Burlington Stores Inc (BURL) 2007 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Burlington Coat Factory year end earnings conference call. During the presentation, all participants will be in a listen only mode. Afterward we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded, Wednesday September 5, 2007. I would now like to turn the conference over to Robert LaPenta, Vice President and Treasurer. Please go ahead sir.

Thank you Chris, and good morning. We appreciate your participation in this morning's conference call to discuss Burlington Coat Factory's fiscal 2007 operating results. I am Robert LaPenta, Vice President and Treasurer of the company. With me today are Mark Nesci who is our Chief Executive Officer; Jack Moore who is our President of Merchandising, Planning and Allocation, and Marketing; Tom Fitzgerald, our Chief Financial Officer; and Todd [Wyrich], our Chief Accounting Officer.

The agenda for the call this morning is as follows; I will start with a brief summary of statements regarding our operating results for fiscal 2007, which were made in the company's annual report on Form 10K; and then Mark Nesci will introduce new members of our management team and provide some additional insight to our operating results for 2007. After the prepared remarks, the group will be available to answer your questions. This call may not be transcribed, recorded or broadcast without our express permission. A replay of this web cast will be available for 24 hours.

In addition I need to remind you that information provided on this call is primarily related to the company's results of operations for fiscal year ended June 2, 2007. Remarks made on this call concerning future expectations, events, objectives, strategies, trends or projected financial results, are forward-looking statements that are subject to certain risks and uncertainties. Actual results or events may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's annual report on Form 10K and the company's other filings with the SEC, all of which are expressly incorporated herein by reference.

As reported, it is important to remember that the company's fiscal year 2007, which ended June 2, 2007, was a 52 week year. The company's fiscal year 2006, which ended June 3, 2006, was a 53 week year. As a result, the first three quarters in fiscal 2007 began and ended one week later than the corresponding periods of the prior fiscal year, and the fourth fiscal quarter began one week later and ended the same week as our prior year. Last year's fourth quarter was a 14 week quarter compared with fiscal 2007's fourth quarter, which was a 13 week quarter. Also, as a result of our merger, our assets and liabilities have been adjusted to their fair values as of April 13, 2006.

Net sales; net sales for the 12 months ended June 2, 2007, a 52 week year, were $3.403 billion compared with $3.439 billion for last year, a 53 week year, which is a 1% decrease. These results reflect a 2.2% comparative store sales decrease for the 12 month period. Net sales for the 52 weeks ended June 2, 2007 compared with the 52 week period ended June 3, 2006, increased $14.8 million. Net sales during the year fell short of our expectations, due primarily to unseasonably warm weather in November and December, unseasonably cool weather in April, and increased returns resulting from the implementation of a new cash refund return policy.

Other revenue; other revenue consists primarily of rental income from lease departments, sub-lease rental income, lay-away, alteration and other service charges. Other revenue in the current fiscal year of $38.2 million increased by $6.5 million from the prior year, primarily due to an increase in service fees from gift cards.

Cost of sales; cost of sales decreased $58.1 million or 2.7% for the fiscal year ended June 2, 2007, compared with last year. Cost of sales as a percentage of net sales decreased from 63.5% in fiscal 2006 to 62.4% in fiscal 2007. This decrease in cost of sales as a percentage of net sales was due primarily to reduced initial merchandise costs and a reduced freight cost. These reduced costs were partly offset by increased mark downs during the year.

Selling and administrative expenses; selling and administrative expenses for the 52 week year ended June 2, 2007 were $1.62 billion compared with $1.52 billion for the 53 week year ended last year, a 1% increase. Expenses increased in the current year by $22.2 million for new stores and $15 million for the merger transaction related expenses. Offsetting these increases were reductions of $10.2 million in employee benefits and the effects of the 53rd week in the prior year. As a percent of net sales, selling and administrative expenses were 31.2% for the year compared with last year of 30.6%.

Depreciation; depreciation expense was $130.4 million for the current fiscal year compared with $96.9 million in the prior fiscal year. The increased deprecation expense reflects the step up in fixed assets of approximately $421 million related to the merger transaction and capital additions purchased in fiscal 2007.

Amortization; amortization expense related to net favorable leases and deferred debt charges amounted to $43.7 million for the current year compared with $10.3 million for the prior fiscal year. All of the increase is related to the merger and reflects the expense for a full year compared to only 1.5 months in last fiscal year.

Impairment charges; in fiscal 2007 the company recorded impairment charges of $18.4 million related to 11 stores that the company decided to sell, close or relocate. In addition, the company recorded $6 million in impairment charges for five stores that continue to operate, but don't generate sufficient cash flow.

Interest expense; interest expense was $134.3 million in the current fiscal year compared with $22.7 million for the prior fiscal year. The increase in interest expense year-over-year is entirely due to the financing activities related to the merger.

Other income net; other income net consists of investment income, gains and losses on disposition of assets and other miscellaneous items. Other income net decreased $2.3 million to $6.2 million in the current fiscal year, primarily due to a decrease in investment income.

Income tax; income tax benefit was $25.4 million for the fiscal year 2007, compared with income tax expense of $46.8 million for the prior year. The effective tax rate was 35% in the current year compared with 41.1% a year ago.

Net loss; net loss amounted to $47.2 million for the 52 week year ended June 2, 2007, compared with $67.2 million of net income for the 53 week year ended June 3, 2006. The decrease in earnings of $114.4 million is due primarily to the continuing expenses from the merger transaction of increased deprecation, amortization and interest expense.

Adjusted EBITDA; for the 52 week year ended June 2, 2007 adjusted EBITDA was $286.5 million compared with $256.8 million for the 53 week year ended June 3, 2006. This is a $29.7 million increase over the prior year's adjusted EBITDA which is an 11.6% increase year-over-year.

During the 12 months ended June 2, 2007, the company opened 19 Burlington Coat Factory stores and three stores previously closed due to hurricanes Katrina and Wilma. Two Burlington Coat Factory stores were relocated during the 12 month period to locations within the same trading market. Three Burlington Coat Factory stores, one MJM shoe store, one Super Baby Depot store, and three Cohoes Fashions stores were closed during the 12 months ended June 2, 2007.

During the 2007 fiscal year the company converted two of its existing Cohoes stores to Burlington Coat Factory stores. As of June 2, 2007 the company operated 379 stores in 44 states, principally under the name Burlington Coat Factory. And with those comments I am now going to turn the call over to Mark Nesci.

Thank you Bob. Good morning everyone. My comments will discuss our recent performance, but first I'd like to introduce some new members of our team. In the beginning of June Jack Moore joined the company and is heading up our merchandising, marketing and planning allocation functions. Jack is a seasoned retailer who spent many years with Target Corporation, formerly known as Dayton Hudson, and at Kohl's in various executive management positions. Most recently Jack was the President and Chief Operating Officer of [Lens and Things]. Jack has been working with his team to focus each of our merchandising strategies on the right brands and trend right fashions to offer to our customers. Jack will be available to answer your questions during the Q&A portion of the call.

Also on the call is the newest member of our leadership team, Todd Wyrich, who joined the company in August as Chief Accounting Officer. He will also serve as interim Chief Financial Officer with the departure of Tom Fitzgerald, who has decided to pursue an opportunity in specialty retailing. We wish Tom Well. Todd has tremendous accounting, finance and IT experience in retail. He was most recently Chief Financial Officer of Arby's, and prior to that he was Senior Vice President of Sports Authority.

Since the Bain transaction, which occurred in April of 2006, we have been working to put in place the right management team to take the company to the next level. I am excited by the skills, capabilities, leadership and experience that Jack and Todd, and our new Executive Vice President of Human Resources, Christine Brewer, bring to the table, and look forward to working with them to taking Burlington to the next level.

Now I would like to discuss my thoughts on our fiscal year 2007 results, and give some color on where we are headed in fiscal 2008. Fiscal 2007 was a year of many challenges, our comps ended the year at a negative 2.2%. Despite the negative comps, we were able to produce $29.7 million increase in adjusted EBITDA, which equates to an 11.6% improvement year on year. I congratulate the management team for working diligently on pursuing that.

We increased our operational performance by controlling selling and administrative expenses, the adoption of a more disciplined and focused buying strategy, and reducing freight costs through out supply chain initiatives. But clearly we were disappointed in our comps for the year; as we all know, comps are the life flow of any retailer. There are three reasons for the soft comps; first, we've had very unusual temperatures that year. The key selling months of November and December occurred during one of the warmest winters in history. Our coat and other colder weather apparels assortments are big traffic and volume drivers, and the weather was significantly warmer than last year, and therefore had an adverse impact on sales.

Second, our cash refund policy had a negative impact on comps, as Bob has mentioned. We still believe it was the right long term strategic decision to be competitive in the retail industry. Our return percentages are not necessarily above our expectations, but we have not attracted a meaningful group of new customers, and it also appears as though a number of customers are not repurchasing with their cash refund. We estimate the cash refund policy had a 2% to 4% negative impact on comps.

Third, we experienced disproportionate softness in two key departments, sportswear and our home division, Jack will give more color to that in the Q&A session. The combination of these three things led to the negative comps. I want to address each of these three issues in turn.

As we look forward, we do not anticipate another unreasonably warm winter. We are preparing to be agile, given one cannot predict the weather, but we are planning for the winter to be more typical. We will anniversary the cash back policy change this month, so the negative impact on comps should wane. And finally, we have altered our merchandising approach in sportswear and our home divisions, and are beginning to see some traction in those departments, very good signs.

To be clear, we have not fundamentally changed our value proposition to the customer since the ownership change at Burlington Coat Factory. We remain focused on providing department store brands and other fashion oriented merchandise at great everyday values. As we look forward to 2008, we are making some changes to improve the product offering and to also improve the in store shopping experience for our consumers. In terms of product content we will make more meaningful statements with many of our key name brands, we will also make stronger statements of seasonally relevant presentations in our stores.

Additionally, we are focused on improving the customer experience in our stores. Specifically we want to make it a more engaging and enjoyable shopping experience. Our customers have told us that they love the value that we offer but that the shopping experience is often too difficult and time consuming. As a result, we are taking steps to make these stores easier to shop. Some of the marketing you are seeing in our stores with our back to school set are reflective of that new approach; more engaging pictures and graphics and clear messaging of brands and key items.

Finally, we have been working with a management consulting firm to better understand our customer segments and develop specific marketing strategies for our most important segments. We will be testing some of those insights in the full selling season to stress in our message to our store customers. We believe the combination of these initiatives and the anticipation of a more typical winter should enable Burlington Coat Factory to get more than its fair share of our customer spending. In fiscal 2008, our target for new store openings is 25 and we feel good about the ramp up in the new store pipeline.

With those comments, I'm going to conclude our prepared remarks and Chris, I will turn it over for Q&A.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of [Karue] Martinson, with Deutsche Bank. Please proceed with your question.

Good morning. In terms of pressure on same store sales, has it really been all traffic? Or, has it been the average basket as well, or how would you split that up?

Traffic, we do not measure specifically at this point. We do believe, similar to what you're hearing - This is Jack Moore - we do believe what you're hearing from similar other retailers is that traffic is down slightly and we do think that is impacting us in the past 12 months.

We do not see measurable changes in our basket at this particular time. So, we do not see that as a significant negative factor. We do believe there is more opportunity to increase our basket long-term. But at this particular point, I think we're very similar to most retailers out there.

Okay. In terms of the margin outlook, you know, the initial markups that you have and the reduced freight, how much more room do you see on that front going forward over the next couple of years?

We continue to think that there're opportunities and there is a concept where we believe, and Jack and I are certainly behind this, indorsing the fact that we can leverage, with some of our vendors, opportunities to raise margins.

And having said that, we are going through a process where we're looking to edit the vendors and make a more significant statement with fewer vendors. Now having said that, we always are going to be a wide department store assortment, so, we're not going to do this to the extent where we're going to blame the majority of the vendors. But having said that, there are opportunities there. We are still in the process of examining exactly how we want to do that but there are some opportunities.

It's Tom, to follow up on the second part of your question.

I think we see continued improvement opportunities in the supply chain area, although the big initiative that we had to move a lot of the merchandise from UPS to go through our network occurred in the last fiscal year and that sort of jump shift changed. We don't see, in the future, more incremental opportunities but they're clearly out there. We'll purse them so, thanks for the question and Chris, next question please?

Our next question comes from the line of Grant Jordan, with Wachovia. Please proceed with your question.

Great; got a couple of quick questions. First, I believe in last year's 10K you disclosed that coats and outwear were about 11% of total sales. Can you give us that number for this year?

We don't really provide, Grant, as you know, that specific divisional, departmental breakdown. But it's roughly comparable is kind of the short answer.

Okay. My next question, you talked about improving the overall shopping experience for the customer. Maybe you could just talk a little bit about your store age, how you feel about that? I think on the road show you said that about 95% of your stores generated a full (inaudible) profit. Is that still the case today?

Yes, that's generally true. To the extent that we have done a lot of work on the customer segmentation piece and we've also gotten a lot of feedback from consumers to help us that are insightful, you know, being insightful enough so we can make some decisions on what we want to fix.

In the case of the store experience, we know that our checkout lines are certainly not where we want it to be in terms of expediency. So, we are ramping that up to make sure that we can check out the consumer and be friendly at the registers.

We are spending quite a bit of time on the - we've actually engaged with another consulting firm to help us with some SOPs, some standard operating procedures on the front of the store to make sure that the process is efficient. We don't want to see cartons lined in the middle of our aisles in stores. From time to time that happens in retail and we think we can clean up those problems that exist in our stores.

So, the idea of making these stores a friendly shop and at the end of the day, I think any retailer would tell you that what really makes it compelling is the fact that it is friendly and easy to navigate. Those are things that we're very focused on. And also to have what limited help that we have on floors to assist customers will at least be friendly in their approach.

So, that's really where the focus is.

Okay, so it's not really that you need to upgrade a third of the stores, in terms of age, it's just that you're trying to improve the overall store shopping experience.

That's correct. I mean there are some remodels that we're going to go back in. We really, for the most part, have hit most of our A and B stores and, like any retailer, there's a certain amount of maintenance that you need to do, even in the lower volume stores.

We will continue to do such and go backwards in those C stores and make sure that, if it's not a full remodel, it's somewhat of a makeover of carpet, paint and tiles, things of that sort. So, it's more maintenance-related issues that's considered to be a full remodel.

Okay and then my last question; it looks like accounts payable is down about $50 million, this year's fourth quarter vs. last year's. Is there any specific driver behind that?

The drop in accounts payable is not due to any change in vendor terms. It's really more related to our initiatives to de-clutter our stores. The payables reflect just a timing shift as to when inventory is being received this year, compared to last year.

Okay, thanks Grant. Chris, back to you.

Our next question comes from the line of Reid [Kemm], with Merrill Lynch. Please proceed with your question.

Thanks. Mark, I was wondering if you could just give us a little more background on the reasons behind the management changes in the merchandise area, whether, you know, what was not being done under the previous leadership or what had been done? And, just below the leadership level, is there a lot of change going on in terms of the merchandising ranks? And what should we see, in terms of tangible changes in the stores, perhaps, by category, like home for example?

Sure. I think, to be insightful, the best way I could describe it to you is Jack is a very seasoned veteran, obviously, and well rounded. I guess he'll be modest in today's call but he has stellar leadership skills. And I thought the team here, being home-grown for many years, could use somebody of that stature who could come in and really show those leadership qualities.

And also, I think, someone outside the box but not stretch the boundaries too far. I think Jack has demonstrated that he is the right person for that job.

So, my sense of it is, is that we are tweaking where necessary; that we think there are some modifications. I don't think it's a major overhaul. That was never anticipated in the business. The business has always been successful, as you know, over the years and it will continue to be successful. We find that where we need tweaks, we're going to make those.

We never had deep bench strength. I think Jack is a supporter of making sure that we implement that bench strength. So, there could be areas of the business where I think we have some good people managing too big of a business, so he may look at that and say that he may tweak that a little bit. Things of that sort, I think, are what I call modifications as opposed to - it's an evolution, not a revolution.

And as far as home is concerned, we did bring in a new head of merchandising. I'll let Jack speak on that.

Yes; the home business here is not unlike what most companies who have home as a major driver in their business have gone through the last 18 months. Basically, we have several initiatives going on right now to address home, whether it be brand or value or certain categories. I can't go into specifics but the issues are pretty similar to what other people are going through.

We've got a wonderful box and home is a very important part of our box. So we're very excited about some of the things we're doing.

Great, okay.

Our next question comes from the line of Emily [Schenkz] with Lehman Brothers. Please proceed with your question.

Yes, hi. Actually, this is Lee [Mahernon] on behalf of Emily. A quick question; in terms of Florida, how's your performance been there, kind of in the face of that weaker economic environment?

(Inaudible) ...Florida?

The question was around Florida and how was our performance in Florida.

Florida has softened a little, compared to its historic trends. Candidly, we're not overly worried about it because, if you look long-term at Florida, the continued population migration down there, it's going to be a very important state to us. You know, basically at this point, we're adjusting and like most retailers are, but I think, long-term, it still is a very important part of our strategy.

The only thing I would add to that, I would guess, is that from a real estate site selection point of view, I could say we are continuing to focus on Florida as well. We deem it to be a (inaudible) part of the business.

Great and, in terms of any other geographies, have you seen weakness or strength, kind of east coast vs. the west coast, or, any certain region?

Basically, by region, the biggest thing you would've seen in the last 12 months is, with the warmer weather, of course, our northeast and our north central part of the country was more negatively impacted than the rest of the country. And again, that was due to, one, we're so dominant in coats and with the much warmer winter, that caused us issues.

Without weather, basically the regions are performing very reasonably to each other. So there's not significant differences.

Great and then finally, do you have any priorities for (inaudible) free cash flow going forward?

This is Bob LaPenta. I think our priority continues to be, as we've stated, since the merger transaction, to de-lever this business as quickly as we can.

Great. Thank you very much.

Our next question comes from the line of Karen Miller with Bear Stearns. Please proceed with your question.

Hi, good morning. I noticed that in your 10K you mentioned that you sold the leases of three stores. Can you quantify that for us and do you expect to have any more sales of leases this year?

We closed four stores in the first part of this year and as part of those store closings, we were able to sell those leaseholds. Those leaseholds had value that we were able to sell off as part of the store closing process.

We continually look at what we deem to be under performing assets or stores. And, to the extent that we think there's a value there and were not performing as such, then obviously we will attempt to sell those leaseholds for what markets will bear.

So, that's just part of a process that we would go through on an annual basis.

And some of those stores, would they also be included in the assets that are held for disposal?

Yes.

And can you tell us how much you received from the selling of leases and how much you expect to generate in assets held disposal, in terms of cash?

Well, for the leases that were already sold in the first quarter of this year, the proceeds were between $4 million and $5 million.

Okay.

And the assets held for disposal we expect to get close to what book value is for those assets, although they haven't been sold yet. So, we won't know definitively until the transactions occur. But we anticipate getting close to what the assets are that are on our balance sheet currently.

So, I think assets held for disposal are something like $35 million?

Correct.

And so you expect to get that sale for the course of a couple of years?

Within one year; any asset that's been re-classified as assets held for disposal, it's because we anticipate selling the asset within one year.

I mean that's helpful because, in view of your eye to de-leveraging, your Cap Ex does ramp up this year. So, we can expect to see, then, cash from sale of assets, which should then help your free cash flow. Is that a correct assumption?

To the extent we sell assets, yes, there will be additional cash flow generated from the sale of those assets.

Yes and Karen, it's Tom; I think, upper level, this is part of kind of everyday retail, looking at the real estate portfolio, making tweaks around the edges. This is not, in any sense, a big step function change.

And I think as it related to capital, I think, while you're right to point out it's going up as we disclosed, it's still far less than our agreements call for. And we think there's plenty of room based on the revised real estate strategy that we talked about.

So, I hope that helps add a little more color.

Right and then, just two more quick questions; so, in terms of your Cap Ex, you gave a net figure in the 10K. Can you tell us what that gross figure would be? You gave us a figure net of landlord allowances.

Yes; we only disclose net because the whole landlord allowance thing we want to kind of keep to ourselves.

Okay and then the warehouse management system that you plan to put - going to spend money on this year, is that going into next year? Or do you plan to be able to finish that this year?

It's a good question, Karen. We're rolling that out into our four distribution centers over the next two years. The bulk of the spending hits in fiscal '08 but there will be some more in fiscal '09.

Okay and then one last question; your senior [cold] co-notes, [cold] cash paid this year, and a pretty high coupon, any plans of you taking an early look at what you might do with those?

This is Bob LaPenta. We will certainly look at the opportunities, there is nothing that we strategically decided to do at this point, but certainly down the road it's something we'll evaluate.

Okay, thanks for taking my questions.

Our next question comes from the line of Camille Burns with CIBC World Markets. Please proceed with your question.

Hi, good morning. Can you give us a sense of what you're seeing in the competitive environment right now? Have there been any increases in promotional activity? And then any color you can provide on how back to school is shaping up.

To answer your last question first, we can't discuss back to school at this particular point, we will be discussing it in the near future. Competitively I don't think I probably would give you any more color than you're observing out there. Retail has been going through a little bit of a yo-yo pattern. There are certain people doing well, there's a lot of people not doing well, it's a very challenging environment out there. Typical of most of my career, when you're successful in retailing you figure out a way to take market share, and I think we're definitely in a significant market share grab time period. I think it's extremely competitive, but if we do what we believe we can do, we're very optimistic about our future.

Okay, thanks. And then can you comment on the quality of your inventory today, are you fully set for fall, or do you still have merchandise that you need to clear out?

In the past our business model was to carry a lot of inventory in general, as well as not take aggressive mark downs in season. That business model did work on several fronts, but we have made some adjustments to that model. We are taking mark downs a little more aggressively, we are taking mark downs in season where appropriate. We do believe as part of decluttering the stores that we should have a higher percentage of current merchandise. We are well on our way to doing all those things.

Okay, great. Then lastly, are you still seeing a good supply of merchandise out there? No shortages on the supply side.

No there's no shortage of merchandise. The biggest challenge I think all retailers have, honestly, is the supply chain with the high percentage of goods made offshore the issue is much more about the quality of your relationships and figuring out when you should bring in goods, but there's plenty of goods out there.

Okay great, thanks a lot.

Our next question comes from the line of Mike [Shrikas] with Long [Egger], please proceed with your question.

Yes I was just wondering, if you sell those assets, $35 million of assets held for sale, does that have to go toward paying down your term loan?

Yes, it does.

Okay. And then I was just wondering in the implementation of -- when will the implementation of the warehouse system be completed?

We expect to roll our first site after January, so probably toward March of calendar year 2008, and we expect to be completed to the middle to latter part of calendar year 2009.

And what exactly is the system going to benefit? Is it an inventory flow system? I'm just wondering what you guys have to prepare for, because implementing a new system can be tricky.

Mike we clearly are looking to implement that around the outside of the peak operating windows. The good news is we have three distribution centers in the northeast all pretty close to each other. So it makes the transitional planning around that much easier and our first site that we're rolling out is one of those three sites, so that generally makes it easier. We're installing the sort of industry standard PKMS from Manhattan Associates, and we're really replacing what is a 25 year old system that was built in the business, it's a legacy system. So the advantages that we will get from that are substantial. Most importantly to make sure we have visibility into our product as its flowing into and out of our distribution centers and ability to move it faster than we can move it today. So we're pretty excited because we're sort of moving off what is a pretty old system.

Okay. And then I was just wondering, when we look out to next year, you're going to open around 25 stores, can we assume that your inventory per store, at least at year end, is going to roughly be about 1.9 million so that we should see an increase in inventory in that proportion?

This is Jack. I don't know if I can confirm your number, our objective is to appropriately continue to lower our inventory to unclutter our stores. Turnover is an output of good business practices. So our objective here is not to increase turnover for turnover's sake, but to narrow our assortment so we're more meaningful with certain vendors and brands; to make sure the shopping environment is much easier to navigate through the store. But I do anticipate, on an average store basis, the inventory will continue to go down and at some point we will communicate to everybody where we feel comfortable with our current inventory positions.

Okay. And then just with regards to, can you provide some more clarity on use of free cash flow? Are you committed, first and foremost, to paying down debt? Or are there any other opportunities out there that you might foresee pursuing with your free cash?

Well certainly we're looking to grow and if there are opportunities that make sense we would consider those. But barring that situation I think the primary, as we've stated in the past, our primary objective is to continue to pay down the debt.

Okay, thanks very much for answering.

This is Paul Tan, General Counsel. I just want to make a clarification around the $35 million held, as assets held for disposal. First off is the timing of the disposal, although we hope and expect to do so within a year, there's certainly no guarantee given the state of the real estate market that they will be sold within a year. And secondly with respect to proceeds generated on those assets disposed of, under our credit agreement we do have the opportunity to use them to reinvest in real estate. So I wouldn't necessarily say that they would be used to pay down debt.

Our next question comes from the line of Sloan Maliki with Oaktree Capital Management. Please proceed with your question.

Hi, thank you. I wondered if you could give us a little bit more color on your Cap Ex spend? Looking at trends over time it looks like, whether you look at it on an absolute basis, on a percent of sales basis, or even on a spend per average store basis, your Cap Ex spend has been trending down. Any concerns that you're under spending in your store base?

Let me sort of address kind of where we're investing, and then I'll talk about the structural change that's really driving what you're seeing. So we've talked about some of this already, but really the changing capital year on year is driven by three areas; one is in IT, we talked about the new warehouse management system, we're making a couple of other minor investments relatively speaking, in our stores, to help manage labor and tasks more efficiently. Mark talked about store remodels, that's up a little bit year on year. And finally DC capacity, because we are flowing more goods through out distribution centers we're making some investments in conveyors and things. Again more so than we did in the last year.

When you look at it structurally though, I think the root of your question stems from the change in real estate strategy where we're getting a lot more money back from landlords because we're acting, in simple terms, more like the rest of folks vying for the spaces we're vying for, and being less demanding on having short term kick outs than we've had in the past. As a result, the landlords are more willing to invest with us in that endeavor, because they know we're going to be there, we're committing to be there for a longer period of time. That fundamentally has been the reason why our capital spending is going down as a percentage of sales or any metric you look at. So I hope that answers the question.

Just one more comment; if you look at historical spend from 2002 to 2005 we built a new distribution facility in Edgewater Park, this was a $45 million project, and we opened the distribution facility in San Bernardino, which is a leased facility, but we still put over $15 million in equipment and systems in that facility. So that was spend that we made at that point for infrastructure to allow us to grow, and that's not a continued expense you'll see going forward.

Okay and then just to make sure I fully understand how you account for the dollars back from landlords that you referred to, I guess I had thought in your statement of cash flows in the cash flow investing, that that showed what you spent, not a net number. Is that incorrect?

The capital we described for stores in the capital section is a net number.

So the $69 million is net? I thought the net number was $37.9 million.

You're quoting the total number now, not just stores. I'm confused on your question actually.

I was trying to understand, it looks like your Cap Ex spending is trending down and you had indicated, to contradict that statement, you were getting more dollars back from landlords, so in fact it wasn't going down. I just want to understand -- my understanding is that the number that you have in your statement of cash flows, the $69.2 million for 2007 for example, was what you are spending, and then you are getting some money back from landlords, so your net number was actually $37.9 million.

And that's correct. So I think the point Tom was trying to make is our spending in our stores is not going down, we're getting some landlord money to offset that. The spending, if you look historically in other areas like distribution that has gone down because we aren't building any new distribution boxes.

Okay so you were just talking about your stores specifically.

Right.

Okay, understood. Thank you.

Our next question comes from the line of Samantha [Serrone] with BDJ Capital; please proceed with your question.

Thank you. Good morning. Two questions on the balance sheet, with regard to favorable leases, could you explain the decrease between this year and last year? It looks like it decreased by $60 million approximately.

Yes, the decrease is due to two things; one, we're amortizing those favorable leases over approximately a 19 year period, so you'll continue to see $30 million to $40 million a year in amortization expense, which we'll continue to decrease that. And then we had some of the lease holds were written off when we made the decision to sell stores or impair stores.

If there are any leases that are valued sort of under market currently, are we to assume that rent expense will go up?

No.

Okay.

They're not under market; they were all assessed to market at the time of the transaction.

Okay. And lastly, could you explain the deferred tax liability?

On the balance sheet?

Yes.

The bulk of the deferred tax liability was set up in purchasing accounting when we did the acquisition. When we stepped up the value for fixed assets and the intangible assets, it creates timing differences between book and tax income. So it creates an enormous offset, which is a deferred tax liability.

Is any of that a cash obligation that is eventually owed?

No, it's the difference between what we're recording for book income, which includes all of these non-deductible deductions versus what we actually can take on the tax return.

Okay thanks Samantha. Chris, back to you.

Our next question comes from the line of Howard Goldberg with Brownstone Asset Management; please proceed with your question.

Yes, thank you, good morning. Early in the call you mentioned your ability last year to take out $10 million or so in employee related expenses. I wonder first if those are recurring or whether it was more of a one time event?

We talked about that on prior calls, and it's something that we wanted to assess each year going forward. We haven't yet made any determination given the fiscal year is just getting under way. So it would be premature, Howard, to talk about that. But, you are correct, in terms of how it impacted the prior year.

And a follow up, if I may, of a different cut on your capital expenditure discussion, which is you're targeting opening 25 stores and had, I think, almost a similar number last year, both of which are more than you did as a public company. I wonder if you could just briefly explain the change in strategy and whether these stores are taking you into new areas or you're filling in existing markets.

It's a combination of both; this is Mark Nesci. We are looking to, where the opportunities arise, to increase the pipeline and increase the expansion.

We feel that one of the things that all us retailers have to live with is the competitive set across the different geographies, across the country. And I will tell you that most of our competitors and other retailers have at least twice the amount of boxes that we have, especially in the big box arena.

So, we think there are lots of opportunities. We are literally going through some new markets. You've got to realize we're pretty spread out across the country, as you know. And we're principally in all the major markets but if you were to ask me, in such major markets like L.A. do we have resulted in all the markets in L.A., the answer is no.

So, we will continue looking to leverage those opportunities into existing markets and, in some cases, we will be branching into new markets that we're not into yet.

So, there is a large pipeline that is growing. We feel good about that. So, to the extent that we can open up 25 or even greater, we would tell you that we can easily handle double that, to the extent that we find the opportunities. And we are seeking it.

Okay, thank you.

Our next question comes from the line of Tom Carroll with Imperial Capital. Please proceed with your question.

Good morning. Hey guys, in the 10K you provided a $108.3 million number as far as cash interest expense in principal obligations, you had during 2008. Now, can you talk about the average revolver draw that you had associated with that number?

Yes. At the end of the year the revolver was at $159 million and average revolver draw during the year was just slightly under $200 million.

Okay and do you expect that to be the case in 2008?

It'll have a very similar pattern. We're hopeful that the draw will be below last year's on average but it's a very similar pattern to the way it was last year.

Okay, excellent. And then, as far as the 25 of these stores you're going to be opening and anything in '09 and forward, how many are you committed to? Do you have huge flexibility in what you're moving forward with? Do you have - have you signed any contracts? What's the story there?

In '08 or '09?

Both years. I mean, what are you committed to?

In '08, we have 15 deals lined up for this fall that are signed that are well on their way. Some have already opened and the balance will be opened yet this year.

In the spring of next year we certainly have lined up at least 10 to 12 stores and we feel very confident about, although the pipeline is still growing but we feel that's, you know, the 25 that we were talking about in '08.

In '09 we are actively pursuing that pipeline. There are lots of opportunities. We are looking to do some deals that are further out, which are more build-to-suit deals in fine regional shopping centers or strip centers. So those take more forward advance processing and in being able to line those types of deals up. So, I would say the pipeline is growing rapidly, not shrinking.

Great. And Mark, you've been with the company for some time now. I was wondering if you could speak to - you know, as we kind of - if we are heading into a more difficult retailing environment and this fall when you're in your two busiest quarters, I mean, what are your thoughts? I mean, could you talk a little bit about how you feel (inaudible) has performed in the past and what can we expect going forward?

I think TJX's CEO came out and spoke to that a little bit. I was wondering if you could do that as well.

Yes. By the way, you make me sound like a relic. I have been here a long time and to the extent that I certainly am the company historian. I will tell you that we've always demonstrated, over the course of the past 34 years, that the business has been able to excel. And yes, there have been soft spots. All retailers have these.

Sometimes they're more macro economic, that we don't always control. And sometimes they're self inflicted. And, to the extent that we feel pretty confident that we're putting together an excellent team to really navigate difficult times, I do believe that there are opportunities even in more difficult times that we should be able to excel.

We've had soft comps before; we bounced back from them. I see no reason why this will change. To the extent that we'd feel pretty aggressive with the merchandising approach, at the end of the day our buys, the compelling values that we offer the customers, is what really resonates. That's what really ticks with the customer. And I think, the more we focus on those prime buys, to show and highlight what we really are capable of doing, I think the customer appreciates it.

So, I think that Jack and the merchandising team are well focused and absolutely in the right direction to find bigger, better buys and make sure that we give the customers the value they've been looking for.

Okay great and I guess the last question is just in more - do you find that, in the more difficult retailing environments, you get better opportunities on the buy side?

Yes. I mean, as a rule of thumb, I would say that does happen. I don't want to tell you that we should expect it normally because, manufacturers are changing their manufacturing cycles and things of that sort. But, as a rule of thumb, yes, I would say to you more often, when times are tough, we do have more opportunities.

Okay, great. Thank you guys.

Great. Chris, we probably have time for one more question.

Our next question will come from the line of Reid Kemm, with Merrill Lynch. Please proceed with your question.

Thanks for taking the follow up. I wasn't fast enough on the draw earlier. I just wanted to follow up on the question about margins.

I was curious; when you cited the more favorable initial markup, is that equally distributed amongst your house brands, like [Fumagalli] or is it more weighted towards that, as opposed to some of the national brands?

And my second one is just, on the leases for your stores that do have renewables on them next year, can you just give us a ballpark what you're expecting in terms of a rent increase on that? Thanks.

On the markup question - this is Jack - markups typically go up when you do a little bit more business with your people. So our markup strategy is to be more meaningful with fewer vendors so that we're more profitable and they're more profitable.

Fumagalli is a private brand strategy and I want to be real careful about the weight of private brands. We are 70%-plus national brands. Our private brand strategy is designed to consolidate labels that really have no significant meaning for the customer. And, as you know, from most retailers that also gives you an opportunity to enhance your margin by, again, pinpointing who you do business with and how you do business with them. So, we do expect that to help us on the markup side of the equation.

And the second part of your question, Reid, I think had to do with the rent increases. And, as you know, it's in all of our agreements predetermined and, generally the way to think about that is probably low single-digit percent increase.

Yes. I mean, all of our leases are really structured in increments and often it's five-year increments of increases. Often; not always but often. And as Tom has said, they are preset and they normally are single-digits.

Right; thank you.

Mr. LaPenta, if there are no further questions, I will now turn the call back to you.

Okay, thank you Chris. Thank you everyone for participating in the earnings call and this will conclude our call for today.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you please to disconnect your lines.