008 SG&A expense rate was 36.6% compared with 36.1% in the prior year period reflecting the reduced sales volume in fiscal 2008 compared to fiscal 2007.

Year-to-date SG&A, expenses decreased $13.8 million, $502.2 million compared with $516 million for the prior year period. The SG&A expense rate year-to-date was 36.6% compared with 35.7% in the prior year period, reflecting the lower sales volume in fiscal 2008.

EBITDA, defined as earnings before interest, taxes, depreciation and amortization, including amortization of lease-related interests and goodwill impairment charge, decreased $19.5 million in the second quarter of fiscal 2008 to $16.5 million compared to $36.1 million in the second quarter of fiscal 2007. Year-to-date EBITDA decreased $24.2 million to $21.3 million compared with $45.5 million in the prior year period. EBITDA is not a non-GAAP term, for reconciliation of EBITDA to net loss, please refer to our earnings press release.

Depreciation and amortization expense, including amortization of lease-related interests in the second quarter of fiscal 2008 decreased $500,000 to $31.1 million compared to $31.6 million in the second quarter of fiscal 2007. Year-to-date depreciation and amortization expense, including amortization expense, including amortization of lease related interest increased $1.6 million to $61.3 million compared with $59.8 million in the prior year period.

Comments regarding the goodwill impairment charge. The current economic environment has depressed stock values for many companies. This factor, coupled with the expectation that the current macro-economic environment challenges will impede near-term recovery in the retail business, has led the company to determine that, in accordance with accounting pronouncement SFAS No. 142, we must recognize impairment of our goodwill.

A review was completed of the carrying value of goodwill for fiscal 2008 and, as a result we recorded a pre-tax charge of $17.8 million to write-off the full value of the goodwill in the second quarter. On an after-tax basis, this equates to $12 million, or a charge of $0.72 per share. This is a non-cash charge and does not impact or impair our future profitability, cash position, EBITDA or ability to generate a positive cash flow in fiscal 2008.

Additionally, we have performed a review of our other indefinite-lived intangible assets and have determined no impairment adjustments are required on these assets in the second quarter of fiscal 2008.

Interest expense, net in the second quarter of fiscal 2008 decreased $3.1 million to $24.4 million compared with the second quarter of fiscal 2007, largely due to decreased borrowing levels and reduced interest rates. Year-to-date interest expense net, decreased $6.2 million to $48.7 million compared with $54.9 million in the prior year period, largely due to decreased borrowing levels and reduced interest rates as well as a $1 million of prior year expense incurred for the early extinguishment of debt.

Moving to some key ratios and balance sheet amounts, we have a strong balance sheet, we believe we will generate positive cash flow in 2008 to invest in our business and continue to pay down debt. Our working capital decreased to approximately $427.4 million compared with $474.6 million last year, a reduction of 9.9% or $47.2 million and it primarily reflects the lower inventory levels. Merchandise inventories at cost decreased $46.6 million or 6.2% compared with the prior year reflecting inventory reductions in response to the macro environment. Retail inventory for comparable stores decreased approximately 9%.

Total debt, to total cap including capital leases was 80% at August 2, 2008 compared with 81% in the prior year period. Total debt including capital leases was $1,189.8 billion at August 2, 2008 compared with $1,270.4 billion at the end of the second quarter of fiscal 2007, a reduction of $80.6 million or 6.3%. We are committed to reducing debt with cash flow generated by the business and we continue to work towards our long-term goal of 2.5 to 3 times debt-to-EBITDA ratio.

We have $100 million of swap and our fixed rate debt to funded debt was 79%. Excess borrowing capacity at the end of the second quarter or fiscal 2008 was $238 million compared to $229 million at the end of the second quarter of 2007 and again our covenant in the revolving credit facility requires a $75 million minimum requirement for excess borrowing capacity and we were at $163 million approximately above that.

In the second quarter of fiscal 2008 we were approximately $18.23 million in Letters of Credit outstanding compared with the prior years $19.5 million. Book value per share was $16.81 versus $17.72 in the prior year and our capital expenditures net of landlord contributions were $43.5 million year-to-date, which compares with the prior years $44.8 million reflecting in 2008 spending for some expanded stores, new stores and IT systems and we do expect capital spending will decrease in the second half of 2008.

Closing with some comments in our full year revised fiscal 2008 guidance which is as follows. In light to the challenging retail environment inventory, capital and expense management remained key focal point for the company. Our revised guidance for the full-year fiscal 2008 is as follows, EBITDA in the range of $200 million to $230 million, EPS in the range of loss of $0.45 to $0.95 per diluted share omitting the write-off of goodwill and a loss of $1.17 to $1.67 per diluted share including the write-off of goodwill.

The underlying assumptions reflected in our revised fiscal 2008 full year guidance include comparable store sales decrease in the range of 3.5% to 5%. Gross margin rate of 35.6%, a continued decrease in our SG&A expense dollars from the prior year. Capital expenditures of $70 million net of landlord contributions, and estimated diluted weighted average shares outstanding of 16.8 million to 17 million shares.

In a difficult retail environment, we believe we need to indicate a range of potential outcomes reflecting that the economy and retail environment may remain challenging for the balance of 2008. We expect that we will generate positive cash flow in fiscal 2008 and reduce our debt level despite the non-cash goodwill charge and the potential results for the year.

Our current estimate for cash flow is in the range of $40 million to $50 million for the year permitting us to reduce our year end debt levels by this amount as compared to the year ended fiscal 2007 balances and I would like to point out that cash flow estimate does not reflect additional benefit of the working capital reduction the company has enacted in response continuing difficult retail environment.

Our balance sheet is stronger than a comparable period in the prior year as evidenced by the reduced debt levels and strong excess borrowing availability. We remained confident that we are well-positioned to take advantage of the opportunities when the economy showed signs of recovery. Our Form 10-Q for the second quarter of fiscal 2008 will be available around September 11, and at this time I would like to turn the call over to Tony.

Tony Buccina

Our second quarter financial results reflect the continuation of the difficult macro economic environment making it difficult for us to grow our top line sales. I remained confident that we effectively executed our merchandize strategy for the second quarter and first half, but I would add that we were not happy with out lower margin rates for the second quarter versus prior year.

Although we had lower inventory levels in prior year all season long our regular price merchandise did not have the sell throughs that we planned or as good a sell through as the prior year. Therefore we needed to be more aggressive with markdowns and promotions in order to ensure entering fall with clean inventories. Having less clearance inventory entering fall should benefit our margin rate in the third quarter. We controlled what we could, our receipts, our pricing and our freshness of our inventory and we did not falter from executing our merchandise strategy.

I’d now like to share with you highlights of our second quarter. Our franchise businesses grow in percent to total sales and outperform the total company sales, but we missed our plan. Out of the three new focus businesses, handbags, men’s outdoor apparel and furniture galleries, only handbags made their plan.

Our storewide key item initiative that provides higher than total store margins penetrated us slightly over 20% of store, but missed plan. However, within our key items initiative our incredible values program our most profitable key item program exceeded our plan penetration. Differentiated product penetrated a third of our total sales but missed plan. Private brand outperform total company sales and grew to 19.4% from 18.7% in the second quarter of 2007 and within our private brand our biggest increases in penetration came in special size sportswear, petites in large sizes, intimate apparel, ladies shoes, men’s furnishing and home.

Our eCommerce business is new to our company and although a very small business is continuing to grow as we increased the assortment offerings online, we are executing to maximize our opportunity within this initiative. Our overall transactions during the second quarter were down from the prior year period, but our average selling retail and average dollar transaction were essentially flat to up-tick, and as Bud mentioned at the end of the second quarter inventory on a comparable store basis was down 9% and our clearance inventory decreased approximately 10%.

We will remain conservative with fall holiday 2008 sales and inventory plans. Our focus is all about executing our merchandise strategy. We will continue to grow our franchise business faster than the total store with the addition of three new businesses to focus on hand bags, men’s outdoor apparel and furniture galleries.

We will continue to strengthen our key items strategy with flawless execution to 20% to 25% penetration with a focus on newness and expanding our incredible value program. We will continue to drive our differentiated merchandise assortment to about one-third of our assortment with private brand now compromising the majority of the differentiated product in our stores.

We are really excited about new product launches starting to hit our stores as we speak. We believe these launches are going to excite our existing customers and attract new customers. First is as an exclusive collection from fashion designer Victor Alfaro. The collection will have broad appeal as it crosses a wide range of age groups and demographics and will be a great complement to our existing portfolio private label and national brands.

We believe the distinctive styling, quality and value of this exclusive line will strengthen our position as a destination for fashionable, exclusive apparel and accessories. The goods are spectacular go see for yourself and women on the call try them on, fit and quality is second to none. We are also excited about the new brands in our moderate update franchise business. Remember these newly produced brands that had been out of our assortments all spring season. Evan Picone it’s produced exclusively for us by Jones apparel, and J.H. Collectibles is being produce exclusively for us in our marketplace by Li & Fung.

Our new relatively signature carrier label in private brands complements one of the largest and most successful brands in our company, Relatively Casual. These new brands in our moderate update franchise business positions us convincingly with affordable, fashionable work apparel that our customers are looking for in all of our market.

In men’s sportswear, we will introduce Kenneth Roberts’s sportswear in 100 doors. This line complements our most successful brand in men's furnishings and in children we will rollout to all locations our exclusive line of Cuddle Bear. I couldn’t be more proud of our associates in merchandise planning, visual marketing stores and human resources. As I said before, people make the business happen. When our company goes into battle they are all side-by-side, no one is behind. This team at Bon-Ton is focused on execution and on winning. We planned on taking advantage of every opportunity to capture market share, and I’ll now turn the call back over to Bud.

Bud Bergren

We have a strong experienced management team and I have a high level of confidence we can execute our plan in this challenging environment. We have many opportunities that we expect to take advantage of as we entered the second half of 2008. We’re taking the appropriate action in this environment and remain confident these actions will benefit both the short and long-term growth of our company.

At this time, we’ll open discussion to question.

Question-and-Answer Session

Operator

(Operator instructions) And we’ll take our first question today from Kerry McInerney of Banc of America Securities.

Kerry McInerney – Banc of America Securities

I was wondering if you could talk about some of the back half expectations that are implicit in guidance, sounds like the higher end of the range looks a little bit of comp left and you’re also looking for gross margin to see less pressure there in the second quarter. So, I was wondering if you could talk about that a little bit and maybe also give your inventory expectations for the back half.

Keith Plowman

Okay, I’ll address the guidance piece of it, Kerry and then I’ll turn it over to Tony for the inventory peak in the second half. As you look at our guidance, what we are trying to accomplish here is we are to trying to give a range of what expectations could be based upon in more difficult environment. As you look at our results in fiscal 2007, which is where we built forward from and you look at the first half of the year versus the second half of the year. In the sales arena, we really did have a stronger performance in the first half of fiscal 2007 and started to see the macro environment deterioration in the second half of 2007.

So, as we go forward in a year and we were building up to our numbers, the 5.1% that we realized in the first six months of 2008 compared back to an adjusted basis taking out the comparison for liquidation of inventory, compared back to about 2.1, a little over 2% decrease in 2007 for that same six months period.

As we go forward into the fall season in the second half of 2007, we were down closer to 3.5% for the fall season in our comp store sales results. So what we said that we would be down 3.5 for the year as of the better end that caused the lower end of the loss range of our guidance. That is with the expectations that because of the comparisons, the fact that we had a much higher decrease in the second half of last year, we would not have as much as of the fall in the comp store sales results. That’s how we built the lower end of our guidance of the loss range.

The higher-end of it, where we have the loss of $0.95 on an unadjusted basis we’re not putting in the goodwill impairment, we reflected essentially if the macro environment continues to deteriorate and essentially we would see about a 5% decrease as we experienced in the first six months, continue throughout the year even though the comparisons to the second half of the year aren’t as bad we are trying to reflect a more conservative models.

Moving over to the gross margin, we essentially look at it in the same way. When you look at our gross margin rates in the first half of 2007 as compared to 2006, it’s fairly comparable in what we did, but when you look at the second half of 2007 as compared to the second half of 2006. We have quite a drop last year. We dropped almost 1.2 percentage points in our gross margin rate in the second half of 2007. So, with our guidance what we are reflecting here is that we’re reflecting that we’ll have continued deterioration in the second half dropping our total year rate to 35.6% for the year.

Taking that back against comparisons, but again the second half should be more favorable, but we are trying to reflect that, the consumer also may retract because of the fuel cost and things like that, for home heating and different items in the second half. So we are trying to give a range here that we believe is potentially realistic depending on the macro environment, but certainly give the conservative view and it also demonstrates that the company will generate positive cash flow in the guidance that we’ve given of $40 million to $50 million.

Bud Bergren

On the inventories Kerry, we entered fall as we said down 9% comp. We have less clearance and less inventory than we had prior year and last year at this time we had more inventories. We had more going into the fall season, so we have less inventory and we have less clearance inventory going into fall, which should benefit margin.

Operator

And we’ll take our next question from Emily Shanks with Lehman Brothers.

Emily Shanks - Lehman Brothers

Can you let us know what the outstanding revolver balance was and specifically, which trenches of debt you reduced during the quarter?

Keith Plowman

I’ll just run down through the debt components. The senior notes would have still been at $510 million, CMBS facility would have been $250 million, the revolver was about $350 million, then we have miscellaneous mortgages, the capital leases all that put together was about $80 million that would bringing you to about the $1,190,000 million of outstanding debt.

Emily Shanks - Lehman Brothers

And then can you comment at all around, if any of your vendors have made or requested any changes to their payment term. You did have some accounts payable leverage, but I like to get your response to that?

Keith Plowman

There is no question, this type environment, you have conversations with vendors, there are partners, we have conversations with our factors and we keep communications out there. The biggest difficulty we have at this point is dealing with the rumor mill. Yesterday there was a release that came out, that talked about changes in terms and such and unfortunately the headlines as they come out make it sound like there has been changes out there, but when you read down through the article you would see that the factors, comments were that there has been no changes in the terms and I can tell you we have good relationships out there.

What we’re trying to do is keep things the facts, and when you look at the facts our excess capacity is $238 million, which is actually running above last year and as we go through the rest of this year historically we have always increased our excess capacity. So we expect that will continue to do that. Our comp inventory levels are below the prior year, we are management inventory is very tight. Our inventory is more current at the end of the second quarter than it was in 2007.

Capital expenditures are being managed below our depreciation and amortization. Our expenses are trending below and we’ll continue to be below the prior year level and essentially our debt level was over $80 million better than the prior year. So, when you look at all the facts, you look at the strength of our balance sheet, you look at the fact that we will have cash flow coming in based upon the guidance we given, it will generate positive cash flow to reduce our debt. Right now, we believe we have very good partnerships out there with the factors, the vendors, the investors so forth and we’re going to continue to communicate the strength of the company as it goes forward in what is the very difficult environment.

Emily Shanks - Lehman Brothers

And clearly, during the quarter your accounts payable leverage did increase, is that a result of the working capital changes and improvements that you are targeting or should we expect some more through the back half of this year?

Keith Plowman

You had a little of leverage improvement, it’s not substantial, we went down little bit in AP, we went down more in inventory. What that really does reflect is as you look at our ageing this compared to last year to second quarter, we were more current and when you have more current inventory you have coverage to cover that inventory, you don’t have to pay for it. The more dollars you have out in the age bucket, you’ve had to pay for the inventory by that time you’re carrying. It costs you more to finance that inventory. We have our inventory in a more current basis, so therefore we can utilize the AP.

Emily Shanks - Lehman Brothers

If you could just one last question, if you could comment at all around the impact of the floods out in Iowa either on sales or EBITDA during the quarter?

Bud Bergren

In the month of June it affected us a little bit, but nothing that really would be a major factor.

Operator

And we will take our next question from Grant Jordan at Wachovia.

Grant Jordan – Wachovia

One follow-up on your discussion of vendors, Keith do you know roughly what percentage of your business is done through factors?

Keith Plowman

I don’t know the percentage, that will be through factors, we have some pretty strong partners there and some very large ones and I do know that the amount that they factor out there is a substantial number, but based upon turns and such I am going to estimate, we are somewhere in the 30% to 40% range, but that’s a guess.

Grant Jordan – Wachovia

And then just drilling down a little bit more in SG&A, first six months of the year you are down $14 million versus last year. I think if you take out some one-time expenses you’re down like $20 million. To fell like that you’re getting closer to the run rate hearing what we’ve seen in Q1 and Q2 or is there more to go?

Keith Plowman

Well I think you have a combination there Grant. I mean first off you do have some extent that are coming out because we are in an environment that is pushing down sales, pushing down the activities in the company and I think you’re saying everyone out there is responding to that which is prudent. So some of what you’re seeing there is a reaction to the market, some of it is the efficiency that we are realizing.

If you go back to original $33 million we talked about in cost savings, we have achieved that, surpass that. That number is pushed back in the record and we are not track to it any more because we realized the efficiencies we expected from the acquisitions. The difficult part is trying to do an apples-to-apple because of the downward trend in the business and the volume. You really do react and you do cut expenses, at long-term we don’t expect to keep there. So we have a mixture right now.

I would tell you that we feel comfortable based on first two quarters, where we are operating with our SG&A. We expect that we will continue to have savings for the reminder of this year in our SG&A line, but certainly we would love to see some growth out there in the sales recovery, in the environment and respond accordingly.

Grant Jordan – Wachovia

Okay and then my last question with the bankruptcy file at Boscov, which is a competitor in some of your markets. Do you feel like there is going to be any sort of competitive pressure coming from those stores if they do anything different.

Bud Bergren

The ten stores they announce closely, none of them compete directly with us. If anything, they laid on receiving for good, so if anything it might be a small benefit.

Operator

And we’ll take our next question from Reade Kem of Merrill Lynch. Please go ahead your line is open.

Reade Kem - Merrill Lynch

I may have missed it, but Tony could you discuss what is the gross margin rate on decline you saw on the quarter, was that a little bit less sever on your private label merchandise?

Tony Buccina

Both the private brand and our branded merchandise had decreased and that’s really because both brand and private brand merchandise had less sell-throughs at regular price than they had the prior year and we make conscious decisions to keep our inventory fresh and as we didn’t sell, get the regular price sell-throughs we took markdowns and as a result of that we are entering cleaner in our better age of inventory and its much fresher and it’s less clearance.

Reade Kem - Merrill Lynch

And as far as the plan with inventory still coming down, I don’t know about in terms of the lead time for the private brands, have you also dial that back a little bit to the fall?

Bud Bergren

Yes, we actually did that in second quarter also. We have flexibility with our resources there as long as there is enough time to make those decisions. We’ll be running down probably mid singles, that’s what we are planning our average inventory down in the fall.

Reade Kem - Merrill Lynch

And I know it’s very new, I guess the Evan Picone and the Alfaro lines have just hit the stores. It seems like maybe just a few weeks ago, but any early takeaways on how they are performing?

Bud Bergren

The fixtures as well as the inventories are coming up, it is set up in our stores over a couple week period, but we got them set up Milwaukee. I do invite the ladies to check it out and try it on because its spectacular.

Reade Kem - Merrill Lynch

The $10 million in CapEx you cut back, can you say what projects or what sorts of things you may have cut back on?

Keith Plowman

We’ll that will be more focused in the store area than anywhere else. We are keeping all the maintenance running as it used to be. There was some expansion in items that we are looking at that we’ve decided to defer at this point until we see some change in the environment.

Reade Kem - Merrill Lynch

And just last one, I know the Internet still ramping up for you, but is that operation profit contributor at this point?

Bud Bergren

Yes it was. Actually, even last year it was a break-even operations, so we expect it to make money this year. Our margin rate there is obviously higher than our company’s margin.

Operator

And we’ll take our next question from Karru Martinson of Deutsche Bank.

Karru Martinson – Deutsche Bank

I believe last quarter you guys also highlighted a $40 million to $50 million free cash flow target, now that you guys are bringing down EBITDA guidance? I was wondering could just kind of walk us through what you’re seeing in terms of cash taxes, interest and so forth that kind of get this to that number?

Keith Plowman

Well there is two things that happened there Karru, and that’s why in the press release we put out the numbers. Starting with the EBITDA you do eliminate the one, which we had a question basically on how you’re going to do that, if your net income is lower based on your guidance and knowing that the goodwill impairment is the non-cash charge, which we do get some tax benefit for, but we have a non-cash in the top-line and the second item is the reduction in the capital. Our guidance before was essentially that we’d be at $80 million, we are down to $70 million, when you take those back and fourth you’re going to reconcile within a couple million dollars with the guidance we’ve given.

Karru Martinson – Deutsche Bank

And in terms of the revolver availability, where do we stand today as we kind of gotten the back-to-school inventory into stores?

Keith Plowman

We’re basically running pretty close to where we were at the end of the quarter, not a whole lot a change, it will continue that way. We are not giving out that number except on a month end basis, but I will tell you again as I’d stated earlier that number will go up, it goes up more straightly in the original part of the month and then it grows larger as we get to the end of the quarter and we’ll have higher capacity as we go through the year.

Karru Martinson – Deutsche Bank

I’m not sure, if I heard the number correctly, you guys had kind of a strong start to the back-to-school season and then a little bit on the slowing going forward, how are we tracking this year?

Bud Bergren

I would tell you that we’re pleased with our children's business. We’re not pleased with our juniors and young man’s business.

Karru Martinson – Deutsche Bank

In terms of the quarter, how much did we feel that there was or is there was any benefit from stimulus checks that we saw?

Keith Plowman

That is something that’s very difficult to measure. We didn’t directly go out and try to attract to that because it’s very difficult to do. We did see within our tender types that there was some increase in the cash and in the check that was paid, but there was decreases in certain other areas that don’t exactly support, so I would say overall there might have been some impact, but it would have been very minimal.

Karru Martinson – Deutsche Bank

Just lastly, in terms of the competitive environment, are you seeing any increases in promotion and based on your larger markets like Chicago, how is that all playing out?

Bud Bergren

We deal with a very promotional business and it’s always been promotional. So, we really haven’t seen a major change at all from any of our competitors.

Operator

And we’ll take our next question from Colleen Burns of Oppenheimer.

Colleen Burns – Oppenheimer

Following on that question about the competitive environment, what’s your budget or your plan for the back half of the year regarding advertising and promotional activity?

Bud Bergren

Our promotional dollars will be about the same as what we’ve spent last year. The mix is probably going to be maybe a little different spending less than ROP and more little bit in television and direct mail. We’ve tested a few things that have been successful and we’re adjusting our accordingly to what the customers responding to.

Colleen Burns – Oppenheimer

And then with your inventory, I think you said you expect comp store inventories to be down mid-single digit into the back half of the year. In regards to your back-to school inventories, how you planned for that, did you plan for that to be down mid-single digits as well?

Bud Bergren

Yes.

Colleen Burns – Oppenheimer

And then, I might have missed this but how did cosmetic perform in quarter?

Bud Bergren

Cosmetics is actually one of our better performers not only for the quarter, but for the whole spring seasons. Our two best performing categories were basically cosmetics and children’s.

Colleen Burns – Oppenheimer

And cosmetics is one of the areas where they track market share, so do you think that you’re holding your own in terms of market share versus competitors?

Bud Bergren

We know we are holding our market share, actually gaining them.

Colleen Burns – Oppenheimer

And then just on the POS rollout, where do we stand on that and what’s the timeline there for the rest of the year into next year?

Bud Bergren

That’s all completed, this year is entirely completed and we we’ll start another batch in the first of February.

Operator

And we’ll take our next question from David Glick of Buckingham Research.

David Glick – Buckingham Research

Good morning, Keith just a quick question on SG&A. How much is any of the SG&A reduction in the quarter was due to lower incentive compensation, was there any accruals of incentive comp from the first quarter, and do you have a revised incentive comp plan in place for the second half or for the fourth quarter based on you reduced plan?

Keith Plowman

David, we’re taking the first part of it. David, there is no question and that’s why when the question came up earlier, I said some more of our temporary items, expense reduction that you don’t want to see there as you go forward. Others are more permanent, better efficiencies, we definitively have pulled out some costs as we go in this year with the operations being were is at and the difficult environment that does impact the incentive plan that we have out there. So that adjustment has been made for the first two quarters and we expect that we will continue to do that until we see a turnaround.

David Glick – Buckingham Research

Do you have a revised plan for the second half?

Bud Bergren

There is nothing that we’ve announced for the second half yet.

Operator

And we’ll take our next question from Michael Exstein of Credit Suisse.

Michael Exstein - Credit Suisse

Good morning everyone. Two quick questions for you; one, can you talk about the other income trends, what you’re seeing in terms of credit card contribution and so forth there, and secondly, as sales have been disappointing unfortunately I would imagine that some other four well profitability is beginning to change. Where are you in terms of valuing your store fleet, and when do you think you will make any decisions, if there are any need to be made on closing stores? Thanks.

Keith Plowman

Taking your first question Mike, this is Keith. Looking at the other income as you can see in the quarter and year-to-date both the percentage, as percent of sales remained strong, so really the decrease does reflect more than any thing, the downturn in the sale environment of which our proprietary credit card sales are portion of that.

We are seeing some impact certainly on the front with HSBC and the card. The credit terms have to tightened up in certain areas and as we have mention on prior calls, they are watching delinquencies and write-off, you’re hear hearing about that everywhere that there is pressure out there in a credit environment and its is impacting whether its American Express, Visa MasterCard so fourth. So, we are continuing to watch that, we are happy with our performance in the first six months and certainly we’ll continue to watch has we go forward in the second half opening for some recovery out in the credit environment.

From the standpoint of performance otherwise, on the credit card I think at this point we feel good about where it sits, we believe that we have it appropriately reflecting in our numbers and I think that will perform strong based upon the rest of year, more or less as we have in the first half.

Bud Bergren

The closing of stores, any store that is not profitable and we have an opportunity we do look at closing, we got a track record of that and we have nothing to announce at this time or anything.

Operator

And we’ll take our next question from [Greg Gore with Kimco].

Greg Gore – Kimco.

Could you please repeat, what’s the outstanding line of credit is please?

Keith Plowman

Do you want to hear all the different debt balances?

Greg Gore – Kimco.

Just the, I miss the comment about outstanding Letter Of Credit.

Keith Plowman

Okay, letter of credit were $18.5 million

Operator

At this time, I will turn the call back to you for additional or closing remarks.

Bud Bergren

Thank you for your interest in Bon-Ton and we look forward to speaking with you about the third quarter of 2008 financial results on our conference call in November and thanks for joining us and your interest this morning.

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Source: The Bon-Ton Stores, Inc. F2Q08 (Qtr End 08/02/08) Earnings Call Transcript
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