The Neiman Marcus Group F4Q08 (Qtr End 8/2/08) Earnings Call Transcript

| About: Neiman Marcus (NMG)

Neiman Marcus, Inc. (Pending:NMG)

F4Q08 Earnings Call

September 24, 2008 11:00 am ET

Executives

Burton M. Tansky – President, Chief Executive Officer

James E. Skinner – Executive Vice President, Chief Financial Officer

Stacie Shirley – Vice President – Finance, Treasurer

Analysts

[Bill Broder] – Banc of America Securities

Reid Kim – Merrill Lynch

Karen Eltrich – Goldman Sachs

Emily Shanks – Barclays Capital

Grant Jordan – Wachovia Securities

Carla Casella – J. P. Morgan

[Ann Warheim – Vancampen]

Colleen Burns – Oppenheimer & Co.

Mary Gilbert – Imperial Capital

Operator

Good day, everyone, and welcome to the Neiman Marcus Q4 fiscal 2008 earnings call. Today’s call is being recorded. And for opening remarks and introductions I’d like to turn the program over to Ms. Stacie Shirley. Please go ahead, Ma’am.

Stacie Shirley

This is Stacie Shirley, Vice President of Finance and Treasurer for Neiman Marcus. Joining me on the call is Jim Skinner, Executive Vice President and CFO, and Burt Tansky, President and CEO of Neiman Marcus. Burt will provide some highlights for the quarter as well as an update on business. Then Jim and I will discuss some of the details of our financial results.

But first, a few housekeeping items. The call today involves our view of the future for the businesses that make up Neiman Marcus, Inc. In these statements referring to the expected future plans and performance of Neiman Marcus are forward-looking statements and actual future results may differ materially from such statements. Please refer to our SEC filings where we include a description of the factors and risks that might cause our future results to differ from what we will be discussing today.

Unless noted otherwise, all references to our results exclude the impact of purchase accounting adjustments and other transaction adjustments related to the acquisition of the company in October of 2005. In addition, unless noted otherwise, all statements reflect the sale of [Kate’s Bay] and the financial statements have been restated to treat them as discontinued operations.

One last note, our fiscal year 2008 included a 53rd week. Unless otherwise stated, the results for our fourth quarter and fiscal year 2008 are reported on a 14- and 53-week basis respectively. However, revenues in the 53rd week are not included in our comparable revenue or sales-per-square-foot calculation. For fiscal 2007 all results are reported on a 13- and 52-week basis. For more details please refer to our 10K, which we filed this morning.

With that I will turn the call over to Burt.

Burton M. Tansky

Good morning and thank you for joining us today to review our fourth quarter and fiscal year-end results. No question about it, fiscal 2008 was a challenging year for us and for most retailers. We began to experience a slowing of consumer demand in the fall. This weakness continued and deepened over the course of our fiscal year. We responded quickly to this downturn by stimulating sales through promotional events, reducing inventory levels, and implementing expense controls. Although our efforts did not completely counteract the effect of the economic downturn, we were able to mitigate the impact of our results.

I’m proud of our team’s response to the difficult environment. We pride ourselves at being good managers on the downside as well as on the upside. I am concerned that fiscal year 2009 will again test our downside skills. But now let me review some of our fiscal year-end financial results.

We ended the year with sales of $4.6 billion. Comparable revenues increased 1.7%, which was primarily due to the strength of our Internet business and the retail sales that remained robust in New York City and resulted in record sales and results at Bergdorf Goodman. The 1.7% comp increase was on top of a 6.7% comp sale increase in the prior year.

The areas where we experienced the greatest relative strength included precious jewellery with particular strength in the most luxurious – and I may add – the most expensive pieces; beauty, which includes cosmetics and fragrance; shoes, both men’s and women’s; and designer handbags. In addition, our last-call division experienced strong results.

As expected, the aspirational shopper has been impacted most by the downturn. Aspirational shoppers include the customers that typically purchase at our opening price point level and the occasional shopper who has an interest in a specific area, such as shoes, handbags, or jewellery. She is buying less during this time, but we are certain that she continues to have a strong desire for the quality of merchandise and level of customer service we offer. We believe this customer will return to a more normal pattern of shopping as the economy rebounds.

As for our most loyal customer, we remain confident that she has not traded down. During difficult economic times this pure luxury customer becomes more focused with her purchasing, which is what we believe we are experiencing this cycle. Market downturns create an uncertainty with this customer also and her desire to shop at the same frequency does diminish. However, this affluent customer is very resilient and will not waver in her desire for the highest level of merchandise quality and customer service.

Importantly, with the slowdown in the retail environment and the impact of opening new stores, which can be less productive in the first few years of operation, we did not lose ground from a productivity standpoint in specialty retail. Sales per square foot were relatively flat at $634 for the year compared to $638 last year. We continue to hold an industry-leading position in terms of productivity. If we exclude the three stores we have opened over the past two years sales per square foot would have been $649.

Gross margin, as you might have expected, has been under pressure. The fiscal 2008 gross margin rate was 36.2, which is a decline of approximately 110 basis points from last year.

As I mentioned earlier, when it became apparent that demand would fall short of our expectations we moved aggressively to bring inventory in line with sales. We took actions to minimize our inventory exposure, including cancelling orders, returning things to vendors, and working with our vendor partners to support the needed markdowns. Even with these actions our inventory was above our plans and, therefore, we added promotional events and increased the value of the events already in our plans. As a result, we incurred higher markdowns which negatively impacted gross margin, but at the same time helped to further liquidate our inventory.

Partially offsetting margin decline was an improvement in our expense rate. For the year our adjusted operating income declined to $537 million, which represents a decrease of only 2.4%. Despite the decline we experienced in our gross margin rate, our adjusted operating margin rate for the year remained a strong 11.7%.

It is important to note that fiscal 2007 was an outstanding year and we achieved our highest results ever, which put even more pressure on fiscal 2008. Although 2008 was lower than fiscal 2007, fiscal 2008 operating income and margin represents our second highest results in our history.

Jim and Stacey will take you through the remaining details of the fiscals in a moment, including our divisional results. But first, let me provide you with a brief update of our current business activities. Let me assure you our focus remains on the long-term success of our company, which means continuing to invest in our businesses while applying the strictest return hurdles to our capital projects.

At our speciality retail stores division, which includes Neiman Marcus stores and Bergdorf Goodman, our plans for remodels and new stores remain intact. We have just opened our 40th full-line Neiman Marcus store in Topanga, which is in the San Fernando Valley in California. The store is beautiful and we are confident about the long-term prospects for this location.

At the charity event the night before the opening I was very impressed with the customers’ enthusiasm and it was immediately clear to us that this is our customer. I don’t believe I have ever seen so much shopping during a pre-opening event.

We have publicly announced six additional locations, including a 125,000-square-foot store in Bellevue, Washington – a suburb of Seattle – our first store in this market. The store is planned to open next year in the fall of 2009. We recently announced a new store plan for Walnut Creek, which is in northern California’s East Bay. This location is approximately 110,000 square feet and is planned to open in the fall of 2010. Also in the Fall of 2010 is an 80,000-square-foot store in Sarasota, Florida, a 90,000-square-foot store in Princeton, New Jersey, in the Fall of 2011, and just last week we announced a store also scheduled to open in the Fall of 2011 in San Jose, California. This location is planned at 120,000 square feet. And lastly, we are still planning a 150,000-square-foot store in Oyster Bay, New York, which is at the north shore of Long Island.

As for remodels, the Atlanta store was totally redone and we added approximately 50,000 square feet. This renovation was completed just a few months ago. In addition, we completed a smaller remodel of our Westchester store. This project involved refreshing the whole store as well as relocating and reallocating space in the store to provide more square footage to the most productive merchandise categories. We are in the planning stages of two more major renovations that will begin in fiscal 2009, as well as a number of minor remodels.

Over the course of the past year we have continued to invest in capital projects at Bergdorf Goodman. Among other things, we remodelled part of the main floor in the jewellery area, including adding a private viewing room. We also added over 1,600 square feet to the jewellery area, which is on Bergdorf’s main floor and is very, very productive. We are very pleased with these changes and anticipate these projects will produce a substantial amount of revenue. We have also remodelled portions of the third, fifth, and seventh floor to add additional capacity. These capital projects contribute to the strong 8% sales increase Bergdorf experienced this year.

We have additional projects for fiscal 2009 that will ensure we are providing our customer with the most luxurious shopping experience in New York City. One very important project is the remodel of the 57th Street room, which will house a number of our most important accessory designers. We have just opened a new Chanel accessories shop in an adjacent area and early sales have been very strong and encouraging for the long-term viability of this part of the store.

In addition to full-line stores we plan to open another four last-call clearance centres over the next 12 months. This will bring our total to 28. As a reminder, our strategy as it relates to clearance differs somewhat from our competitors. Essentially, we view the clearance stores as an efficient way to liquidate inventory from our full-price stores. What’s more, most importantly, we want to ensure our customers receive an outstanding Neiman Marcus experience.

During this challenging time sales at our last-call stores have remained strong. Over the past two years we’ve added infrastructure to support the growth of this business and we continue to believe there is still more opportunity in this area.

The last update on real estate relates to our newest concept, Cusp. We recently opened our fifth Cusp store in Chestnut Hill, a suburb of Boston, this past August. The store is approximately 6,000 square feet, which is more in line with our planned future locations. We remain very pleased with these stores and are excited about the prospects of this concept. We believe that we are branding our market share and we are reaching a new, younger customer. We are planning to open an additional four to six new Cusp stores over the next 12 to 15 months. We are in the process now of securing locations for these new sites and will keep you updated.

In addition, we continue to invest in our other non-real estate related projects as well. This past year we began a multi-year project that will support our future growth. The first phase of the project was the implementation of both equipment and process changes designed to improve the allocation of inventory on a store-by-store basis. The remaining phases involve many areas of the company, but will primarily be focused on merchant organizations in the logistics area. We believe this investment will ultimately result in improved merchandise sell through and enhanced gross margin.

And now a few comments on our direct marketing division, which includes the Neiman Marcus, Bergdorf Goodman, and Horchow brands. We achieved a top-line sales growth at Neiman Marcus Direct of 4.5% driven by approximately 13% increase in Internet sales compared to last year. This increase was a result of strong improvements in both neimanmarcus.com and bergdorfgoodman.com. Also, sales for our nine vendor sitelets [sic] continued to grow.

Partially offsetting the positive results was a decline in our Horchow business. As we have said for some time, our home business has struggled consistent with others in the industry. We continue to analyze our approach to this business, looking at everything from merchandise assortments, inventory commitment, catalogue production, and prospecting to mitigate the continued slowness in this business. However, this business goes through cycles and we believe the environment and the resulting sales trend will improve.

As I mentioned earlier, capital investment is a critical part of our strategy and that certainly holds true for our direct business. In order to continue our growth in direct we have put a number of new technology initiatives in place. These initiatives will deepen our systems and allow us to more efficiently and proactively manage our businesses. The most significant projects we implemented this past year include the cusp.com website. This innovative sight compliments our Cusp stores, extending our reach to new customer bases. We have developed an efficient distribution model to fulfill web orders from the Cusp store inventory in our distribution centre. This model allows us to offer a much broader assortment on our website while limiting our inventory exposure.

We have also recently developed the capability to now offer our customers the ability to easily ship Neiman Marcus merchandise to Canada making the process much smoother for our Canadian customers through the automated ability to make payments for duties and taxes through our website.

In addition, we continue to invest in enhanced analyses tools for our merchants. These tools gave us greater visibility into sales, markdowns, and receipts, which in turn helped control our inventory. And we improved the search engine capability for our sites that will increase customer personalization and navigation, including a suggestive selling feature that shows items which may be of interest based on past purchases.

Looking forward to fiscal 2009, we will continue to challenge ourselves to further develop the technology that supports this growing business. We understand the importance of staying ahead of the curve in this business and we are always focused on providing our customers with the most rewarding experience possible. We remain committed to being the leader in luxury e-commerce.

In closing, let me again say that fiscal 2008 was a difficult year. We’re approaching fiscal 2009 assuming the environment will remain very challenging. Our August sales were relatively flat for the month, although our business has been strong at Bergdorf Goodman. However, the ongoing consolidation of Wall Street and the reduction in workforce could have a negative impact on our business in the New York City economy in general.

Given the recent announcements of various financial institutions and the current uncertainty in the market, we are anticipating the months ahead will be difficult. Our customers are heavily invested in the markets and, as I pointed out earlier, turmoil in financial markets and the ensuing instability negatively affects customers’ buying patterns.

Looking back at the last nine to 12 months, most retailers, including ourselves, were more promotional in an effort to bring inventory levels more in line with demand. However, as we stated last quarter, increased promotional activity is not something we take lightly. We know that price promotions do not necessarily motivate how our core customers shop. Our customers are interested in unique and special merchandise provided with high-touch service and a luxurious environment. She is not looking for a discounted experience. We are very focused on full-price selling and will strive to eliminate as many of the added promotions as possible this year while focusing on events that we have had positive experience with that will motivate customers to come in and shop.

While planning for this fall’s purchases we did make adjustments to reflect a lower expected sales trend. However, the environment has deteriorated further than we had anticipated six months ago when we made our initial fall buys. Therefore, it is currently putting more pressure on our inventory levels. As a result, we are taking the appropriate actions once again to effectively manage the inventories and to the current levels’ demand and mitigate the loss of any of gross margin. However, the quality of our customer helps us to minimize the impact of any downturn. In addition, the progress we have made over the last five years to increase our productivity and operating margin has solidified this foundation.

That being said, we have not lowered the bar for ourselves or our company. We have much to do in order to continue to weather this storm. I also believe that difficult times teach us to be better at what we do. These are lessons to be learned and discipline to be applied when the consumer is cautious and business is challenging. In this climate we have to focus on what we can control and change.

With that in mind, our strategy is centred on great events, special new merchandise, and outstanding customer service. We are planning conservatively, tightly managing our expenses and controlling our inventories, and maintaining strong relationships with our customers and vendors. We are identifying any and all opportunities to improve our financial results while at the same time investing in the future.

This is a challenging time, but as with previous cycles, this too will pass. We are always focused on building our business for the long term. In fiscal 2008 we celebrated our 100th anniversary. It was an outstanding accomplishment; not one many retailers have achieved. Let me assure you, our eye is on the next century of growth and opportunity for Neiman Marcus.

Now Jim Skinner will review our financial results.

James E. Skinner

Thanks, Burt. Good morning. As Stacie mentioned earlier, our fiscal 2008 included a 53rd week, which makes the comparisons somewhat challenging. As a reminder, all references, unless stated otherwise, will be on a 14- and 53-week basis. However, comparable store sales results were calculated on a 13-to-13- or 52-to-52-week basis. For fiscal 2007 all results are reported on a 13- and 52-week basis.

First let’s review our consolidated results. Despite the difficult environment we managed to grow our fiscal year 2008 revenues by 4.8%. We are proud to report that each division hit new sales milestones this year and in total our sales reached $4.6 billion for the year for the first time.

For the quarter, gross margin decreased approximately 140 basis points compared to last year. This decrease was primarily due to higher markdowns and a decrease in full-price selling at our specialty retail stores due to the lower level of customer demand and the higher level of indices and inventories that was sold at a discounted price. In addition, we realized lower margins on delivery and processing revenues as a result of higher level discounted free shipping promotions in our direct marketing segment. For the year gross margin declined 110 basis points due to the same factors I just mentioned: higher markdowns and additional free shipping promotions.

On the positive side, our expense rate once again improved. We reacted quickly to the downturn and quickly managed those expenses we could control. On a year-over-year basis our SG&A rate for the fourth quarter improved approximately 60 basis points. This improvement was primarily due to lower payroll costs, including incident compensation costs for the quarter, and a decrease in marketing and advertising costs as a percent of sales primarily due to the planned shift from catalogue to web-based marketing. Web marketing costs are generally lower as a percentage of revenue than print catalogue.

Partially offsetting these improvements was an increase in long-term benefit costs. For the year, our SG&A rate as a percentage of sales improved approximately 40 basis points. Some of the factors I just mentioned for the quarter also contributed to the year-over-year improvement, including lower annual incentive compensation and a decrease in marketing and advertising costs in our direct marketing segment of approximately 20 basis points. These improvements were partially offset by an increase in long-term benefit costs for approximately 20 basis points and the higher level of advertising and promotional costs incurred by our specialty retail division of approximately 10 basis points in connection with, one, the celebration of our 100th anniversary last fall, and two, promotional events and activities to facilitate the sell through of excess inventory.

Depreciation increased for both the quarter and the year in total dollars primarily due to the higher level of capital expenditures in the past few years. On a rate basis depreciation increased approximately 60 basis points for the quarter and is roughly flat for the year.

In total adjusted operating results, which excludes purchase price accounting and other items as detailed in our earnings release, decreased approximately 22% in the fourth quarter compared to last year. For the year, adjusted operating earnings declined approximately 2.4% to $537 million. As Burt mentioned, although our adjusted operating margin declined from fiscal year 2007, our fiscal year 2008’s adjusted operating income and margin represents our second best results ever.

Now a brief review of our segments. Specialty retail sales increased 5.5% for the quarter and on a comparable basis sales decreased 1.8%. For the year, specialty retail total sales increased 4.9% and increased 1.3% on a comparable basis last year. This increase was comprised of a cost increase of 0.1% at Neiman Marcus stores and a strong 8% at Bergdorf Goodman. There was also the 13.9 comp increase for the prior year.

For the year we experienced the greatest strength in sales at our stores in Texas and New York City. Adjusted offering earnings at the specialty retail division were $32 million this quarter compared to about $44 million in the prior years, a 28% decrease.

For the year, operating earnings at the specialty retail division decreased 2.8% to $477 million. On a rate basis, operating margin for the year at specialty retail was 12.4%. This decrease is primarily the result of factors mentioned earlier, including a lower-level full-price sales as a result of lower than anticipated demand in higher markdowns and net increases in advertising and promotion costs partially offset by lower estimated annual incentive compensation costs.

At Neiman Marcus Direct, Internet again drove the sales for the division with Internet sales growing over 13% for fiscal 2008. Internet sales for fiscal 2008 were $565 million. Once again we had improvements in several key e-commerce metrics, including total number of customers, average order value, gross demand, and number of orders.

Quarterly operating earnings at Neiman Marcus Direct decreased 7% to $24 million, which represents an operating margin of 14.3%, a decrease of approximately 160 basis points from last year. For the year, operating earnings increase about 1.5% to approximately $118 million. The operating margins, however, declined approximately 50 basis points to 15.7%. The decrease in operating margin is primarily the result of a decrease in margin realized in delivery and processing revenues offset by a decrease in advertising and marketing costs as a percentage of revenue due to the continued growth in Internet revenues.

We anticipate we’ll continue to impress on our gross margin at Neiman Marcus Direct due to the increasing use of offering free shipping to customers. For competitive reasons we will continue to use this tool. In addition, the higher cost of fuel is negatively impacting our gross margin in our direct business.

One last note on the quarter. Inventory increased about 6.5% to $978 million, which is above our sales improvement, obviously. If we eliminate the inventory for our new stores that we opened at Topanga, the Cusp stores, and new clearance centres, inventory increased approximately $0.04.8, which is more in line with our sales increase. But if you look at it on a 52-week basis our inventory comp actually declined about 23% for the year. During this time of year one week of receipts can make a big difference, as we were beginning to receive fall merchandise where the 53rd week can have an impact on what we inventory.

We remain very focused on managing our inventory. Because the lead time of purchasing inventory is so many months ahead of the applicable selling season it’s one of our biggest challenges to actively engage what the sell demand will be and to buy accordingly. As you can imagine, it’s even more difficult to do this during an economic downturn. At the same time, it’s extremely important that we maintain our brand integrity [inaudible] to our customers by providing a luxury assortment.

Through actively monitoring the sales environment on a daily, sometimes hourly, basis. As Burt mentioned, it’s not our desire to be heavily promotional from a pricing standpoint. It’s not reflective of our brands. However, we will take necessary actions to ensure that we are adjusting our inventory position appropriately.

We’ll be prudent but aggressive in our methodology as we continue to work through this cycle. We can march this on selling through seasonal or fashion merchandise that we won’t carry over to next year.

Thank you. Now Stacie Shirley will review remaining items before we take your questions.

Stacie Shirley

Thank you, Jim. I will begin with a few other items that impacted the income statement. First, we recorded other expense of $31.3 million in the fourth quarter of fiscal year 2008 which includes a pre-tax impairment charge related to the write down to fair value and the net carrying value of the Horchow trade name. As Burt mentioned, this business continues to be a challenge. The ongoing softness in the home industry has contributed to the decline in this category.

For fiscal year 2008 we also recorded other income of $32.5 million in the first quarter, which represents a one-time pension curtailment gain as a result of the company’s decision to freeze certain pension and retirement benefits as of December 31st, 2007. These two items resulted in net other income of $1.2 million for fiscal 2008.

Net interest expense for the quarter was relatively flat with last year. On an [inaudible] however, fiscal 2008 net interest expense was approximately $240 million or 5.2% of revenues compared to $260 million or 5.9% of revenues for the previous year. The $20 million decline in [inaudible] is primarily due to the decrease in term loan interest rates, as well as the pay down of $250 million that we made during fiscal 2007.

For the full year our effective income tax rate was approximately 37%, which is slightly lower than last year’s rate of 37.9%. On an ongoing basis or for fiscal 2008-2009 we expect the rate to be approximately 39%.

Just a few comments on the balance sheet. We ended the year with cash at $239 million compared to $141 million a year ago. As we have discussed previously, we did not make any payments on our term loan this year. Although we have sufficient levels of cash flow that meets our working capital needs and allows us to continue to invest in the company, we have made the decision to wait until we feel the financial markets are more stable before we make any additional payments. However, we remain very focused on deleveraging and will continue to evaluate our decision.

Capital expenditures for the quarter on gross basis were $50 million and we received available contributions of $8 million resulting in net CapEx of $42 million for the quarter. The majority of the CapEx this quarter was spent on our new Topanga store that just opened, the major remodels that Burt mentioned, and the investment in our logistics area.

For the fiscal year gross capital expenditures were approximately $183 million. Net of development contributions, total net CapEx was about $147 million for the year.

Most of the capital in 2008 was invested in new stores, major and minor remodels, IT enhancements, and many in-store selling projects. We also invested a significant amount of capital and expense on security issues in order to achieve compliance with the Paynet card industry standards.

Final CapEx for the year was lower than our original fiscal 2008 plan, primarily due to the shift in timing of certain projects. A significant amount of this underspend shifted into our fiscal 2009 CapEx plan.

For fiscal 2009 we currently expect CapEx on a gross basis to be in the range of $155 million to $165 million and on a net basis we expect CapEx to be approximately $135 million to $145 million. As in the past, the majority of our planned capital spend will be investments in new stores, remodelling existing stores, and technology improvements.

Our adjusted EBIDTA for fiscal year 2008 was $686 million, which is relatively flat with last year. Our leverage ratio was approximately 4.2 as of our year end. However, if you adjust for the excess cash we are carrying our leverage ratio would be approximately 3.9. This compares to a leverage ratio of in excess of 6 at the time of the acquisition. We are very pleased with the ongoing progress that we have made.

And lastly, the general basket for restricted payments is estimated to be approximately $500 million as of the end of fiscal 2008. As we have said before, this calculation is very detailed. Until a point of time in which we anticipate using the basket, we’ll only be estimating the size of the basket.

Thank you, and now I’d like to turn the call over to the operator and we will take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. The question and answer session will be conducted electronically. (Operator Instructions).

Your first question comes from [Bill Broder] – Banc of America Securities.

[Bill Broder] – Banc of America Securities

Good morning. You guys made the comment that obviously a lot of your decisions were made for fall purchasing approximately six months ago. Are you guys able, I guess, were you able to reduce your orders and, in general, how much are you able to impact the size of your orders when you may have over ordered?

Burton M. Tansky

We have obviously somewhat flexibility. When we did the plans for this fiscal year we were making them in the middle of 2008 and we realized that business was going to be challenging and we project the challenging business environment going forward. So we tempered our purchases accordingly. That was step one. As we get into the season, you know, as I said, it has not panned out exactly as we had thought and we are now making those adjustments. And our vendors, I may add, have been very cooperative in working with us.

[Bill Broder] – Banc of America Securities

Okay. In terms of your CapEx guidance for next year, you guys talk about the $155 million to $165 million and then part of this is going to be used for these process and system changes. I guess you guys talked about some gross margin enhancement. When should we start modelling some sort of gross margin improvement from these system investments?

James E. Skinner

Again, we don’t forecast those kind of things. I think that’s going to be a slow, it’s not one of these that you can turn on. This is really an evolution that will occur over time. So I don’t know in a modelling you would see it because I think it will come out over time. I don’t think we would expect to see anything really for a year or two and then I think it’s not going to be a turn on. It’s a slowly, an evolution that occurs, not a switch that you turn. So it’s going to be gradual. It’s not going to be dramatic. Again, we’re not a private label place. It doesn’t take very much change to be worth it to us.

[Bill Broder] – Banc of America Securities

Right. And can you remind us what maintenance capital expenditures would be for your business?

James E. Skinner

Yeah, that’s probably an art more than science. We can all debate what maintenance means because I think we talk about it in our company here. You’ve got maintenance, you know, do you need just to keep the lights on, that would be a very low number. I don’t know, $25 million or $30 million or something like that. If you said, I need to maintain the stores at the level that our customers expect, I’m not doing any expansion, I’m just maintaining it, well, that’s a bigger number. That may be, again, this is an art more than science, I don’t know, $50 million or $60 million, something like that. Because you couldn’t run it just on the lights because our expectation, back to what Burt says, our customers expect a luxurious environment. So you could do that for a very short period of time, but over time you’d want to make sure you’re maintaining at the level they expect.

[Bill Broder] – Banc of America Securities

Okay. And then I guess one more and then I’ll hop out. Do you guys break out what percentage of your business is New York City? Given that this has been an area of strength, but we could see some additional weakness, I’m wondering whether you guys still think your New York City region will do better than the company average.

James E. Skinner

Well, I mean, Bergdorf leads, we could break out the silver for Bergdorf. You know that. Obviously. When we said what’s the strength that we have, I think Burt mentioned it was Texas and New York City. Not necessarily New York region. So you definitely are seeing a differentiation between New York City and New York region. So I think, we think impacted by the tourism that’s been occurring over the last year and though, we anticipate that might slow down somewhat if there’s [inaudible] at this point. So I think when we look at it we’re very cautious about what’s going on in the New York region, especially because of the financial services issues that are out there, and New York City is that the tourism may start waning somewhat.

[Bill Broder] – Banc of America Securities

Okay. Thanks for taking the questions.

Operator

Your next question comes from Reid Kim – Merrill Lynch.

Reid Kim – Merrill Lynch

Hi. Good morning. Thanks for taking the question. I just had a couple. First one was, as we model the coming year given that it is a tough environment and we think about the SG&A, I was just wondering if you could help us to consider how much you can continue to play defence and maybe take SG&A dollars down. I think by my calculations, please correct me if I’m wrong, you reduced incentive comp and payroll expenses by about $6 million in the fourth quarter and I’m just wondering how much more you can kind of pull that out.

James E. Skinner

Yeah. And one is we don’t forecast out [inaudible] so I’ll just have to talk about qualitative. I think there’s two things. We’re obviously doing what everybody would be doing anyway, which is just hang tight. Starting another year we will start approving incentive comps. If it doesn’t work out that way we’ll deal with that at the time. So obviously you got kind of a win in your head on expenses, kind of resetting what your goals are for the next year. Like what’s coming. As far as expense control, you know, as we sit around here, you know, we start a new fiscal year, the world had changed. August 1st didn’t mean that all of a sudden everything’s good. Effectively, we’re just continuing what we’ve done.

That being said, we’ve started some things and framework [inaudible] some stuff that Burt was talking about on some of the merchandise things, there’s a bunch of activity that we’re doing that really looking at, not necessarily cost reduction, but really how we do business and thinking about really for the year. This is probably, as Burt was saying, this kind of environment is a good environment to kind of look at yourself. So we’ll be using this time to really think about what we want to do in the future. It’s something we did a great job after 9/11 of really pushing on the organization as far as how do we want to be structured when we come back out of that. And so we do a lot of talking about that. Because there will be a lot of activity. That could actually, where that decrease is cost to increasing, you know, to do some of that thing, you know, we’ll see. But our goal is to make sure that we’re positioned to really take advantage of this when we come out of this period of time, whenever that is.

Reid Kim – Merrill Lynch

Okay. And just to clarify on the direct business, in terms of margins, and I think I can ask this referencing the back review instead of guidance, but in terms of the impact of the free shipping promotions, would that tend to be user comp once we get into the second half of 2009? So you’re really facing the tougher comp in the first half? Is it mostly the shipping offers or is it really just the markdown rate that’s pressuring margins?

James E. Skinner

Yeah, I mean, I think there’s two things. I mean, this has been, I think what we’ve seen is a trend that’s been going two or three years. What you see is an increase. I mean, I know last holiday season there was a lot of it, so it’s not a second half of our fiscal year issue. I think we just use this thing to continue. We’re going at it [inaudible] we’re assuming this will just continue to decrease.

Now, what they are sort of having is kind of like the restaurant business. Your revenue’s down and your costs are up. Because the shipping costs are up you’re actually getting squeezed two ways: on your delivery and processing. I would say in general, and, Stacie, you can disagree, that what happened at direct is more related to that than it is to markdowns.

Stacie Shirley

Yes, and that is primarily what has driven it. Yeah.

James E. Skinner

As opposed to specialty retail, which is all really markdown of inventory. Direct came into their year with very good inventory. Their lead times are not as long as the retail area and they turn faster. So their ability to adjust is better than the retail side.

Reid Kim – Merrill Lynch

Okay. Jim, my last one is just given the extremity of the environment and I know you want to reduce debt, not increase it, but have you looked into maybe ticking the notes or maybe even drawing on the revolver kind of in a pre-emptive way?

James E. Skinner

That’s not something that we would think that we would need to do. I think, as Stacie described, our kind of approach to liquidity. So I don’t see us drawing on our line or definitely not ticking our notes. I think we got adequate liquidity. We can do some pretty severe things, what can go on in the environment. We feel very good about our liquidity in the coming year. I’m very grateful as a company that we earned this cycle, that we worked, our whole structure was built to have more liquidity than a lot of the other companies have. I see $600 million undrawn line, starting the year off with several hundred million dollars of cash is a great place to be if we’re about to go through another tough year.

Reid Kim – Merrill Lynch

Got it. That’s what I thought. Thanks a lot.

Operator

Your next question comes from Karen Eltrich – Goldman Sachs.

Karen Eltrich – Goldman Sachs

Thanks. What are you seeing on the competitive front? Obviously it’s been an emotional environment. As you’ve said, you know, things have changed pretty dramatically over summer. You have a bit more inventory than you’d like going into fall. Do you think that’s the same amongst some of your competitors?

James E. Skinner

Well, you know, it’s hard to know until we see the results, which we see on a month-to-month basis, for many, many of the other retailers. However, we believe and have always thought that when we do well many others do well; when we do poorly, others do poorly. So it would surprise me that the atmosphere and the environment for others is different from what we’re experiencing.

Karen Eltrich – Goldman Sachs

And then final question. For, as you’ve said, aggressively moved down inventory, what are you finding to be the most effective, profitable means to doing this as you have the outlet stores? You are also utilizing the web increasingly, I’ve noticed. Is it the combination of the two or are you finding one to be a bit more effective?

Burton M. Tansky

I’m sorry, you started by saying what’s the most effective way to reduce the inventory?

Karen Eltrich – Goldman Sachs

Sorry. For moving excess inventory at a promotional level.

Burton M. Tansky

Ah, for moving excess inventory. No, no, we have kind of a step stone of doing that and it’s well, well thought out and very well documented. First and foremost we strive to sell the inventory at full price, something I said in my prepared statement, and it’s really the key in the centerpiece of our thrust. Obviously in this environment that’s becoming more difficult to do on an ongoing basis. Although we have plenty of merchandise being sold plenty at full price every day of the week. Certainly with the new season changing and the new goods coming in it’s been very favourable in many areas. However, that being said, should that not occur we have some promotional activity that we will do and then we will go to our first and last call, which is our normal cycle for clearance in clearing the merchandise. At the end of that cycle we send the merchandise to our last-call stores.

James E. Skinner

And Burt, maybe you should, I think their reference is to the types of things we do to stimulate activity that’s not price related. That’s what –

Burton M. Tansky

Well, yeah, okay. However, so I outlined the steps we take when it comes to price. Full price first, then whatever price promotions might be appropriate. In addition to that we have a calendar just packed by store by store by store with events, whether they be personal appearances, vendor events, cocktail parties, afternoon teas, luncheons; you name it, we’re going to do it and we are doing it. In some cases, many cases, this seems to be a good motivator to get the ladies to come into the stores. It’s a good way to see the new collections and to see the merchandise that has arrived in the stores. Couple that with the fact that our sales associates, who are a key player in this because they all commission based, their compensation is, they’re out working very closely with their customers to motivate them to come into the stores and to shop for the new season.

James E. Skinner

And I think the other side is, that’s going out the front door. The other side, as Burt mentioned, is working with our vendors to either cancel orders, return goods to them – which obviously is the same thing as getting rid of it. So you’re actually doing all those activities. I think as most retailers would do, you got a live TV on the front of the house and you got stuff in the back of the house to get these in line. That’s why we’re busy.

Burton M. Tansky

Yeah, there’s no one thing that we’re doing. There are many, many things and they’re going on simultaneously.

Karen Eltrich – Goldman Sachs

Thank you very much.

Operator

Your next question comes from Emily Shanks – Barclays Capital.

Emily Shanks – Barclays Capital

Good morning. I wanted to ask a follow up around SG&A specific to the lower marketing advertising costs as you switch from catalogue to online. Is there more of that to come or when are we going to be cycling that comparison?

James E. Skinner

That’s also been one that we’ve probably feted in probably two or three years. Essentially, we started off in early 2001 or something with Internet being zero and we’re had about a $350 million directive. Today we have about $700 million business with $500 million Internet and $200 million catalogue. So catalogue has shrunk by, you know, roughly almost half whereas Internet went from nothing to $500 million. We still believe in catalogues. We think they have a position. There’s obviously some impact between the Internet and catalogue. That being said, we will continue to probably reduce the number of catalogues we send as we see more and more people, being their primary vehicle of purchasing on the direct side, as being the Internet. I don’t think we’re through. Maybe in diminishing amounts as it becomes a smaller and smaller amount of the total. But I don’t think this is over. I can’t tell you were it stabilizes and those kind of things, but I don’t think we’re through with that trend.

Emily Shanks – Barclays Capital

Okay. Great. That’s helpful. And then just one last question. It looks like accounts payable leverage was pretty nice during the quarter. Is that more of a timing issue or have any of the terms of your vendors changed to be more favourable to you?

Stacie Shirley

Related to last year, I guess?

Emily Shanks – Barclays Capital

Yes. Sorry. I’m looking on a sequential basis as well as year over year.

Stacie Shirley

Yeah, it really has more to do with timing. As far as, you know, last year we had a lot of inventory that came in right at the end of the year and so where we are at the end of this year is kind of where we think is more of a normal level, but it has nothing to do with changes in terms of our vendors.

James E. Skinner

You can’t even look at sequentially. You have to, even if you’re comparing it year to year.

Emily Shanks – Barclays Capital

Right. It looked like it. It looked favourable in both regards. Okay. Great. Thank you.

Operator

Your next question comes from Grant Jordan – Wachovia Securities.

Grant Jordan – Wachovia Securities

My first question here, you talked about some of the challenges you see, but the August same-store sales numbers were pretty good. Were there any extra promotions that drove activity in the month? Or maybe just give us a little more colour.

Burton M. Tansky

I don’t think we added any additional promotions. I think we worked very, very hard to get the customer to come in on the new receipts. It was really a beginning of season and there probably was, throughout the country in our stores, more in-store activity. Some of the events that I was talking about, PAs, trunk shows, events that we think and we have watched have stimulated activity.

James E. Skinner

And I do remember, Burt, part of this is, being the month after the 53rd week, we’re going to go through this all year where we’re off kilter. So effectively, the four weeks that we’re comparing this year is not the same four weeks as last year because we’re now falling in the 53rd week. And that’s essentially traded the first week in August for the first week in September, which is favourable in that kind of calculation.

Grant Jordan – Wachovia Securities

Okay. Thank you. That’s helpful. You may not have this in front of you, but are there any months we should think about this year or maybe in the near term that are going to have strange comparisons like that?

James E. Skinner

The answer is yes. If you remember what happens, much of our retail prints went through this, they finished this, I guess, last January, but effectively, especially around the holiday you will have very weird results.

Grant Jordan – Wachovia Securities

Okay. That’s helpful to keep in mind. My next question, you talked about, you know, obviously some challenges in New York. After the events and the Texas storms, did you see that impact your business any? Do you have any feel for how the Texas market’s going to be?

Burton M. Tansky

We took a hit in Houston. We were mandated by government to close and we closed on Thursday afternoon and we were closed Friday, Saturday, Sunday, Monday. Opened up on a limited basis Tuesday. That cost us a considerable amount of business. In addition to that we had, one of our last-call stores was closed for three days also. Four days. So it had an impact that did cost us business.

James E. Skinner

Houston’s still recovering. It’s going to take a while for those guys to get back to normal. It’s kind of sad, kind of when bad things happen at bad times in one of our strongest markets, best printing stores, and you end up with what happened in Houston.

Grant Jordan – Wachovia Securities

Yeah. And then my last question. I think you’ve talked about this some on previous calls. Just the rate of inflation, particularly on European sourced goods. What’s that dynamic look like right now and how have consumers reacted to the price increases?

Burton M. Tansky

Well, you know, the dollar actually improved a little bit, as you know. Then the other day it had a bounce back to, I believe, $1.48, it was down to $1.40, which had it stayed and gone down it would have certainly been beneficial as we go forward onto the new deliveries as we go into spring. However, you know, I think we’re, on a year-to-year basis there isn’t much difference and the prices are what they are. The consumer, I’m not sure they’re reacting to price as much as to the environment. We sense that price is not the issue because we’re selling a great deal of very expensive merchandise throughout the company. Virtually in every category. In fact, we’re actually selling at the top of the range, better than in the middle of the range in many categories. So price is always a concern because everyone has a limit, but I think the customers make decisions based on quality and desire. They want something, the price diminishes considerably as an issue.

Grant Jordan – Wachovia Securities

Great. Thank you. That was very helpful.

Operator

Your next question comes from Carla Casella – J. P. Morgan.

Carla Casella – J. P. Morgan

Hi, from J. P. Morgan. Can you remind us how much you spent last year in the first quarter on the 100th anniversary promotion? Or advertising?

Stacie Shirley

Carla, I don’t think we actually broke that out for you guys.

Carla Casella – J. P. Morgan

Oh, okay.

James E. Skinner

We noted it, but without an amount.

Carla Casella – J. P. Morgan

Okay.

Stacie Shirley

I’ll verify that. If we did I’ll let you know, but I don’t believe we did.

Carla Casella – J. P. Morgan

Okay. But it would have been, mostly been spent in the first quarter last year?

Stacie Shirley

There might have been some in the second quarter.

James E. Skinner

I think primarily it was in the first.

Carla Casella – J. P. Morgan

Okay. And could you give us a sense of how much of your costs are fixed versus variable?

James E. Skinner

Nothing’s fixed over time. Everybody will always tell you. Obviously our commission plays a thing that, you look at our commission, which in the retail side we’ll usually use, rule of thumb, it varies from department to department. We kind of use an 8%. So technically your commission is totally a variable cost. It’s not 100% of your payroll costs, but it’s a big chunk of that, obviously. Some of our rent is percentage rent. That is truly variable. And obviously the cost you pay to American Express and those kind of things. It’s not a huge amount, but we’ve got a decent amount because of commission. Another –

Carla Casella – J. P. Morgan

Right.

James E. Skinner

-- you can collect over time, obviously.

Carla Casella – J. P. Morgan

When you say commission is 8%, 8% of your sales force is on commission? No, it’s higher than that.

James E. Skinner

No, the commission rate is roughly 8% of sales, especially retail. On direct that’s a different model. They have much more of a fixed model than the retail side.

Burton M. Tansky

Well, virtually all of our sellers are on commission.

James E. Skinner

Right.

Burton M. Tansky

All of them.

Carla Casella – J. P. Morgan

Okay.

Burton M. Tansky

At Bergdorf also.

Carla Casella – J. P. Morgan

Right. That’s what I thought. And do you bring in many people during the holidays?

Burton M. Tansky

We do not. We do supplement where we believe it is needed, but we tend to depend on our own team. There is some build up, but it is not the big issue with us.

Carla Casella – J. P. Morgan

Okay. So you don’t have a general rule of thumb that you would look at fixed versus variable? I’m sorry to go back to that last.

James E. Skinner

No.

Carla Casella – J. P. Morgan

Okay. And then one accounting question. The construction allowances that are netted to rent expense, does that run through net to the rent expense that was the $92 million annual rent? Is that a net number?

James E. Skinner

Yes. Yes.

Carla Casella – J. P. Morgan

Of the construction allowances?

James E. Skinner

Right.

Carla Casella – J. P. Morgan

Okay. Great. So it doesn’t run through CapEx?

James E. Skinner

Right.

Carla Casella – J. P. Morgan

Okay. Great. Thank you.

James E. Skinner

And on the cash flow it shows up in operations. In operations on a cash flow side of it.

Carla Casella – J. P. Morgan

Right.

James E. Skinner

[Inaudible] and then the P&L [inaudible]

Carla Casella – J. P. Morgan

Okay. Thank you.

Operator

Your next question comes from [Ann Warheim – Vancampen].

[Ann Warheim – Vancampen]

Hi. Just a couple questions. First, going back to your vendor terms, just wondering if you’re seeing any pressure from them as far as making payments sooner than you normally would have.

James E. Skinner

No, we’re not.

[Ann Warheim – Vancampen]

Okay. And that’s not something that you’re expecting? It’s just something that we’re seeing in other retailers.

Burton M. Tansky

No, that is not the question.

James E. Skinner

I don’t think that’s been our, vendors downturns have been [inaudible] but after 9/11 we didn’t see any of that. Anything. Some of them may be having financial issues, but they probably wouldn’t be coming to us. You may see more of them go into factors.

[Ann Warheim – Vancampen]

Okay. And then just given that this is a shorter holiday season coming up, I was wondering if you’re planning on being more aggressive with your holiday promotions as far as either taking deeper discounts earlier or how you’re kind of looking at that?

Burton M. Tansky

We don’t think that Christmas is a deeper discount opportunity. We’re going to try and sell it at full price and have everybody enjoy our gifts.

[Ann Warheim – Vancampen]

Okay.

Burton M. Tansky

It’s a concept we developed. Sell it at full price. Now, if things don’t pan out the way we hope they will obviously we’re going to want to move the inventory. Sitting here today, I think it’s premature.

James E. Skinner

Again, more related to inventory levels, not to the shortening of the holiday season.

Burton M. Tansky

That’s correct. It’s more related to where we start EOM, where we start EOM December and in November, actually. So we have a little bit of time to see how this thing all works itself through. But what we’d like to do is to sell merchandise for gift giving and for personal use at full price because we are not only going to have a very good assortment of holiday, but we get our cruise resort merchandise in at the beginning of November and has in the past been a very, very strong motivator for our customer who does a lot of travel in the late part of the year.

[Ann Warheim – Vancampen]

Okay. That helped. And then just lastly, on your CapEx, the shift into fiscal 2009, was that more just a timing issue or were those conscious decisions made to kind of reduce your capital expenditures for the year?

Stacie Shirley

It was just a timing issue. It’s just a cash flow timing issue. So it’s projects that were approved as part of the fiscal year, but the cash flow just hasn’t got out the door yet.

[Ann Warheim – Vancampen]

Okay, great. Thank you so much.

Operator

Your next question comes from Colleen Burns – Oppenheimer & Co.

Colleen Burns – Oppenheimer & Co.

On inventory, can you comment what percent of your inventory is clearance inventories or left over from summer at this point?

Burton M. Tansky

Very little. The left over from summer has been moved to our last-call stores. We have none in the store. If we do it’s half a rack. We have nothing. The summer goods is gone and the currency of our inventory is rather good.

Colleen Burns – Oppenheimer & Co.

Have you already completed your spring purchases at this point?

Burton M. Tansky

We’re in the process of doing that now. It’s not completed.

Colleen Burns – Oppenheimer & Co.

Okay.

Burton M. Tansky

Our people are in Europe now, and Milan. We have seen New York two or three weeks ago. We go to Milan, and then the following week, next week we go to Paris.

Colleen Burns – Oppenheimer & Co.

Okay. And would you say that you’re being more conservative obviously in those purchases than you are of the fall?

Burton M. Tansky

We’re being conservative, yes.

Colleen Burns – Oppenheimer & Co.

Okay. And then just with your [inaudible] the store events that you’re planning for this year, it sounds like you’re going to have additional events this year versus last year. Do you expect additional marketing dollars to go along with that?

Burton M. Tansky

Well, you know, we’ve reallocated the monies. There are some additional dollars, but for the most part what we’ve done is we’ve reallocated the monies from our spend last year to help support and fund some of the things that we’re doing this year, which we think are more on target for our needs at this point.

Colleen Burns – Oppenheimer & Co.

Okay. And then just lastly, can you comment on sales trends in California and Florida? Have things gotten better or worse?

Burton M. Tansky

The California market continues to be challenging. There’s no question. It had been our most difficult market. It improved slightly, but it still, you know, very difficult. Florida’s the same.

Colleen Burns – Oppenheimer & Co.

Okay. Thanks. That’s it for me.

Operator

(Operator Instructions). Your next question is from Mary Gilbert – Imperial Capital.

Mary Gilbert – Imperial Capital

Yeah, going back to the inventory issue, can you give us an idea of what we should be looking at in terms of inventory per store? If it is expected to be down 2% to 3% year over year how you’re budgeting your purchases on that basis.

Burton M. Tansky

No. We don’t give you that information. We have not ever said, told the store-by-store inventory information.

James E. Skinner

As Burt said, and what most of us in our prepared remarks, I mean, obviously what you’ve got to decide, where that goes is where the demand is. Ultimately our goal is to leverage our inventory, so in the long term we would like to see the inventory growth and sales growth be about the same. The question is, what is it going to take to get there?

Mary Gilbert – Imperial Capital

Right. So, in other words, if you’re experiencing weakness, let’s say you’re going to be down 2% or 3% or whatever the number is, then you’re going to try and bring your inventories down by that much, basically.

James E. Skinner

Yeah, roughly. I mean, yes.

Mary Gilbert – Imperial Capital

Okay.

James E. Skinner

That’s the goal, right. And it depends on how long it takes, you’re trying to make, you know, I think, you know, you get this thing, some of it is, as Burt says, look at seasonal goods, we’re going to mark down, they’re going to be gone. We don’t carry overstock, we don’t put it away or that kind of stuff. Some of the stuff you look at and some of the categories aren’t as mark down intensive as hand bags. You make a choice. Is this a seasonal bag, you need to mark it down and get it out there, get the cash, or am I better selling it through over time? Which one is going to give you a better long-term cash answer? That’s the decision you’re making on the business side. So we’re making those on a continuing basis. In the long term, though, you want those inventories all to get in line with your sales.

Mary Gilbert – Imperial Capital

Okay. The other thing is, when you’re looking at the New York business, what percentage is your sort of core New York City customer do you think and what percent reflects, you know, the tourists, basically?

Burton M. Tansky

You know, that’s a difficult number for us to deal with. We know our customers very, very well. It’s the foreign customer that we try to track and try to understand what percentage they are and how they’re growing. Without giving you the specifics I can tell you that that is a growing part of our New York business and has been for the last couple of years. It has been very, very helpful to offset whatever softness there might be within the local business. I’m not sure there has been any softness in the local business because Bergdorf has a very, very loyal clientele. But I would say that the majority of our business at Bergdorf is still clearly with the local customer. Perhaps their percentage of the total has come down a little bit because the foreigners have been very, very aggressive, but it’s still a New York driven business.

Mary Gilbert – Imperial Capital

Okay. Yeah, and you said you haven’t seen any softness in the local business yet except that, you know, with the events of the latest week or two –

Burton M. Tansky

Well, we don’t know yet. You know? So far the businesses hang in there. In terms of mid to long term, we don’t know yet what the impact of the Wall Street issues will be on our customer.

James E. Skinner

Now, I mean, looking at, we’re assuming things will be tougher up in New York than what they have been. That’s how we’re at least thinking on a qualitative basis as we’re planning.

Mary Gilbert – Imperial Capital

Okay.

Burton M. Tansky

Because we have to plan our purchases from our vendors so far ahead we have to be a bit of a visionary in terms of what can be or what could be in any of our communities. We feel that Wall Street’s issues will permeate throughout the New York economy and could absolutely impact both Bergdorf, Westchester, and Shore Hill stores for Neimans and Bergdorfs. So we have to view this as an issue as we go to market. We’re in market now, so therefore obviously we’re going to be more conservative.

Mary Gilbert – Imperial Capital

Okay. And then in terms of looking at some of your foreign customers, do you have an idea of the mix? You know, how many of them or whatever represent Europeans versus Asia and that sort of thing?

Burton M. Tansky

No, we don’t have those numbers. We only have what we’re being told by our associates. Europe seems to be very, very strong right now, but we have customers that come from throughout the Far East also.

Mary Gilbert – Imperial Capital

Okay. And the Middle East, too, I suppose.

Burton M. Tansky

Some from the Middle East, yes.

Mary Gilbert – Imperial Capital

Okay. And then I’m looking at your Neiman Marcus business sort of around the country. Are you able to gauge how much represents the core luxury customer? I mean the real, true luxury versus aspirational?

Burton M. Tansky

Yes. We have that very well.

Mary Gilbert – Imperial Capital

Okay. And what is that –

Burton M. Tansky

We know it through our Incircle group, which is really our solid core customer makes up 50% of our business.

Mary Gilbert – Imperial Capital

Okay. Fifty percent. That’s helpful. And then the rest is aspirational?

Stacie Shirley

Depends on how you kind of define aspirational.

James E. Skinner

It’s an art more than a science.

Stacie Shirley

And the 50% is at our Neiman Marcus stores, Incircle represents about 50% of sales at Neiman Marcus stores. A little bit different ratio at Bergdorf Goodman than NMD.

Burton M. Tansky

Yeah, the rest are not necessarily aspirational. Some could be occasional shoppers. Some could be just gift-giving shoppers. And others shop regularly, but do not make the criteria for being in the Incircle. In order to become an Incircler you have to get $5,000 in purchases, and then you become a member of Incircle and you start collecting one point for every dollar spent, plus two points. Three times a year we have a two-point event. So, you know, there may be people who are spending $3,000 or $4,000 a year who have not quite made it.

Mary Gilbert – Imperial Capital

Okay. Got it.

Burton M. Tansky

But we love them anyway.

Mary Gilbert – Imperial Capital

Okay. And then also one final thing with regard to vendors. Are there any vendors that may be having their own financial issues where they may not even be able to factor just because of the financing slow down where they may need greater support from you in order to continue to buy?

James E. Skinner

I mean, in general I don’t, some of that would be invisible to us. Not that they’re sharing with us what their financial stresses are. There’s always a few, you know, we obviously can deal with very, very small vendors. Whether it’s good times or bad times, there’s always some vendors that are having some kind of financial issue. Sometimes we’re aware of those, sometimes we’re not. But I’m not seeing a real tick up of those. It wouldn’t shock me to find that some of our vendors have some financial issues. Again, I don’t think they come to us.

Mary Gilbert – Imperial Capital

Right. Well, I just wondered, in those instances where you may have great product, but they’re just not able to get the financing to wait to get paid, do you give them, you know, essentially pay them in advance?

James E. Skinner

Essentially there’s probably an array of what we do with different people in good times and bad times. Some of these are very small vendors and we could kind of crush with a PO that’s too big. We do a good job of kind of working these guys up, not try to lose them too fast just for that exact reason where their working capital needs, some of these guys, they can be very talented but not very good financial managers, which is not shocking. So we try to make sure we’re opening doors slowly so that they’re kind of growing their business and [inaudible] some of those guys get overstretched. They don’t understand that getting too much business they can go broke. But you do have that. And that’s why you have this good times, because you just grow too fast. We’ll probably have a few more of those. What we do, we’re very cautious of those, we don’t want to be in the investment business, so we’re not sitting there trying to be exposed. There are some things we’ll do on occasion. It’s not a big part of our business, though.

Mary Gilbert – Imperial Capital

Okay. Great. Thank you very much.

Operator

At this time we have no other questions standing by on our question roster. I’d like at this time to turn the program back to our speakers for any additional or closing comments.

Stacie Shirley

Okay. Thank you and thank you all for participating in our call today. You may access the replay of this call at 888-203-1112 through October 24th and the pass code is 6641705. Thanks and have a good day.

Operator

Thank you, everyone, for your participation in today’s call. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!