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Executives

David R. Jaffe - President, Chief Executive Officer

Armand Correia - Senior Vice President, Chief Financial Officer

Keith Fulsher - Chief Merchandising Officer of Dress Barn

Lisa Rhodes - Chief Merchandising Officer of Maurice's

Analysts

Gary Giblen - Goldsmith & Harris

Samantha Panella - Raymond James

Christopher Kim - J.P. Morgan

Janet Kloppenburg - JJK Research

Mark Montagna - C. L. King & Associates

Robin Murchison - Sun Trust Robinson Humphrey

Brian Runick - BLR Capital Partners

The Dress Barn, Inc. (DBRN) F4Q08 Earnings Call September 17, 2008 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to Dress Barn Inc.’s fiscal 2008 fourth quarter and year-end financial results conference call. At this time, all participants are in a listen-only mode. Later, the company will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference call over to Mr. David Jaffe, President and CEO of Dress Barn Inc. Please go ahead, Mr. Jaffe.

David R. Jaffe

Thank you. Good afternoon, everyone. With me on the call today are Armand Correia, CFO; Keith Fulsher and Lisa Rhodes, Chief Merchandising Officers for Dress Barn stores and Maurice's stores.

Before our prepared remarks, Armand will make a few introductory comments.

Armand Correia

Thank you, David. I would like to remind everyone that our discussion this afternoon may include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company’s current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

A detailed discussion of these factors and uncertainties is contained in the company’s filings with the Securities and Exchange Commission.

I would now like to turn the call back over to David Jaffe.

David R. Jaffe

Thanks, Armand. To start with an overview, the disparate trends throughout the year at DB Inc. continued in the fourth quarter. Maurice's registered a plus 4 comp increase and was also plus 4 for the year. Dress Barn improved somewhat to a minus 5 but was still minus 7 comp for the year.

Maurice's solid comp performance, coupled with strong margins and cost controls, enabled the division to reach its operating income plan for the year. On the other hand, the weak comps at Dress Barn led to deleveraging that significantly reduced operating income below the prior year’s levels. As a result, DB Inc. recorded earnings per share of $0.34 for the fourth quarter and $1.15 for fiscal 2008. While we are disappointed that this is approximately a 20% drop from last year, the strategies we have put in place help to mitigate the loss and to enable us to beat Wall Street’s expectations for the quarter.

Going into fall, the weak economy continues to impact our Dress Barn business but the business is improving, partly as a function of easier comp comparisons and is currently posting no decline in comparable store sales. However, Maurice's is up against tough comparisons and is currently down in the mid-single-digits.

The backdrop for the business and our stock is obviously dominated by the turmoil in the financial markets and the continued problem in the economy. That having been said, there is some good news that perhaps is being missed -- the drop in energy prices and the relatively steady interest rate environment are good things for our customer and our business. While the consumer remains hesitant and fall is likely to be challenging, we believe that our focus on cost control, careful merchandising, and measured investment is the right strategy. Our inventories and expenses are appropriate for the business condition and we are planning prudently for both the holiday and spring seasons.

I will now turn it over to Armand for a review of our financial performance.

Armand Correia

Thank you, David. Thank you and good afternoon, everyone. In looking at our fourth quarter results, net earnings were $22.1 million, or as David said, $0.34 per diluted share compared to a record net earnings of $33.6 million, or $0.48 per share for the same period a year ago. I would note, however, that this performance did exceed analyst consensus views of the quarter, which were $0.30. The year-over-year decrease in quarterly net earnings was primarily sales related. Quarter net sales increased 1% to $382.3 million versus a year-ago quarter. The increase reflected the overall growth from new stores but offset by a comp store sales decline of 2%. Sales results were mixed by division. Dress Barn's stores quarterly sales decreased 5% versus last year to $238.5 million, reflecting a comp store sales decrease of 5%. By region, the northeast had the better performance, while the west coast had the weaker performance.

Regarding some of the key Dress Barn store sales components, sales transactions decreased 4% to last year while average dollar sales remained flat at $63.59, with units per transaction also flat to last year at three.

In contrast, Maurice's quarterly sales increased a solid 12% versus last year to $143.8 million. The increase was primarily driven by new store growth, along with a comp store sales increase of 4%. All regions posted an increase in comp store sales, with the Midwest region the stronger performer.

Key sales components for the Maurice's stores were all positive compared to last year and more than offset a traffic decline of 4.5%. Average dollar sales increased 6.5% to $46.31, which included a 6.5% increase in average unit price to $16.64, with units per transaction flat at 2.8.

Moving to gross profit, our rate for the quarter came in at 39.5%, declined 360 basis points compared to last year. Here’s how this breaks down -- 250 basis points was from merchandise margin and 110 basis points on buying and occupancy costs from comp sales deleverage. Within the merchandise margin, increased markdowns accounted for 220 basis points of the 250 point merchandise margin decrease. By division, gross profit for Dress Barn stores was 38.1%, a decline of 510 basis points to last year. Here’s the breakdown -- 320 basis points from merchandise margin, primarily due to higher markdowns, and 190 basis points from buying and occupancy cost deleveraging.

Gross profit for the Maurice's stores was 41.8%, a decline of 120 basis points to last year, with the breakdown being 90 basis points on merchandise margin, again primarily from higher markdowns, and 30 basis points from buying and occupancy costs, primarily from new stores’ increased occupancy costs.

We were pleased with our ability to control SG&A expenses during the quarter. Our SG&A spend for the quarter was $101.9 million, 2% above last year, despite a 5% increase in the net number of stores. SG&A as a percent of sales came in at 26.6%, an increase of 20 basis points versus last year’s 26.4%, and reflected good expense control given the deleverage from the decrease in comp store sales.

Quarterly operating income was $36.7 million, or 9.6% of sales. This compares to a record operating income of $51.9 million, or 13.6% of sales last year. The breakdown by division -- operating income as a percent of sales for Dress Barn stores for the quarter was 8.2% compared to 14.2% last year. The decrease of 600 basis points to last year was primarily to sales and gross profit related.

Maurice's stores operating income came in at a healthy 12% of sales compared to 12.7% last year. The decrease of 70 basis points to last year was primarily in gross profit from the higher markdowns. Our quarterly effective tax rate was 39.6% compared to 37.4% last year.

Our quarterly weighted average diluted shares outstanding of 64.5 million shares declined 8% from last year’s 70 million shares outstanding. This year’s decrease of 5.5 million shares was due to a decrease of 2.7 million shares less from the convergence feature, about 2.5% convertible senior notes, along with a decrease of 2.2 million resulting from our share buy-back during the early part of the year. And third, a decrease of approximately 600,000 shares in share-based compensation.

Now briefly reviewing our fiscal 2008 results -- net sales were $1.444 billion versus $1.427 billion for fiscal 2007. Comp store sales declined 3%, with Dress Barn stores decreasing 7% and Maurice's increasing 4%.

For the year, operating income as a percent of sales decreased 310 basis points to 7.8%, compared to 10.9% last year. By division, Dress Barn stores decreased 530 basis points for the year to 4.8% compared to 10.1% last year, while Maurice's stores increased 30 basis points to 12.6% compared to 12.3% last year. Net earnings for the fiscal 2008 were $74.1 million, or $1.15 per diluted share. This compares to a record $101.2 million, or $1.45 per diluted share for fiscal 2007. Fiscal 2008’s earnings per share compared to the company’s previous earnings per share guidance of $1.05 to $1.10.

Moving to the balance sheet, we ended the year with cash and marketable securities of $278 million compared to $245 million the prior year. This year’s total includes approximately $58 million of auction rate securities that are classified as long-term investments. These investments reflect a temporary mark-to-market adjustment of approximately $4 million. We are encouraged by the recent developments in the overall auction rate market.

Total inventories at cost ending our fiscal year was $187 million, down 5%, or a decrease of 10% on a per square footage basis versus the prior year. By division, Dress Barn stores total inventory ending our fiscal year were $117.9 million at cost, down 10% or a decrease of 11% on a per square footage basis versus the year ago, while average store inventory levels ending the year were down 10%. Overall freshness was very comparable to last year.

Maurice's stores total inventory ending our fiscal year was $69.1 million at cost, an increase of 3.5%. However, on a per square footage basis, inventory decreased 7% versus last year with average store inventory levels down 7%, with overall freshness very comparable to the prior year.

As for capital expenditures for fiscal 2008, they came in at $61.4 million. This is less than the $70 million previously estimated and is due to some carryover to 2009 IT projects.

I would like now to turn this call over to Keith Fulsher, Dress Barn Stores’ Chief Merchandising Officer.

Keith Fulsher

Thanks, Armand. Although Dress Barn stores comp sales decreased 5% for our fourth quarter, there were marked differences in our monthly results. May was very difficult but June and July showed improvement. It should be noted that this improvement in the sales trend was due to the strong performance of our wear now transitional and fall product. The traditional summer categories such as shorts and tees under-performed for the quarter and required additional markdowns to move out the merchandise. As a result, although the margins were not up to plan, we entered fall with clean inventories with freshness comparable to last year.

I would like to talk a little bit about inventory control, which is one of our main initiatives for fiscal year 2009. As Armand has told you, our average store inventory entering August was down to last year, which is exactly where we want to be. This change in merchandising flow enables us to deliver more wear now fall product later in September and October as the weather becomes more seasonal. It also allows us to transition more aggressively in November and December to the forward season and have more newness in the selling floors for the key holiday time period, rather than rely on markdowns to drive the business. Overall, this change in flow of product should impact both our sales and margins in a positive manner.

To talk about merchandise, we have a number of initiatives that are performing well. Our focus on the denim business has paid results, with August sales trending above plan. This category is merchandised in the front of the store and serves as the anchor to our casual business. Denim will remain in the front of the store for the entire fall season, with the fashion tops rotating out to highlight key trends.

We are also very pleased with our early sweater selling, with cardigans being very strong and lightweight wear now sweaters performing well. Fine gauge as a category is trending better than last year. These results are very encouraging as sweaters represent approximately 20% of our business going forward in the fall season.

Other key performing areas are fashion knits and novelty blouses with prints, smocking, and banner bottoms all performing well. Jackets, both career and casual, as a category are still exceeding plan. Our new handbag assortment, with a focus on fashion and higher price points, is driving the accessory business. Dressy as a category continues to do well and our new suit separate business is trending above plan and will be expanded as we head into spring ’09.

We have successfully relaunched our fragrance business this August with three new fragrances. On the negative side, the bottoms business outside of denim continues to be a struggle but we are keeping the inventory levels in line with the sales.

On a final note, EVOS, our new proprietary contemporary brand which retails for approximately 25% more in the core Dress Barn assortments, continues to make plan. The line is in 150 stores for this fall and will be expanded as we head into spring 2009. We continue to make changes to the assortments as we learn more about this customer.

On the IT side, we’ve had our new Oracle retail merchandising system in place for over a year now and we are beginning to leverage the information available to us. We are also in the process of adding a new planning department and we will be implementing a new allocation system within the next six months. These new initiatives will aid us in better understanding and reacting to the customer down to the store level, which will lead to increased sales and margins in the years ahead.

In summary, I believe we are well-positioned to weather a continuing tough business environment with fashion right merchandise, strong inventory control, and improved systems functionality.

I would now like to turn it over to Lisa Rhodes, Chief Merchandising Officer of Maurice's.

Lisa Rhodes

Thank you, Keith. At Maurice's, we were pleased with the plus 4 comp increase we delivered in the fourth quarter, on top of last year’s strong 13% increase. The key to achieving these results was the combination of product versatility and value while providing a great shopping experience. More than ever, our customer is seeking versatility for her wardrobe. Our continued commitment to developing unique concept shops plays to that customer focus, providing looks for our lifestyles. The diversity of color, breadth of style, and variety of shape within each lifestyle shop provides a broad range of outfits, [building more] transactions and aiding in conversion.

Our positive fourth quarter results were driven by new initiative businesses, plus and wear at work, steady performance in our well-developed casual classifications and the resurgence in the accessory businesses. Particularly strong was the performance of wear at work tops with fashion knits, transition [white] sweaters and woven tops, all posting strong results.

Denim continues to be the fabric of choice in bottoms, with jeans, shorts, and Capri lengths all exceeding expectations. Within accessories shoes, driven by flip-flops and sandals, and jewelry were very strong in the quarter. Disappointments included bottoms in non-denim fabrications. Both casual and dress pants were softer than anticipated. Additionally, twill shorts and capris did not meet expectations during the quarter.

The plus size business continues to gain traction, satisfying new guests in our stores. For the quarter, the plus business contributed a significant portion of our comp results and is in line with our targets. Sales drivers for this shop have been fashion knit tops, five pocket jeans, and casual bottoms.

As mentioned, our inventories are well-positioned heading into the new fiscal year, with roughly 7% less inventory on a per square foot basis than a year ago. This tight inventory management affords us adequate inventory to achieve our sales expectations while providing the flexibility needed to react to the soft early fall season trends.

Traffic declines and a slightly lower average dollar sale have been the primary factors behind our low-single-digit comp drops season to date.

Looking forward to the fall season, our sales will continue to be driven by denim, fashion tops, novelty sweaters, and wear-at-work essentials. Within denim, medium washes and boot and flair silhouettes have been strong. We’ve also seen positive acceptance to denim in trouser bodies. The response to skinnys have been less favorable.

Under-performing businesses, such as shoes and fashion bottoms, have been planned down, with funds shifted to capitalize on classifications that provide the fashion versatility our customer is seeking. We look for the continued growth of the plus offering to provide positive comp growth for Maurice's. We will remain liquid with our open-to-buy in order to provide newness of receipts, minimize markdown liability, and preserving margin performance.

I would now like to turn the call back over to David Jaffe.

David R. Jaffe

Thanks, Lisa. Turning to marketing, the overview for fiscal 2009, we are taking key learnings from fiscal 2008 for both Dress Barn and Maurice's. Fiscal ’09 is focused on driving comp sales through proven marketing vehicles, such as direct mail bounce-backs and impactful value oriented window messages. We will continue to test different formats [and offerings] to better understand what motivates our customers to come into our stores and buy. We will continue to strengthen our PR/editorial exposure as well as our local outreach events within our communities.

Marketing at Dress Barn dollars is slightly down while Maurice's is up slightly for the fiscal year. At Dress Barn for the first quarter, while the economy remains challenging we are testing various offers and we will continue to refine our marketing strategies to optimize results. This fall, in progress as we speak, are two direct mailers, each 2 million pieces. The first, a newly formatted fall preview mailer with a new clearance offer, coupled with our standard offers, and the second, our fall fashion book and supplemental postcard.

To enhance this promotion for the first time, we feature a smart shopper sweepstakes, which is open to all customers.

At Maurice's, we begin the first quarter with the exciting launch of our Christina Bag, the winning design from our Project Handbag Initiative with Fashion Indie, creating excitement with our associates, customers, and local press.

In progress, we have a uniquely formatted direct mail piece targeting 1.8 million Maurice's customers. Additionally, we are launching two sweepstakes, one in late August, a $1,000 gas card focused on Maurice's credit card sign-ups and usage. The second sweepstakes in October features several prizes geared to building your wardrobe.

Now turning to real estate, Dress Barn opened 38 stores and closed 33 throughout the year for a net square footage increase of 2%. For fiscal 2009, we anticipate opening 35 to 40 stores and closing 20 to 25 for net square footage increase of 2%.

Maurice's opened 72 stores and closed two, for net square footage increase of 12%. Looking ahead to fiscal ’09, we are planning on 55 openings and 10 closings, a 9% net square footage growth.

These numbers are our current best estimates but may be reduced by center opening delays due to anchors pulling out, developers not getting financing, and so on. We will continue to commit to only those locations that we are confident for the long-term and not to reach some arbitrary store opening goal.

In addition, at Maurice's we will be rolling out our new store design beginning with our October openings. Dress Barn is currently developing new prototypes for testing this spring.

In conclusion, as you’ve heard, we are on top of our business and managing to its potential in this challenging environment. In addition to investing in new stores and remodeling existing ones, we will be continuing our projects to upgrade our POS, improve our merchandising systems, and enhance our DCs. We believe that all of our CapEx has an attractive, long-term ROI.

Our balance sheet will continue to be strengthened by a projected $75 million of free cash flow this year. We are still open to making an acquisition and have narrowed the list to just a handful of candidates. We will be watching them carefully, waiting for an appropriate opportunity.

Giving our slow start to fall selling, coupled with our previously mentioned concerns about the economy and consumer spending, we are cautious about the outlook for the fiscal 2009 fiscal year. Therefore, we are projecting EPS in the $1.23 to $1.28 range, based on low-single-digit comp sales increases at both divisions for the balance of the year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Gary Giblen with Goldsmith & Harris.

Gary Giblen - Goldsmith & Harris

Excellent quarter in these circumstances. Just wondering what your crystal ball tells you in terms of how promotional the holiday season will be -- will it be super, super promotional or just fairly promotional? What do you think?

David R. Jaffe

Well, it’s pretty early in the season yet so I think we’ve got time but I do think all of our brethren and ourselves have reduced our inventories dramatically versus last year so I don’t think we are going to be in the same position going into Christmas that we were last year. So I’m hoping that the promotional tenor will be a lot lower than last year but it remains to be seen. But going into the September, the early fall, I feel like it can’t be any worse than last year and hopefully it will be a little bit better.

Gary Giblen - Goldsmith & Harris

Okay, and my only other question is what’s the common thread that explains the -- you said northeast was comparatively the best region and west coast was the worst. Is that a function of housing bubble markets or are there other factors at work? And why wasn’t the southeast the worst region, which has been called out by several other retails as the worst region?

David R. Jaffe

If you drill down, Maurice's doesn’t have a lot of stores in the deep southeast, which if we look at Dress Barn's performance, the Florida market was also impacted so the two real hotspots for us were Southern California, maybe even Phoenix and Florida and as you know, those are the two hotspot for sub-prime.

Gary Giblen - Goldsmith & Harris

Sure, okay the --

David R. Jaffe

I think we are fairly consistent with what you are hearing out there.

Gary Giblen - Goldsmith & Harris

Yeah. Okay, good luck in Q1.

Operator

Your next question will come from the line of Sam Panella with Raymond James.

Samantha Panella - Raymond James

Good afternoon and congrats on the quarter. A couple of questions -- one, Armand, regarding the $700,000 in other expense, what was that related to?

Armand Correia

I’m actually looking at it. Are you talking about the expense itself?

Samantha Panella - Raymond James

Yeah, because usually -- I thought that usually comes from income from leasing at your headquarters.

Armand Correia

During the quarter, we had a small investment, a little over $1 million, or a $1.1 million investment. We call it a toe-hold investment and what we did is we took an impairment during the quarter of the entire amount and what we did is we applied it against that other so-called expense interest line, reversing basically what would typically be obviously an income to an expense of $671,000.

Samantha Panella - Raymond James

Okay, thanks. And then I guess regarding the comp trend at Maurice's, if you could just talk about that a little bit more, what you are seeing. Is it partly because of a tougher comparison year over year? Was it tougher maybe in the August, early September versus last year? Does it get easier? Is it partly due to anniversarying the addition of the plus-size offering? I guess anymore color we could get on that.

Lisa Rhodes

I think it’s a combination of all of those things. I don’t think there’s one piece of it. As we had mentioned, traffic was down a little bit harder in the August/September timeframe. The average selling price was down a little bit from last year and through the fourth quarter, as well as last year the average selling price had been up. And a portion of that is coming from balance of sale and the customer choosing items at a lower ticket price, as well as classifications that we promoted to a higher rate.

From a specific product category, the product category that was impacted the most for the last few weeks has been casual knit tops, and that has been driven by again balance of sale in more buy now, wear now versus some commodities that were at higher ticket prices a year ago.

I don’t believe the 16 -- the 16 to 24 is a minor impact to that number.

Samantha Panella - Raymond James

Okay, and then I guess what gives you the confidence then to be able to do low-single-digit comps? I believe that is what you are saying for the year.

Lisa Rhodes

Right. Where do I see the confidence?

Samantha Panella - Raymond James

Yes, please.

Lisa Rhodes

The confidence is we’ve got a lot of categories that are still growing double-digits in new initiative businesses. The 16 to 24 business is still under-matured and we have a lot of opportunity there, as well as our wear-at-work and dressy classifications continue to generate great comp increases as well as does lounge. And then within the casual world, denim bottoms has been very strong and remains strong and this year I think we will see in tops a balancing out of sales where last year we had significant comp increases in knits but had a disappointing sweater season, and I think we will balance that out between the two categories, sweaters and knits. So we’ll see strong increases in sweaters and maybe a little bit of a retreat in knits, so I’m very comfortable with the comp increases that we have forecasted out there.

Samantha Panella - Raymond James

Okay, thanks and then one last question -- Armand, where do you see the leverage point for Maurice's on the buying and occupancy line, given that with a 4% comp you delevered in the fourth quarter? And that’s it. Thank you.

Armand Correia

I think at Maurice's, we probably see close to a 3% this coming year with probably Dress Barn down probably in the 2.5% leverage back-up.

Samantha Panella - Raymond James

Okay, thanks and good luck, guys.

Operator

Your next question will come from the line of Chris Kim with J.P. Morgan. Please proceed.

Christopher Kim - J.P. Morgan

Thanks. Armand, I was hoping that you could give a little more detail in terms of the guidance. What are you guys looking at in terms of the comp by segment for the year? Should we be assuming a similar positive low-single at Maurice's and Dress Barn?

Armand Correia

Yes.

Christopher Kim - J.P. Morgan

And it sounds like the trend to date is within that guidance?

David R. Jaffe

Well right now, as you heard, the Maurice's business is off mid-single-digits, so it’s not. But as you just heard Lisa say, we are hopeful that it’s going to come back. The Dress Barn business is very close [to that], it’s about flat. But the weather hasn’t broken yet. We all know back-to-school was a disappointment for everybody so I think in two weeks, three weeks when we get that first crisp fall morning, hopefully we’ll see the numbers pick up.

Christopher Kim - J.P. Morgan

Okay, and just a similar kind of question in terms of the segment operating margin, how we should be thinking about that. I mean, it seems like the opportunity is really at the Dress Barn division, given the first half results of this past year.

David R. Jaffe

We’re not anticipating we’re going to get recovery back to the ’07 levels, Chris. It’s going to take us a couple of years to build it back up again.

Christopher Kim - J.P. Morgan

Okay, but I mean the assumption obviously would be --

Armand Correia

The assumption is correct, Chris. I think this coming year, we’re looking at a greater increase in operating margin for our Dress Barn stores divisions than the Maurice's stores division.

Christopher Kim - J.P. Morgan

Okay, and then the share count guidance, is that based on kind of where the stock is today?

Armand Correia

No, I think what we did is we basically projected out the share count or the price of the stock in relationship to around an $18 price on average.

Christopher Kim - J.P. Morgan

Okay, and then finally obviously lots of cash on the balance sheet. It’s a crazy environment right now but I was wondering if you had any commentary around uses of cash.

David R. Jaffe

You know, we keep talking about not doing a dividend and certainly that holds. Beyond that, I think in this environment, I feel pretty good sleeping at night building up the cash. Does there come a point in time which we’ve got plenty of cash and it doesn’t look like there’s an acquisition on the horizon and the environment is stabilized and we think about buying back stock? Of course. We are not there but it’s certainly something we talk about every quarter at our board meetings.

Christopher Kim - J.P. Morgan

Okay, great. Very helpful and best of luck with the fall season.

Operator

Your next question will come from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Good quarter, better than expected, thank goodness. I wondered if Armand could give us comps by quarter for both -- from ’08 for Maurice's and Dress Barn because if I’m not mistaken, I think Maurice's is up against some pretty tough numbers from the first and maybe second quarter.

Armand Correia

Yeah, I can do that. You’re right -- Maurice's, let me give them to you for the previous year. The first quarter, they were up against an 8% comp increase; the second quarter, 2%; with the third quarter, up against 4%; and the fourth quarter as Lisa said, 4% as well up.

Janet Kloppenburg - JJK Research

Okay, and Dress Barn?

Armand Correia

And Dress Barn for the first quarter, the coming first quarter, we’re up against a minus 8%; with a second quarter of minus 7%; the third quarter, minus 6%; and the fourth quarter of minus 5%.

Janet Kloppenburg - JJK Research

Okay, and Lisa, you had said that -- I think you said most of your comp increase in fiscal ’08 came from new businesses, wear to work and plus. And I’m wondering if you look for those businesses to drive the low-single-digit comp you guys are looking for this year or whether you look for those to sort of wane a bit, given tougher comparisons and where the increase might come from.

Lisa Rhodes

I still think there is a lot of potential in both of those businesses, so I am still looking significantly to the plus piece to represent a good portion of it. The wear at work business continues to gain traction and surprise us with the magnitude of the appetite our guest has for that category and I’m looking for more of the maintains in the casual business, which is really the most developed business in the store.

Janet Kloppenburg - JJK Research

Okay, so other than a tough comparison in August, are there other categories or marketing strategies you look back, you think about now that maybe you should have executed?

Lisa Rhodes

I’m sorry, for August? Is that what you are --

Janet Kloppenburg - JJK Research

-- August was a tough, the back-to-school was tough for you.

Lisa Rhodes

I think the August back-to-school was tough for the industry as well as for Maurice's. I actually think that the promotional strategy or the cadence that we had, I would not have changed much at all. And I think that it’s really about newness and managing the average selling price out the door.

So it wasn’t really -- if I could say to you it was one specific product category that it was, it was really more a traffic driven component and an average selling price component than it was a specific business component.

Janet Kloppenburg - JJK Research

Okay, so there’s no one category or two categories that are seeing some deep declines, or anything like that?

Lisa Rhodes

Not the month of August, no.

Janet Kloppenburg - JJK Research

Okay, and September, is it improving from August or is it still --

Lisa Rhodes

It’s still about the same place.

Janet Kloppenburg - JJK Research

Okay, and Armand, I wondered if you could just talk a little bit, your inventories at both brands right now are in very good shape. I’m wondering if we should look forward to them staying this lean of if there will be a tick-up as the year goes along.

Armand Correia

Well, Janet, obviously -- not that I’m trying to avoid the question. It all depends upon business. Our game strategy is to have the inventory below last year. Certainly I was very pleased with the level below last year that they ended with. Am I looking at the same kind of levels in the first quarter? No. I would probably say more like mid-single-digits down. But again, everything is predicated on the business.

Janet Kloppenburg - JJK Research

Okay, and Keith, is your business plan based on higher promotional activity as we move through the fall? We’re hearing from a lot of retailers that they plan on being as promotional as they need to be, so maybe if you could talk about that relative to last year. Thank you.

Keith Fulsher

Relative to last year, absolutely not -- [to be less] promotional. I think that’s one of the major reasons we’ve changed our flow of inventory, to avoid having that backlog of fall merchandise that you have to push out at too deep of prices in the November/December time period. So actually, we’re looking for an average retail increase as we head deeper into the season because we are managing our flow better and we are delivering more new product.

Janet Kloppenburg - JJK Research

Okay, great. Lots of luck to you both.

Operator

Your next question will come from the line of Mark Montagna with C. L. King.

Mark Montagna - C. L. King & Associates

Let’s see, a few questions -- Armand, when you were talking about operating margins earlier during Q&A, you had said that you expect Dress Barn divisions up more than Maurice's. Can you give greater clarity than that? Because if last year was -- I think you were 4.6% and you peaked around 10, I’m wondering, what is your plan for this year for the Dress Barn division, and then also the Maurice's division?

Armand Correia

I think the way our financial plan is structured right now, we would be looking at somewhere in the range of 7% for Dress Barn stores and Maurice's somewhere in the range of 12%.

Mark Montagna - C. L. King & Associates

Okay. All right, and then -- let’s see, what’s your plan for D&A for this year?

Armand Correia

Up slightly.

Mark Montagna - C. L. King & Associates

Okay. Let’s see -- what about store counts? Because I know you say a hundred new stores, 30 closed stores, but can you tell us what the year-ending store count is going to be by concept, and is it possible to even tell us that by quarter?

Armand Correia

Mark, you’re killing me here.

Mark Montagna - C. L. King & Associates

Yeah, well if you don’t -- I mean, if you don’t have that at your fingertips, that’s fine but just like a year-end would be great.

David R. Jaffe

Mark, if you want, call Armand back later and we’ll get you the details.

Mark Montagna - C. L. King & Associates

Okay. Then as far as inventory declines, you just mentioned that you expect first quarter down mid-single-digits. Is that what you would anticipate for every quarter of this year? I know it’s hard to predict necessarily with the sales but you guys typically do a pretty good job of being tight on inventory by the end of the quarter and you seem to hit your targets pretty consistently.

Armand Correia

Well thank you, Mark. I think that’s probably a goal for us each quarter, to be down in the mid-single-digit range for both brands.

Mark Montagna - C. L. King & Associates

Okay. All right, let’s see, what else did I have -- David, actually, the last question is towards the end of your prepared commentary, you said that you guys are off to a slow start but I thought you said Dress Barn was above plan, so to me it sounds like Dress Barn is above plan, Maurice's is below --

David R. Jaffe

If I said above plan, I misspoke. I think what we are saying is that we are above last year but no, we are below plan. We are flat and we had planned up low-single-digits.

Mark Montagna - C. L. King & Associates

Okay, you did say that. All right.

David R. Jaffe

So you know, it’s better than last year but it’s not what we need.

Mark Montagna - C. L. King & Associates

Okay, but I would think that just on a margin perspective with reduced inventories, reduced promotions, perhaps better inventory planning that perhaps margins are higher.

David R. Jaffe

Too early in the season to say.

Mark Montagna - C. L. King & Associates

Okay.

David R. Jaffe

We’re heading in the right direction but a lot of time between now and then.

Mark Montagna - C. L. King & Associates

Okay, and then just a question regarding inventory for Keith -- it sounds as though what you are describing is that you are doing more of a chase strategy as opposed to committing so much up front. Is that a fair way of describing what you are doing this year versus last year?

Keith Fulsher

There’s really two things -- one, we are looking to turn faster. We are putting less merchandise in the store to start and the second is we are reserving a greater portion of our inventory to “chase” merchandise. So there’s really two strategies -- one is an overall inventory level and the second is what percentage of that, which is more than last year that we are leaving open to chase.

Mark Montagna - C. L. King & Associates

Can you tell us how much you are hoping to boost your inventory turn this year versus last year?

Keith Fulsher

I think that’s a tough question. We are looking for definitely improvement over last year. Certainly as we head into our second quarter, we expect greater, better inventory turns but yeah, it’s tense. It’s a faster turn but we’re running with down mid-single-digits and we are getting flat to slight increased comp sales -- I mean, that will kind of tell you the kind of --

Mark Montagna - C. L. King & Associates

Okay. All right, that was all the questions I had.

Operator

Your next question will come from the line of Robin Murchison with Sun Trust.

Robin Murchison - Sun Trust Robinson Humphrey

Thank you. Good afternoon, guys. Armand, I’m sorry, would you please explain the 67.5 million shares again -- why we are seeing that increase?

Armand Correia

It’s a result of the -- if you’ll recall our 2.5% convertible note. That’s the dilution impact. The higher the price of the stock goes, the greater dilution we have.

Robin Murchison - Sun Trust Robinson Humphrey

And that’s the $18 bogey?

Armand Correia

That’s right. We’re using $18 as an average price to come up with that approximately $67.5 million weighted average shares outstanding for next year.

Robin Murchison - Sun Trust Robinson Humphrey

Okay, right. And then if you can answer it, and harkening back on another question, the August/September cadence, business cadence, I know Lisa said that it sounded like business was relatively the same in September as what you saw in August. Is that also true, Keith, in the core division -- is it about the same, slightly better or slightly worse?

Keith Fulsher

No, it’s about the same. August/September are very similar at this point.

Robin Murchison - Sun Trust Robinson Humphrey

Okay, and you mentioned bottoms -- also for Keith -- you mentioned bottoms were a struggle. Is this just a trade still to dresses and skirts or something different?

Keith Fulsher

I just think the bottom business, if you look at the customer, what’s happening out there right now, if she has extra dollars to spend, she can update her wardrobe very easily with a different fashion top rather than using her dollars to replace the basic flat pant.

Robin Murchison - Sun Trust Robinson Humphrey

Right, and we’re definitely seeing that in our channel checks. Most of --

Keith Fulsher

We’re just managing our inventory, keeping our inventories in line with our sales. It is not a promotional business, nor will it ever turn to be a promotional business at Dress Barn, so we just have to get our [inaudible].

Robin Murchison - Sun Trust Robinson Humphrey

Okay, and then also for you, in terms of EVOS, you mentioned the ticketed price is about 25% than --

Keith Fulsher

Floor assortments.

Robin Murchison - Sun Trust Robinson Humphrey

And it’s in 150 stores for fall, right? Now, what -- take one of those stores and then tell me what percentage of merchandise is EVOS and what percentage is the rest of the core Dress Barn business?

Keith Fulsher

Still a very, very small percentage of the source assortment at this point, somewhere between 5% and 10% of the store would be in EVOS, so -- and that’s in the missy side. It’s not in the large side for fall at this point, so it’s a work in progress. We are pleased with the results and we are looking to grow it and have it become a more important part of our business, but it still is in the very early stages.

Robin Murchison - Sun Trust Robinson Humphrey

As I think about it, sometimes I wonder if you wouldn’t -- would you ever supplant over time the Dress Barn brand with the EVOS brand? I’m guessing not, or you haven’t thought of it?

Keith Fulsher

I think you are probably right. You are probably premature on that. Certainly over time we feel this EVOS brand has a lot of potential and we’ll see where that takes us in the next few years but we are looking at it as a good growth vehicle for us.

David R. Jaffe

One of the things, the reason I don’t think we will, Robin, is that what we are trying to do is maybe segment our offerings a little bit and have a good, better, best. So EVOS, as Keith mentioned, is 20%-plus higher than our average price point on comparable goods and therefore, now you’ve got something that our better customers can aspire to. So we kind of want to have it out there. If we change everything to EVOS, EVOS wouldn’t be special.

Robin Murchison - Sun Trust Robinson Humphrey

True, true. David, I actually have a question for you -- can you just comment on the acquisition market? And we know you guys are always looking around -- what do you see out there right now?

David R. Jaffe

I see a lot of people sitting on their hands, saying one more season and my stock price is going to come back or one more season and my results will come back and a little bit of denial out there, or hope, and there is definitely going to be I think another shakeout after this Christmas because I don’t think it’s going to be a strong Christmas. Maybe it won’t be a horrible one like last year but I don’t think it’s going to be a strong one and I think you are going to get maybe one more group of those marginal players to either drop out or cut back their size.

Robin Murchison - Sun Trust Robinson Humphrey

Yeah, apparently -- I mean, some data came out today that is calling for about a 1.5% increase in holiday sales.

David R. Jaffe

That’s a tiny number.

Robin Murchison - Sun Trust Robinson Humphrey

That’s from -- I don’t know who it’s from -- the Columbus, Ohio group, sorry.

David R. Jaffe

Oh, Retail Force.

Robin Murchison - Sun Trust Robinson Humphrey

Retail Force, yeah. All right, thanks very much and good luck. Congratulations.

Operator

Your next question will come from the line of [Brian Runick] with BLR Capital Partners.

Brian Runick - BLR Capital Partners

Just a couple of quick questions -- Armand, D&A for the year, what was that again?

Armand Correia

For the year, came in at $48.2 million.

Brian Runick - BLR Capital Partners

And you said CapEx I think was 64-point-something?

Armand Correia

Sixty-one.

Brian Runick - BLR Capital Partners

Sixty-one, okay, great. Regarding your comments for Christmas, obviously consumer sentiment probably will be affected with what’s been going on recently. Are you noticing or have you noticed in the past consumer sentiment filtering down into your business more so, less so than maybe others or can you comment on that, relative to Christmas, obviously?

David R. Jaffe

I think it’s somewhat anecdotal but I’ll tell you, last Christmas was an absolute disaster for us. I think during the Christmas period, we were down 13% at Dress Barn comps. Maurice's was much stronger, as Armand mentioned a minute ago. So I think the bad news started filtering out then and yeah, we felt it. There were other issues because it was a weak fall and the inventory and all that but I do think that our customer, especially the Dress Barn customer, a little bit older, a little bit more sensitive to what’s happening in the economy, does react to it and I think we are feeling it right now and I think the Maurice's customer, the back-to-school customer, whether it’s the kids spending their own money or their parent’s money, I think we saw across the industry a pull-back in reaction to what was going on in the news, in the economy and unfortunately I think it’s going to be a challenging fall and I’m holding my breath that maybe things do stabilize and you can clear out a lot of the bad news and with a new President, I think you are going to see a little bit of post-election euphoria, no matter who’s elected, and the consumer is hopefully going to feel good about the world and come back into stores for the holidays.

Brian Runick - BLR Capital Partners

Have you noticed during like peak time frames, and I would say the most recent would probably be back-to-school, last two weeks of August, first two weeks of September specifically relating to Maurice's, is that business let’s say gets a little bit better during those times when people let’s say need to shop, and then let’s say it gets into a worse trend thereafter?

David R. Jaffe

Lisa, let me start and you finish, if you have anything to add to it -- we have not seen any kind of a switch or anything that happened this year, happened last year, so we’re just seeing a general weakness out there, whether it’s back-to-school and as you know, back-to-school is different, it’s for different age groups, for different parts of the country and we have not seen any dramatic change this year versus last year where it was all of a sudden strong and then fell off, or visa versa.

Lisa Rhodes

I agree with David. I think year after year, we see the peak not as high and the valleys not as low and it’s more of a constant.

Brian Runick - BLR Capital Partners

And Lisa, also can you -- I didn’t hear your comments regarding last year, I think comp increases were coming from the plus size business as well as wear to work. This year --

Lisa Rhodes

Last year’s comp increases were coming from actually all parts of the business. Casual had a strong increase last year and -- are you saying the whole year or last year back-to-school?

Brian Runick - BLR Capital Partners

Okay, great. Thank you very much and good luck, guys.

Operator

You have a follow-up question coming from the line of Janet Kloppenburg with JJK Research. Please proceed.

Janet Kloppenburg - JJK Research

Armand, I was wondering if the tax rate for the quarter was higher than expected or if that’s the rate we should be using going forward?

Armand Correia

I think that’s probably a -- it’s slightly higher for the quarter but I would probably feel comfortable with a 39 to 39.5 tax rate going forward.

Janet Kloppenburg - JJK Research

Okay, so we should be using that rate?

Armand Correia

Yes.

Janet Kloppenburg - JJK Research

And was there something one-time in nature in the other income line in the quarter?

Armand Correia

Yes, as I said, we took an impairment charge of a little over $1 million for an investment.

Janet Kloppenburg - JJK Research

So other income would have been more like $1.5 million, instead of $500 million -- instead of $0.5 million?

Armand Correia

Yeah, it was a swing. I think we show $600,000 as an expense and it would have been obviously a swing into the positive. Is that what you are asking or are you asking on the --

Janet Kloppenburg - JJK Research

Yeah, yeah, just say it again -- it was a swing of $600,000 expense?

Armand Correia

No, the other expense line, expense income, for the quarter shows $671,000 as an expense item. Normally that line would be income and there was an impairment charge of approximately $1.1 million to that particular line for the quarter.

Janet Kloppenburg - JJK Research

Okay, $1.1 million. Okay, so to get the adjusted -- can we adjust EPS for that amount to get a better number, it would take it up a little bit? Is that a fair way of looking at it?

Armand Correia

It is a one-time. You could, but I don’t think it’s meaningful and therefore --

Janet Kloppenburg - JJK Research

Probably a penny, right?

Armand Correia

Yeah, probably.

Janet Kloppenburg - JJK Research

Okay. Thanks so much.

Operator

There are no more questions at this time.

David R. Jaffe

Operator, thank you for your help and I would like to thank everyone for their interest in Dress Barn and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Dress Barn F4Q08 (Qtr End 7/26/08) Earnings Call Transcript
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