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Executives

Jean Fontana - Integrated Corporate Relations

Lorna Nagler - President & CEO

Andrew Moller – Exec. VP & CFO

Monica Dahl – Sr. VP of Planning & Allocation and e-Commerce

Analysts

Crystal Kallik - DA Davidson & Co.

Robin Murchison - Suntrust Robinson Humphrey

Howard Tubin - RBC Capital Markets

Margaret Whitfield - Sterne, Agee & Leach

Christopher & Banks Corporation (CBK) Q2 2009 Earnings Call September 25, 2008 5:00 PM ET

Operator

Welcome to today’s Christopher & Banks Corporation second quarter fiscal 2009 earnings conference call. (Operator Instructions) Now I would like to turn the program over to your host Ms. Jean Fontana of ICR; please go ahead.

Jean Fontana

Good afternoon and thank you for joining us to discuss Christopher & Banks second quarter fiscal 2009 earnings results. Joining us on our call are Lorna Nagler, President and Chief Executive Officer, Andrew Moller, Chief Financial Officer and Monica Dahl, Senior Vice President of Planning and Allocation and e-Commerce. After management has made their formal remarks we will open up the call to questions and answers.

Before we begin I would like to remind you that some of the comments made on the conference call during the prepared remarks or in response to your questions may constitute forward-looking statements that are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.

These forward-looking statements may address the beliefs, plans, objectives, estimates or expectations of the company. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

Those risks and uncertainties are described in the press release and in Christopher & Banks most recent Annual Report on Form 10-K, its recent 10-Q filings and the company’s filings on Form 8-K filed with the SEC.

Investors should not assume that statements made during the conference call will remain operative at a later time. Christopher & Banks undertakes no obligation to update any information discussed in this conference call including its forward-looking statements even if actual results, future events or changes reflect that the projected results or expectations discussed or described in such forward-looking statements will not be realized.

Now I’d like to turn the call over to Lorna Nagler, President and Chief Executive Officer of Christopher & Banks.

Lorna Nagler

Thank you Jean, good afternoon everyone and welcome to the Christopher & Banks second quarter fiscal 2009 conference call. With me today are Monica Dahl, Senior Vice President of Planning and Allocation and e-Commerce, and Andrew Moller, the company’s Chief Financial Officer.

During today’s call I will be providing a brief overview of the company’s second quarter performance, some highlights of the business and our view of the current retail environment. Following that I will turn the call over to Andrew for a more in depth review of our second quarter fiscal 2009 financial results.

Last I will make a few closing comments and then Andrew, Monica and I will be happy to take your questions.

Before I comment specifically on our second quarter results, I would like to comment on the current dichotomy we are seeing and feeling when evaluating the state of our business given the current economic and retail environment.

First as everyone knows store and mall traffic is down considerably and our sales are suffering because of it. Given our expectations that the current environment will not improve in the short-term, we are doing our best to plan the business in line with the sales that we expect to generate while also taking the opportunity to score points with our customers and both improve and expand our brand awareness.

Contrasted against this, is that we feel really good about the underlying fundamentals of the company given the various business and merchandising initiatives we have begun working on or have put in place over the past year.

Our fall products have evolved nicely from our [inaudible] novelty styles to newer, more refined offerings which blended elevate taste level of novelty with new fabrications and silhouettes and what we call solution-based products like our Tummy Slimmer jeans.

We are also building a more effective store organization under the leadership of our new Senior Vice President of Stores who I am thrilled to have on board. We are also redefining our organization across many functions with a focus exclusively now on our two core brands.

We are making good progress on our e-Commerce and planning and allocation initiatives and overall we are getting more efficient and smarter.

While the payback on all this progress at least in the short-term, is being nullified by overall business conditions, we feel we’ll be ready to capitalize and yield returns on these efforts more fully when the economic conditions improve and more of our consumers return to the malls.

So, at the moment, we are being both prudent and patient. In fact, we see all of this as an opportunity to improve and gain share.

Finally we are fortunate to have a strong balance sheet which provides us the flexibility we need to ride this storm out.

Now turning to the second quarter results, we delivered earnings per share of $0.02 and these earnings are after a $0.02 charge in the quarter associated with the closing of the Acorn division. Comparable store sales hampered by a continuation of weak traffic trends declined 13%.

Despite the disappointing same store sales comp we were pleased to see an improvement in our average transaction value and merchandise margins as our customer continues to give us her approval on new products.

Customer buying patterns did not change much from the first quarter meaning that when customers do buy, they continue to spend more then in the recent past. We were also pleased with our petites business which was expanded to 300 stores this month.

Reaction continues to be favorable. Our e-Commerce site also continues to perform well in the second quarter continuing to track above planned. And as I mentioned earlier, updated novelty and solution-based products were very well received as were petites, knit jackets and core denim among others.

The result of the [Hot Sun] initiative has been positive particularly at Christopher & Banks. During the second quarter we opened six new stores and closed two. This brings our total store count as of August 30 to 854 stores compared with 807 as of September 1 last year.

For all of fiscal 2009 excluding Acorn of course, we anticipate opening 29 new stores and closing approximately 12 stores for a net increase of 17 stores or 2%.

We anticipate six store openings during this third quarter, half of the new stores will be CJ Banks and half will be Christopher & Banks.

Given the uncertain environment we continue to proceed with caution in planning for new stores as we evaluate and fine tune our real estate growth strategy. Our focus continues to be on maximizing productivity and achieving increased returns on all of our real estate investments.

We ended the quarter in a much cleaner inventory position with inventory per store down approximately 6% versus a year ago. However we want to remind you that we will begin to cycle tighter inventory levels in the second half of the year and inventory levels are expected to approximate last year’s levels going forward.

Based on how sales trends are looking we will continue to prudently manage inventory levels. While we are not planning for same store sales to improve in Q3, we intend to use a variety of pre-planned promotions and in-store events to entice our customer with a goal of improving both average dollar sales and units per transaction.

With that let me turn the call over to Andrew to discuss our financials for the second quarter.

Andrew Moller

Thanks Lorna, for the second quarter total sales declined 7% to $131.6 million. Same store sales were down 13% from last year. In terms of regional performance approximately half our comp stores are located in the eight states that touch the Great Lakes and Iowa.

Same store sales for this group of stores were down approximately 11%. Comp sales for the stores located in all other states were down approximately 14%. During the quarter we had a decline of approximately 19% in the number of transactions per average store.

This was offset by an increase of approximately 6% in the average transaction value. Merchandise, buying and occupancy costs were $81.5 million or 61.9% of sales this year. We gained 230 basis points of improvement over last year.

Merchandise margins improved by 480 basis points due to lower mark-downs. This gain was offset by deleveraging of buying and occupancy expenses due to the 13% decline in comp sales.

SG&A in the second quarter was $41.4 million, up approximately 2% from last year. As a reminder in last year’s second quarter we had a one-time $2.1 million CEO transition charge. Expenses where we saw the greatest increase over last year included marketing where we planned for an increase, e-Commerce which is a new business this year, and medical claims.

The 2% increase in SG&A was not as large as the high single-digit increase we expected at the beginning of the quarter. We worked to control expenses across categories. The biggest area of savings from our previous projection was in the areas of store salaries, travel, and IT related costs.

Depreciation was $8 million in the second quarter compared to $5.5 million last year. This year’s depreciation included approximately $1.2 million related to long-life asset impairment at our Acorn division.

Operating income was $0.8 million or six-tenths of 1% of sales. This compares to $4.4 million or 3.1% of sales last year. Net income was $0.8 million or $0.02 per diluted share as compared to $3.4 million or $0.09 per diluted share for the same period last year.

Turning to the balance sheet, we had approximately $84 million in cash as of August 30. In addition we had $18.5 million of long-term investments consisting of auction rate securities and are in a strong cash position.

We had approximately $13 million of capital expenditures during the first six months of the year. We currently forecast approximately $5 million to $7 million in additional capital expenditures for the remainder of the year.

Total inventory was $51.5 million this year compared to $50.2 million last year. Excluding inventory for e-Commerce, inventory per store at the end of the second quarter was down approximately 6% from last year.

The aging of inventory was current and slightly more then 2% of inventory was more then 120 days old.

Turning to guidance, assuming third quarter same store sales are similar to the 13% decline that occurred during the second quarter we anticipate third quarter earnings from continuing operations before Acorn operating results and closing costs to range from $0.10 to $0.13 per diluted share.

As previously announced we anticipate pre-tax expenses associated with closing Acorn to range from $7 million to $10 million with the charges being incurred in the second, third and fourth quarters of fiscal 2009.

During the second quarter we incurred $1.2 million in costs associated with closing Acorn. We anticipate most Acorn stores will close in the third quarter. As such we expect the majority of Acorn results to qualify as discontinued operations by the end of the third quarter.

If the stores are not closed we’ll separately identify their impact in our third quarter press release. And now I’ll turn the call back to Lorna.

Lorna Nagler

Thanks Andrew, so in summary right now we are highly focused on managing expenses and inventory in the current environment while also continuing to make strides in strengthening many facets of our business. While there remains considerable uncertainty as to when the economic and retail environment will improve, we will continue to focus on those strategic initiatives that will position the company for the long-term.

We see the end result of all this being an enhanced ability to deliver to our customers quality merchandise that is fashionable and functional at the value price points they expect from us.

Now we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Crystal Kallik - DA Davidson & Co.

Crystal Kallik - DA Davidson & Co.

You had originally guided for the second half SG&A up high single-digits and obviously coming out of Q2 it looks like it came in better then expected, so should we think about second half SG&A differently now as we look towards the second half estimates?

Andrew Moller

That’s probably a fair assumption. Again we did work to control costs in the second quarter and again we’ll do so in the third quarter so now use a mid single-digit increase probably in the dollar amount of SG&A from what we had in the third quarter of last year. Really the biggest increase to what we did have last year is really the addition of our e-Commerce business which wasn’t in last year’s number.

Crystal Kallik - DA Davidson & Co.

I know last quarter you gave us the actual merchandise, the basis point benefit to the merchandise margin based on your inventory controls, do you have that information available?

Monica Dahl

The gross margin obviously that we gained in the first and second quarter both, was achieved really through that conservative and controlled inventory management particularly the second quarter where we were up against extremely promotional and depressed margins last year. So as we look at the back half of the year while inventory management continues we’re no longer comparing against that significant promotional [inaudible]. So the opportunity for improving our gross margin is minimal and it’s really going to continue to come from the customers’ acceptance to buy our products at fuller price.

Crystal Kallik - DA Davidson & Co.

Do you have the basis points; I think last quarter you gave it to us on the margin somewhere around a few hundred basis points improvement.

Andrew Moller

In the second quarter we did have 480 basis points of merchandise margin improvement over the second quarter of last year when we were very promotional.

Crystal Kallik - DA Davidson & Co.

And so you’re saying the vast majority of that is from the inventory control?

Monica Dahl

Absolutely in second quarter it was.

Crystal Kallik - DA Davidson & Co.

Could you also speak to, obviously Acorn will be completely out of your, will all be shut by the end of the year, so as we look towards next year, how does the gross margin benefit with the Acorn division our of your business?

Andrew Moller

There’s probably a modest benefit because Acorn was really probably 3% to 4% of the total business so the margins there were lower there then they are at Christopher & Banks and CJ Banks, but because the division was so small I didn’t have that big of an impact. Overall when we did our previous announcement on the Acorn closing and broke out the costs related to Acorn probably somewhere in the neighborhood for the full year of fiscal 2010, you could look for about $0.07 a share improvement from us no longer operating the Acorn division.

Operator

Your next question comes from the line of Robin Murchison - Suntrust Robinson Humphrey

Robin Murchison - Suntrust Robinson Humphrey

The Acorn division, the operating loss last year was about $9 million, so wouldn’t that translate--?

Andrew Moller

Well the $9 million included the asset impairment and goodwill impairment so I think when we did the press release that discussed the closing, we broke out how much the operating loss was which basically we indicated I think this press release came out the end of July on July 31 that we had an operating loss of more then $4 million including the store and administrative costs and then the charge of about $10 million for the long-life asset and goodwill impairment.

Robin Murchison - Suntrust Robinson Humphrey

So absent that, just operationally from the Acorn division last year, EPS impact, I guess on the $9 million I was coming up with about $0.16 impact but that includes--

Andrew Moller

Right in the fourth quarter if you recall we did impair a significant amount of the assets as well as the goodwill and then there was a small amount of assets or the $1.2 million that still remained that we took the impairment charge on here in the second quarter. But true operating loss for the full year was about $4 million. That’s probably the better number to use if you’re looking for and a benefit to next year.

Robin Murchison - Suntrust Robinson Humphrey

There’s a shift, fashion wise, there seems to be shift this year certainly towards sweaters with the younger market, the [boyfriend] sweaters, so forth, so on, does that make you think any differently in terms of how you approach your tops, jackets, versus sweaters or how does that translate for your customer or is it just too hard to read given the traffic?

Lorna Nagler

I would say that as we talked though we don’t like the total comps number we really feel good about the quality of the sales and she is definitely responding to newness in our assortment. So obviously historically sweaters were a very strong category for us. What’s exciting is our customer is really gravitating to those new silhouettes that you alluded to, whether it be [inaudible] styles or cardigans or more swing styles. So she is absolutely gravitating to it whether it be a sweater or a jacket so we feel very good because those silhouettes are very what I call body-cooperative and very good for a wide range of consumers so to us it just opens up an opportunity to really continue to bring newness to our customers. So we feel great about the fashion direction.

Robin Murchison - Suntrust Robinson Humphrey

Let me ask about pants because I see a fair number of promotions in the malls or retail particularly directly in your space with pants, can you comment on how that business is trending for you and what you could do better?

Lorna Nagler

We’ve talked previously about—just a point in the bottoms business and we’re very excited about some new product that we have delivered. Right now we have a line of product that we’re calling solution-based programs or what we’re calling our solution revolution. Really the big highlight is we’re calling our Tummy Slimmer jean which has a hidden control top to make you look and feel slimmer. We’re doing that in denim, we’re doing it in twill, we have a dress pant and the great news is this innovation, first of all there’s no resistance to the higher price point which is very exciting but then again what woman can put a price tag on feeling and looking better.

So we’re excited about the newness that we’re seeing in bottoms and her appetite for it and even more we had really looked at based on consumer feedback the spec of our garment so we really reengineered and improved the fit based on the customers’ feedback so we’re energized about no only the solution-based categories but our wrinkle free programs. Bringing back great looking comfort weight programs which you know are important for our customer.

American classic denim, great cord denim that we’re actually now [selling] on a regular basis so there is actually a lot of good traction in the bottoms business so we look to continue to carry that momentum as we get into the heat of the battle in the back half of the year.

Robin Murchison - Suntrust Robinson Humphrey

Do you want to comment on dresses?

Lorna Nagler

Dresses are a very small business for us. We had it in select group of stores. What we found through the spring season, although it was a great, great dress season from a fashion standpoint, where we went wrong is we really continued to try and bring out some of our more tried and true silhouettes. What she responded to was fabrications like [ITY] which makes a lot of sense. Why? Because its very easy fit, its very easy care and it really looks good on a variety of body shapes. So we’re still very cautious about dresses. It’s still very isolated business however we use e-Commerce because it is an incredible business on e-Commerce and that’s a great way for us to offer our customers dress silhouettes but it will certainly be more important as we get to the spring season but right now for the fall half, very limited in our dress inventory.

Robin Murchison - Suntrust Robinson Humphrey

Could you comment on how the marketing spend might change, the differential second half this year, second half last year?

Lorna Nagler

As we get to Q3 we really start to anniversary some of our bigger marketing spends. We’ve said all along that our spend this year is targeted to be approximately at 1.5% of sales and we’ll continue to see that. I think the exciting news for us is that we’ve been able to add in the past year over a million names to our email database which is a very exciting way and more efficient way for us to communicate to our consumer and we’ll continue to look to find ways between direct mail, grassroots events, and the exciting part for the holiday season is that e-Commerce will be an opportunity for us this holiday because it wasn’t up and running last year so we know that that’s a great way to drive traffic to the stores throughout the year and especially during the holiday. So we’ve got a lot of things that we’re working on in the marketing front.

Operator

Your next question comes from the line of Howard Tubin - RBC Capital Markets

Howard Tubin - RBC Capital Markets

On gross margin, if you look at gross margin 4Q 2005 it was pretty good margin performance, 40.6% and in the fourth quarter you kind of yet to recover back to that level so am I thinking about something wrong if I would look for a gross margin improvement in the fourth quarter this year?

Monica Dahl

Obviously we continue to be focused on how we’re going to gain every gross margin dollar we can through using our mark-downs wisely and we’re doing everything to the inventory control and the pre-planned promotions to try to leverage what has been historically a challenging fourth quarter gross margin situation. So we’ll continue to look for ways to improve and maximize that from a merchandise margin standpoint.

Lorna Nagler

One of the great disciplines Monica and the team in planning is how do we make sure we have that freshness of merchandise so where we have an opportunity even though we think it’s going to be a challenging back half of the year, the content and our freshness in that December, January time period should be improved. You put all that together and you still have the economic uncertainty so we’re working and pulling a lot of levers to continue to make improvements but I think the overall picture and the total sales climate will always kind of hang a little bit a cloud over what we think that expectation could be.

Howard Tubin - RBC Capital Markets

Any different form of gift giving or giftable strategy you have planned for the holiday season this year versus last year?

Lorna Nagler

Yes, first of all we know that apparel has been a more challenging category the last three or four years from a holiday standpoint so we’re focused on what we can do to take care of her. But first of all for the first time we really have a strategy for Thanksgiving. We really were not aggressive about planning events during that time period so we’re very excited about that. We continue to have some additional grassroots events planned. As I mentioned e-Commerce will play. Obviously gift cards, but we’ve also pre-planned a lot of promotions in our categories like sweaters or jackets so I think we have taken a more robust approach to holiday and of course as fast as we can move certainly the overall climate will continue to [inaudible] at something we need to deal with, but we have been more aggressive about planning ahead for holiday and I think as I said with e-Commerce being in our game plan this year that also opens up opportunities so we’re positive about what we’ve approached, how we’ve approached the holiday and what continues to be that freshness of inventory because as we ramp up our gift card focus, having that fresh merchandise when she comes after Christmas will be a big advantage for us as well.

Operator

Your final question comes from the line of Margaret Whitfield - Sterne, Agee & Leach

Margaret Whitfield - Sterne, Agee & Leach

Could you comment on how your comps trended during the August quarter and what the trends are like thus far in September?

Andrew Moller

In terms of reporting, we’re just reporting on a quarterly basis so certainly the September trends we did take those into account when we developed our guidance for the third quarter. Going back to the second quarter I don’t know that we can give out specific months but probably in terms of just relative performance July probably was less negative then even June or August.

Lorna Nagler

The consumer, she really is changing, our customer seems to be really changing what she’s buying so last year during the quarter certainly we had a lot of sale products and she bought it but I think especially as we got into the August time period, her focus was more on investment dressing and things that she could wear for the months to come so we really saw, which is why we saw the quality of the sale and the average transaction value, she was really looking to fall forward then to buy sale products. I think its kind of a change in the consumer psyche.

Margaret Whitfield - Sterne, Agee & Leach

So the bulk of these stores will close in Q3 then we would assume that the bulk of the remaining charges of the $7 to $10 million that remains would occur in the third quarter?

Andrew Moller

Yes the $7 to $10 million was our estimate of the total closing charges primarily including lease termination payments and given that we expect most of them to wrap up during the third quarter its likely that most of it will obviously with negotiations we can never be certain as to when the ultimate termination will be concluded.

Margaret Whitfield - Sterne, Agee & Leach

And imbedded in your guidance what is a good depreciation number to use in Q3?

Andrew Moller

I think we probably talked about last time as well, but in terms of where we were this quarter basically we were at $8 million with $1.2 million of it being related to asset impairment so really if you just back that off you’d probably get a normalized quarter.

Margaret Whitfield - Sterne, Agee & Leach

What are your thoughts on real estate expansion next year?

Lorna Nagler

As we said all along, even starting last December that we’re still going to remain pretty conservative until we see things, we’ve already scaled back our plans for next year and we’ve approved less then 10 deals for next year. But I think more important is we’re working on really what our strategy is and our focus will be when we open more stores to really focus on our CJ brand which we know has huge potential with the size 14 or more consumer. We also want to take advantage of the [inaudible] software that we’ve talked about in our previous calls which enable us to really identify and prioritize markets across the US so we can be smarter about picking those locations. So we’re going to be on the sidelines for awhile and be cautious but I think it gives us time to really ramp up our strategy and to be smarter and during this time we’ll take advantage of that time to get our strategy in tact.

Margaret Whitfield - Sterne, Agee & Leach

Could you give us some commentary on the new Senior VP of Stores? Where did this person come from?

Lorna Nagler

Gary Thompson is our new Senior Vice President of Store Ops. He has nearly 30 years of retail experience. He has been, he was the head of stores at Lids when it grew from 16 to 400 stores. He was CEO of Bag’N Baggage and the last four years or so he was at Lane Bryant and Fashion Bug running their division. So we just recently completed our first national sales meeting under Gary’s leadership and having attended the whole meeting I can assure you that it was well received and a resounding success and Gary’s impact is really already being felt and the number one focus is really to continue to transform that culture into a more customer centric sales orientation.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Lorna Nagler

Thanks everyone for participating on today’s call and for your interest in Christopher & Banks and we look forward to talking to you on our next call.

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Source: Christopher & Banks Corporation F2Q09 (Qtr End 08/30/08) Earnings Call Transcript
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