Burlington Stores Inc (BURL) 2008 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Burlington Coat Factory first-quarter 2008 earnings conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Friday October 19, 2007. I would now like to turn the conference over to Robert LaPenta., Vice President and Treasurer. Please go ahead, sir.

Thank you, operator and good morning. We appreciate your participation in this morning's conference call to discuss Burlington Coat Factory's first-quarter 2008 operating results. I am Bob LaPenta, Vice President and Treasurer of the Company. With me today are Mark Nesci who is our Chief Executive Officer, Jack Moore, our President of merchandising, planning and allocation and marketing and Todd Wyrick, our Chief Accounting Officer.

The agenda for the call this morning is as follows. I will start with a review and of our financial performance for the quarter and then Mark Nesci will discuss some additional insights to our business and provide an overview of the Value City transaction. Mark will turn the call over to Jack Moore who will discuss more specifically our merchandising performance in the first quarter.

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 call 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 the fiscal quarter ended September 1, 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 10-K and the Company's other filings with the SEC all of which are expressly incorporated herein by reference.

Net sales. During the current fiscal quarter, net sales increased $21.9 million or 3.3% compared with the similar quarter last year. $5.2 million of the increase was related to a barter transaction with the Company exchanged, aged outerwear inventory for advertising credits.

Five new Burlington Coat Factory stores opened during this current quarter and stores opened in fiscal 2007 contributed $27.8 million to net sales during the quarter. Offsetting these net sales gains, the Company's comparative store sales decreased 2% in the quarter.

Other revenues. Other revenues which consist primarily of rental income from leased departments, sublease rental income, layaway, alteration and other service charges decreased to $6.8 million in the current period from $7.4 million a year ago. The decrease is primarily related to decreases in rental income from leased departments that are being converted to Company run departments.

Cost of sales. Cost of sales increased $16.9 million or 3.9% for the current fiscal quarter compared with the first quarter a year ago. The dollar increase in cost of sales was due to the increase in net sales during the quarter. Cost of sales as a percentage of net sales increased to 65.4% in the current first quarter compared with 65.0% in the similar quarter a year ago.

This percentage increase in cost of sales reflects higher markdowns and shrinkage cost in the first quarter offset in part by higher initial margins. In addition the Company charged $5.2 million to cost of sales for the barter transaction.

Selling and administrative expense. Selling and administrative expenses increased $3.8 million compared with the prior year three-month period. The increase in selling and administrative expenses was due primarily to the increased number of stores in operation during the first quarter of fiscal 2008 as compared with the first quarter of fiscal 2007.

This was offset in part by a reduction of $5 million in cost relating to the merger transaction that were recorded in last year's first quarter. As a percentage of net sales, selling and administrative expenses were 37% in the current quarter compared with 37.6% in the prior year's quarter.

Depreciation. Depreciation expense amounted to $30.8 million in the current quarter compared with $35 million in the prior year's comparative quarter. The decrease of $4.2 million in depreciation expense is primarily due to $13.9 million in computer equipment that as a result of the merger transaction was determined to have a remaining useful life of one year. As a result those assets were fully depreciated during fiscal 2007.

Amortization expense. Amortization expense did not change materially from the similar period a year ago. Amortization expense which is related to net favorable leases and deferred debt charges was $10.8 million for the fiscal 2008 first quarter and $10.9 million for the fiscal 2007 first quarter.

Impairment charges. The Company recorded $0.6 million in impairment charges this quarter compared with none in last year's first quarter. The impairment charges were related to distribution center conveyor equipment that is no longer being used and is determined to no longer have any market value.

Interest expense. Interest expense was $33.2 million and 35.4 million, respectively for this year's fiscal first quarter and prior year's fiscal first quarter. The decrease in interest expense was due to the payment of long-term debt during the previous fiscal year, reduced borrowings on the ABL credit facility this fiscal quarter compared with last year's first fiscal quarter and a $1.2 million swing in the fair market value of the Company's interest rate cap contracts which is recorded in interest expense.

Other income net. Other income net consists of investment income, gains and losses on disposal of assets and other miscellaneous items. Other income net decreased $0.3 million to $0.7 million for the current fiscal quarter. This decrease is due primarily to lower interest income and a loss recorded on the disposition of fixed assets during the quarter offset in part by an increase in other miscellaneous income items.

Provision for income taxes. The income tax benefit was $33.4 million for the quarter ended September 1, 2007 compared with $38.3 million benefit for the similar period a year ago. The effective tax rate for the first quarter was 39.8% compared with 42.5% a year ago.

Net loss. Net loss amounted to $50.4 million for the current first fiscal quarter compared with $51.8 million for the similar period a year ago. The decrease in that loss of one $1.4 million is due primarily to increased sales and decreases in depreciation and interest expense.

Adjusted EBITDA. Adjusted EBITDA in the current fiscal quarter was -$4.6 million compared with last year's first fiscal quarter of $0.4 million. The Company's pretax loss in this quarter after adjusting for year's first fiscal quarter pretax loss for the transaction related expenses and retention bonuses was better in this quarter by $1.9 million. However, this improvement to the pretax loss was offset in our adjusted EBITDA calculation by a $4.2 million decrease in depreciation expense and a $2.2 million decrease in interest expense all of which resulted in a net reduction of our adjusted EBITDA of $4.2 million when compared with last year's prior first fiscal quarter.

Store growth. During the three months ended September 1, 2007, the Company opened five Burlington Coat Factory stores. Three Burlington Coat Factory stores were relocated during the period to locations within the same trading markets. As of September 1 2007, the Company operates 384 stores in 44 states principally under the name Burlington Coat Factory. And with those comments, I'm now going to turn the call over to Mark Nesci.

Thank you, Bob, and good morning, everyone. My comments will provide an overview of our performance for the first quarter of fiscal 2008 and I will discuss the Value City acquisition agreement for lease properties.

The Company experienced comp store sales of a negative 2% during first fiscal quarter of 2008. There are two primary factors that are directly related impacting our comp store sales.

First, as we have previously discussed, our cash refund policy changed and has had a negative impact on comps. While we believe that implementing this policy was the right long-term decision, we believe that we've not attracted a meaningful group of new customers and our customers are not repurchasing with their cash refunds. We continue to estimate that the cash refund policy has had a 2 to 4% negative impact on comps.

Second, during the quarter, we experienced softness in a few areas of the business due to inventory flow. When we moved forward on our initiatives to improve our customer shopping experience by making our stores more shoppable and reducing store inventory levels, our efforts resulted in out-of-stocks in certain categories. We are in the process of rectifying that situation.

Even though we were disappointed with our comp store performance, we continue to focus on the execution of our value proposition to our customers which is famous brands, department store brands at everyday low prices.

At this time, I would like to switch gears and discuss the Value City transaction briefly. On October 3, we entered into an agreement to acquire 24 leased Value City locations for conversion to Burlington Coat Factory stores. The majority of the locations will be in Ohio, Pennsylvania, New Jersey, and Maryland.

We are excited about this acquisition of proven retail locations because it allows us to officially execute our operational growth strategy of opening more new stores each year. We anticipate that this transaction will close in the early part of calendar 2008 and the stores will open in the fall of 2008 and the spring of 2009.

In fiscal 2008, we expect to open a total of 22 stores which is down from the expected 25 stores that were reported last quarter. Three locations originally planned to open in fiscal 2008 are expected to open in early fiscal 2009. At this time, I would like to turn the call over to Jack Moore.

Thank you, Mark. In addition to Mark's comments, I would like to provide some specific color about our first quarter performance. First, the performance of each month was fairly consistent when you factor in the timing shift of back to school between July and August. This impact was due to the later starts of schools and the shift of tax-free sales weeks in key states such as Florida and Texas.

Second, most of our merchandising issues after factoring out the impact of the change of our return policy were due to execution issues in a few key areas of our business as we were changing our inventory models. These problems were internal. In areas of the business where we have appropriately planned and bought our performance was better. We are addressing our underperforming areas of the business and we expect improvements in the coming months.

Since joining the Company and learning a lot about the Company's business model, I have developed an even stronger belief in our business model. Our focus continues to be on delivering great brands, trend [rate] fashions at great prices presented in a more shoppable environment.

We believe our everyday low pricing philosophy is a strong component of the strategy. We want our customers to discover great values everyday. With those comments, I'm going to include our prepared remarks. Operator, we are ready to begin the Q&A session.

(OPERATOR INSTRUCTIONS) Grant Jordan, Wachcovia.

Great, thanks for taking the questions. My first question I know you don't want to get into results after the end of the quarter but you've talked about the refund policy negatively impacted comps by about 2 to 4%. Now that we've [anniversaried] that do you still feel comfortable with that estimate? Have you seen that impact go away?

It transitioned in September and it is starting to wean. So I would say by October it should be fully [anniversaried] in comp.

Still you think's it's more in that to 2 to 4% range?

Yes, but weaning down. I mean, we started promoting the refund policy in the early part of September and it broke in different markets and it was a ramp, so to speak. So the full month of September we still saw some impact but the impact started to wean. In October we should really [anniversary].

My second question obviously we have heard that September weather was weak. Maybe you can just give us an idea -- historically speaking whenever we have seen soft retail sales how your model of blended purchasing between preseason and in season works. If you're able to capitalize on that, if there's more goods available? What is your mix between in season versus preseason purchasing right now?

This is Jack Moore. Grant, our percentage of in season versus preseason buying hasn't changed dramatically, to answer the latter question. As far as the weather, I think you have heard from other retailers what the impact was in September. The interesting thing about this time of year, as soon as it gets cold you can see a quick shift. I think it's just really too early to tell exactly how the warmer weather will impact all retailers for the next few months.

Grant, the only thing I would add would be when times get tough and there is some softness in retail out there, that those typically tend to be pretty good opportunities for Burlington. We will continue to exercise as we have done in the past to strategically make good purchases that we think fit into our model and our mix which is that optimistic driven piece of our model and as you have noted with some softness attempt to create more of those opportunities.

Okay, can you just remind us what is generally speaking the percentage of inventory you're purchasing in season?

We really don't disclose that. As Mark has stated we are an off-price retailer in may of our categories and we're always liquid to take advantage of good opportunities out in the marketplace.

My final question. Obviously your inventory turns went up a good bit in the quarter. You talked about being out of stock in some key areas. Do you have a goal in mind of where you want to head to on inventory turns?

Basically my primary goal is to make the store more shoppable. We want to be full but we don't want to be stuffed. And there are opportunities for us to reduce inventory without losing sales. In our effort to do that we did reduce inventories in a few key areas a little bit too quickly. It did hurt the sales but those are areas we can of course correct. But we do see an opportunity to improve our inventory management and to improve our turns without any negative impact on sales.

Karru Martinson, Deutsche Bank.

Just a follow-up on the inventory question. In terms of the key areas where you feel you went too quickly, have you corrected those problems or is that the something that is the work in progress?

It's always a work in progress. As you know when you do reduce inventories in certain areas, it doesn't happen overnight, the reduction. And sometimes when you go a little bit too far you don't spot it right away. And as you know, most of the goods we have in our store is imported, sourced overseas. So it takes a little bit of time to fill the pipeline. But we are making progress, steady progress and we should see continued progress month after month.

Okay in terms of the cash back policy, you mentioned you are not attracting new customers. Are there plans afoot to -- or how are you planning on addressing that side of the equation?

Well you know, there are lots of market initiatives that are being tested right now --can't disclose what they are -- but we are for trying to learn. We certainly have what we call a much better vision of who our customer is from lots of the studies that we had conducted during the prior year.

So how we conduct to that customer, how we market to that customer is to try to get really our existing customer into our stores more frequently. That is the first goal. New customers are always attractive but they're also the hardest to obtain as you probably know. So we're going to stay focused on really concentrating on our existing core customer base and really marketing to them more directly and just getting more frequent shops.

Given that Value City had put its entire chain up for sale and you guys -- it sounds like you cherry picked a couple of locations here. Is that review for you done at this stage or is there more to come?

We are always looking at opportunities not just with the balance of the Value City chain. As they decide what's in their best interest we would stay close contact with them obviously. But likewise for others where there is big opportunities with big boxes that may be preparing or getting ready to get rid of some of their locations.

So these 24 did fit by the way, in the sense that they were ones that [wouldn't be] cannibalized from existing locations or were in the markets where we wanted to be. There are probably more of those that could obtain through Values City if they were to liquidate more of their stores. Time will tell if that should happen.

Just lastly in terms of the back-to-school sales that you saw adjusting for the shift, I was curious as to the competitive pressure you were seeing during that period and how that played out with your customer base.

Back-to-school is always a very competitive period. I don't think it was any more significantly competitive than in previous years. Like I said earlier, the biggest issue was there were quite a few parts of the country where back to school timing shifted to later in August and that impacted the latter part of July. Also it shifted their tax free weeks in a couple of key states. But back-to-school has been very competitive for quite a few years and remains so this year.

Emily Shanks, Lehman Brothers.

Hi, good morning. Thank you for all the helpful information. I had just a couple of follow-up questions. First, I was hoping that you could expand a bit on the barter transaction. We just want to understand who the counterparty was, if it was one or more of, what type of inventory it was. Is this something that you have done before in the past?

Emily, this is Bob LaPenta. This was the first time we have ever done a barter transaction. It was done through their companies that do this. So they put -- they connect you with a buyer and a seller. And the Company exchanged $5.2 million of aged coat inventory for advertising credits.

The credits that we received are credits that we will have to use over the next three to five years. We were very excited about the transaction because we felt that it helped us better utilize our investment in our inventory. It allowed us to reduce our aged inventory and at the same time reduce cash expenses related to advertising. I don't know if the Company will ever enter into another transaction. But if it is compelling, I think we would certainly consider another one.

Great, that's very helpful. And moving to inventory, I know you have already given us quite a bit of information around the potential out of stock, etcetera. You had mentioned some key areas. What were those areas that you felt that you had dialed the inventory too far back?

As you can tell, Emily, we are being a little close to the vest on this one. For competitive reasons we prefer not to disclose that.

Okay, completely understood. If I may, just one more. Certainly, we saw the guidance around CapEx in the queue of $61.1 million for fiscal year 2008. In there, of the $28.8 million for store expenditures, what portion of that -- it constitutes maintenance CapEx? We just weren't sure the right way to think about what you guys need to do on a go-forward basis around that.

(multiple speakers) the maintenance CapEx for the year -- this is Todd -- is planned currently at $64 million. We do have a substantial amount of landlord -- of tenant improvement money that offsets a gross CapEx number that's a little over $100 million. So the maintenance CapEx is planned at 64.

Okay, super, that was it. Thank you very much.

[Ted Bernstein], UBS securities.

Good morning. I would like to understand a little bit more about what looks like a modest amount of margin pressure on the gross margin line this first quarter versus last year. And specifically I would like to understand the reasons for what sounds like a higher degree of markdowns and perhaps an increased level of shrink in what the Company is doing to address that.

Ted, this is Jack. Our buyers work very very hard to increase their markup. I'm very pleased with what they're negotiating and how they're negotiating without sacrificing any quality or price to our customer. As a part of that initiative we want some of that increased markup to be taken in markdowns in order to -- again, my number one priority is to have great brands, great values and a very shoppable environment.

So we are being more aggressive with our markdowns early on in this fiscal year in order to position us as well as possible for the upcoming critical Christmas holiday season. We fully expect over the long haul that we will use some of this markup improvement to continue to be aggressive on markdowns but also some of it will drop to the bottom line.

How about the shrink issue?

We calculate shrink once a year at the end of the fiscal year when we take a complete physical inventory. We did see some increase in shrink last year which was not completely unexpected. Because of the refund policy change we felt there were versus the prior year which did not have the cash refund policy there was the potential for some more shrinkage issues.

But it's something we are monitoring. We don't feel it's out of line and we book an estimate through the first 11 months of the year and then we will calculate our actual shrinkage in the twelve-month when we take our chain-wide physicals.

The only thing I would add to that is we do have some systems in place and lots of -- which we run some KPIs to really monitor the front end register area for those -- that type of shrinkage and we seem to be doing a pretty good job of mitigating and managing that part of the business.

Has the Company fully realized the benefits of moving a greater volume of merchandise through the Company's distribution facilities in network as opposed to the drop shipments?

I think the answer is yes. I think it's been -- the initiative has been very favorable in that it's had the effect of reducing our freight costs which has been, which has helped the margin increases that we have seen over the last year. And just to be able to manage flow of goods into the stores I think it gives us more control over that whole flow process.

Yes, I mean this was one of many supply chain initiatives that we had said that we would set goals on. And we certainly have received a great amount of success in rolling that one out. So it worked well.

Like any change that you make, we have a little bit of a backup last year when we went through this distribution process where so much more goods was coming through the center, the multiple distribution centers. And we have geared up to solve those problems this year and to be frank with you, the supply chain has never worked better.

So the efficiencies are getting much much better. We ramped up the help and with the necessary tools we'll be able to manage the onset of all that merchandise we went through and this year is running quite smoothly.

That's good. I have one last question. It concerns the EBITDA reconciliation. What is the difference between the non-cash straight-line rent expense, the line on the EBITDA reconciliation versus the non-cash rent expense and other line on the cash-flow statement?

Give us a minute here.

I know it's a detailed question and I apologize. (multiple speakers)

No.

Let me take a stab at it. In the EBITDA reconciliation, the non-cash straight-line rent expense is what we book in addition to cash rent because we have this -- there's this financial accounting standard that requires us to take the average over the life of the lease of what your rent expense is. In the early part of that lease you're booking additional expense to what you're cash rent is and in the later part of the lease it will reverse itself. And that's an addback in our EBITDA calculation with our covenant calculations. So that's what the $2.9 million is in our adjusted EBITDA formula.

In the source and use statement, we are netting against that, the amortization of the tenant allowances. So in 2007 we have got approximately $35 million from the landlords. That money gets recorded as a long-term liability and then it gets amortized over the life of the lease. So, just in the cash-flow presentation, we just net those two against each other.

Colleen Burns, CIBC World Markets.

Hi, good morning. On the new Value City leases, what are the conversion costs associated with those stores and the timing, if possible?

To be frank with you, it's actually a process that's going to take a little bit of time. Each of these leases have unique specific facts that makes it a little complicated to answer that question.

The landlords -- there's multiple different landlords and the arrangement is very complex to be frank with you. And we are in the midst of working out arrangements -- we made an arrangement with Value City but now there's a workout with each of these landlords. So until that process is done it's very hard to really get our hands around that. So it's really something we would have report to you in month to come.

And then in the past you talked about opportunities to leverage your relationships with your vendors and possibly edit some vendors. Is there any update you can provide there? Have you made any changes and do you expect to see any benefits to margin this year from that initiative or is that really something that can come in the future?

It is an initiative that was started several months ago. We're making very good progress on it. We will see benefits this year as we grow with our most valuable resources. It does give us an opportunity to negotiate and create a win-win situation for both us and for them. And that's part of I think the impact of us improving our margins during the first quarter. This will be a big big win for the Company long-term.

That's helpful. And then just lastly in light of the soft comp store sales trends, have you made any changes to advertising for the holiday season or do you expect to increase advertising this year?

I won't give you specifics but we're going to be more aggressive in the fourth quarter and the number one objective is to be more frequent out in the marketplace. We really think it's that old Midwest saying, when the ducks are flying you've got to take some shots and we're definitely going to be doing that.

Also one of the critical things about marketing that's very important just to stress on this call is we're very firmly committed to our everyday pricing model. So our marketing efforts will be to reinforce our core messages of great brands, great brands at great prices and very timely buys of great brands at great prices. So we're very excited about what we're doing going forward.

Okay, great. That's helpful; thanks a lot.

[Gretchen Heide], JPMorgan.

Hi, most of my questions have actually been answered. But just wanted to confirm the timing on the new stores from Value City. Will about half of those stores be opened in the back half of 2008 and the other half early 2009, is that right?

Yes, the plan is to execute these obviously as soon as we can. And we are in workouts as I had suggested earlier, with these landlords currently. Actually we had started prior to the close of the transaction. So many of these have been worked on at least half of them prior to closing.

But it's a work in progress and based on when we complete some of those workouts and there's all kinds of covenants, other types of issues in these leases that we are dealing with. That will really dictate when they turn it over to us. And they obviously have a vested interest to turn it over as soon as they can.

And to the extent that we do this workout in this next three months, two or three months, then they will turn them over right after, sometime after the spring season March or April-ish. We will start converting the stores.

We've lined up -- we're already preparing, lining up documents and construction documents and things of that sort so that we can get a jump on it. The plan is to get as many of these open for the fall of 2008 and then the balance in the spring. That's the plan.

Can you offer any more specifics on just further margin opportunities?

Not at this time. Margin growth typically comes mostly from negotiating better situations and hopefully if you buy the right product you have less markdowns. It's a pretty simple formula and I'm pretty pleased with how the team is really attacking this and addressing it.

Michael Shrekgast, Longacre Management, LLC.

I was just wondering, you mentioned in your filing and I don't think it was in there previously, the potential to do future acquisitions. And I know you commented a little bit early on. I was just wondered if you could clarify why you felt the need to put that in?

First of all the acquisitions and the nature of what we have done in the past has really not been to acquire chains to operate different chains as much as acquiring large blocks of real estate. That's really the main focus that we have. We're really looking for the opportunity -- it's much easier if we can make one deal with one particular user to take 20 or 30 stores as opposed to trying to find 20 or 30 individual locations with individual landlords.

So those are efficiencies that from a real estate perspective are attractive to us, assuming that obviously it's real estate that we want and it fits into our model. But that's what we meant by the acquisitions.

I'm generally seeing a number of other retailers out there pull back on their store plans or close underperforming stores. Are you getting more opportunities presented to you?

From the real estate sector?

Yes.

I will tell you the short answer is yes and no. Good locations always demand a lot of attention so -- and typically good locations still demand decent prices and real estate prices in the commercial side of the sector unlike the residential haven't really dropped off radically at all. So at our box size, being that it's 80,000 square foot has also put some pressure on finding those types of boxes.

So I would say there are some opportunities. I would say that the mall operators are increasing activity with us to the extent that they're looking to take blocks of space in those malls and convert it to a big block of space for users such as us. That activity is increasing.

Just one other question was with regards to this sharing of CapEx by landlords. When do you get paid for that and could you just explain in the first quarter you booked $26 million of CapEx I believe and so that would -- if you did it on a quarterly basis say around $100 million which is the gross number you just mentioned, when do you get reimbursed?

It typically happens after the store is open and we are paying cash rent for a month and all of the lien waivers are received from all the subcontractors.

So then by year-end you definitely get the catch-up, you get to that net amount by year-end usually?

Yes.

Tom Carroll, Imperial Capital.

Good morning guys. I was hoping you guys can give me an upstate on the assets held for sale, any progress there?

In the quarter we actually moved out of assets held for sale in one store that we had under contract for sale. That contract fell through. And since we have not been able to identify another buyer for that property and we don't believe that it's likely that we will sell the property within 12 months, we moved that one property back into property and equipment and we are depreciating and amortizing those assets. And we would continue to monitor the remaining assets that are still classified as held for disposal.

Sure, and just in that regard, I mean the West Coast stores I think you have held for disposals -- is there any progress there as well?

There's no change from where we were at year-end.

Okay; could you talk a little bit about the nonapparel segment this last quarter and kind of any position or new position you have in the quarters going forward?

The mix of the store is not changing. We have a great mix of departments and all of them have an equal chance to grow. So at this particular point there's not a lot of work being -- a lot of thinking going forward on changing the mix. I feel very good about the mix of the store.

Jack, could you talk a little bit more about -- are you identifying any opportunities that you see now that you have been here a little bit and just kind of go into your mindset and what if any you are seeing?

Yes, there are quite a few opportunities. It's premature for me to make a statement on a conference call like this. And I think in future calls I do owe the investment community some insights into our initiatives. But there's a lot of exciting opportunities.

Burlington Coat Factory has a good reason for existing when you look at the competitive mix out there. Our unique merchandising mix between off-price and traditional department store brands and the value pricing we have; I think we have a very exciting story.

Okay, and the last question for you, Bob is in terms of your inventory -- I know going back to the reduction initiative, it looks like the reduced buy of about $64 million allows you to generate about $20 million from working capital this quarter. Is there a range for 2008 we can expect that this reduced inventory can help us generate in terms of cash flow from working capital?

The initiative is to I think not necessarily reduce inventory but just in Jack's overall initiative of just trying to make the store a better experience for the customer. I think one of the fallouts of that we've seen at least in the first quarter was that inventories are down compared to last year's first quarter.

Whether we will see that throughout the entire year to that level -- I don't think so. But I think overall -- I think if we achieve some of our initiatives I think one of the benefits we will get from that will be an increase in working capital.

Karen Miller, Bear Stearns.

Good morning, I'm wondering -- you talked about back-to-school and the calendar shift. I'm wondering if you can tell us what you're seeing in back-to-school. If you could just give us a year-over-year comparison. Because is it correct to assume that most of your back-to-school occurred in the second quarter?

No, the back-to-school shift I'm talking about is there was less business done the last ten days of July and more business done in August. Without disclosing numbers we saw a little bit better back-to-school than we had the previous year. And what's happened traditionally with back-to-school over quite a few years is you do see back-to-school extending into September more and more.

The average consumer is very much a buy-now, wear-now consumer. In years where the weather is cold in September you actually see more activity of back-to-school categories. And in times when weather is warmer in September you see a little bit of a delay in purchases. There used to be a time when I was going up everything was purchased in August and at Christmastime as a kid. That has changed a lot over the years. But in general we were pleased that our back-to-school was a little bit better than the previous year.

Would that continue into September as well?

We really can't discuss anything going forward. I have given you the major premise that the kids business is very influenced by weather as you move through September, October, November.

Okay; that's helpful. Thanks. I'm wondering if you can tell us a little bit about your plans for -- if you have any plans for the MJM shoe division. It's been underperforming for quite some time. Do you plan to take any strategic action to improve it or perhaps sell the division?

Yes, we're keeping all options open at this point. It is one of those divisions that is getting some attention. It has some potential. We looked at some parties who did have an outside interest and at this point time we're holding tight until the we get some more activity which we think should come up shortly. We have some parties who are looking to possibly do something with the transaction but at this point time it's really something that is still being evaluated.

One last question. I'm wondering if you could comment a little bit about traffic versus transaction. I mean you did mention that your advertising is aimed at trying to get your existing customers to shop more frequently. Are you seeing any of that bearing fruit?

I'm not quite sure how to answer your question. Our perception is our traffic is very similar to last year. Because of the change in the return policy we do believe we do know that the average transaction was down a little bit and that was the reason and that's how we measure the impact of our return policy.

As you know it's always very competitive for traffic. We did not make any material changes in our marketing for this particular quarter and we are looking at improving our marketing to drive more traffic into the stores going forward.

Okay you've answered all my questions; thank you.

Reid Kemm, Merrill Lynch.

Thanks; good morning. I was just curious on the warehouse system implementation you're going to be doing next year. Just so it's clear in my mind is that completely determined what you're going to do, it's just a matter of rolling it out? And then related to do that, when will be the specific times that you will be rolling that new system out?

Well, yes; we are on the way. The system is actively still being somewhat modified for our use and has very little modification to really go into it. We purchased the product from Manhattan and we felt that the -- we wanted to do as least the modification to the system that fit the operating model that we had.

Like any one of these implementations, there's always some of those changes that have to be made. So those changes are what's happening right now into the system. We are actively working on a plan that is going to roll this out in a very test mode.

Obviously we're taking one of our buildings that would be in Bristol actually one of the warehouse locations that has not the biggest impact to the operation to test that there, to make sure that we debug it. And that should hopefully roll out in the next six months, down the road.

Okay so you expect to complete the whole rollout within the next six months or that is just the test?

No, that's just the test.

Okay and actually just a category question I guess for Jack. On the home product sales which were down on a dollar basis and year-over-year in the quarter, was that partly because that was an area where some of the in stocks were or is it just softness in a category or changes on the floor? If you could just help us understand that more.

I don't think we discussed home specifically. But home was at the Company average. So that was not an issue.

Okay, then lastly you were benefiting some more from the supply chain initiatives you rolled out last year in the quarter that helped your margin. When will that kind of fully roll off or has it already rolled off in this first quarter, the big benefit?

Yes, I mean there's multiple supply chain initiatives and I think you're referring to a specific one maybe. But there's several initiatives that are still being planned and they are not baked into -- haven't got rolled out yet. The one that you're referring to I think the majority of that has been achieved. And it is probably the freight one that you're referring to which is the conversion from dropship to central distribution.

But there are others that are on their way. We have a network strategy. We have supply chain initiatives that are around creating some SOPs and standards for our truckers to get inventory to our stores more timely which increases turn. None of those have been built into the plan. But those are the ones that are underway and being analyzed.

I guess I'm just curious if we looked at the merchandise margin separating that -- those favorable benefits out where the merchandise margin would have been down and also excluding the barter transaction.

The merchandise margins would have still been even with the adjusting of the moving the goods to the warehouse. So we make good improvement both on the negotiating side of it as well as the cost side of moving the goods to the supply chain.

The one other comment to make is while we are having good savings there now I think we're at a level of flow through the distribution centers that will be consistent going forward. We don't plan there to be any significant changes.

Do keep in mind that last year at this point we also had a substantial amount of offsetting expenses as we didn't move the goods as efficiently through the distribution centers as we planned. So we are at an area now where I think the savings will be favorable going forward.

Joshua Givelber, Nomura Group.

Just curious, did you ever say how much the stockouts cost you in terms of comp store sales?

No, we never disclosed any numbers. But obviously it did cost us sales and we're rectifying that.

Do you want to take a stab at it?

No, I don't. Nice try.

Thank you. Just going into the -- I guess what I am hearing is going into the next quarter there will also be an impact from that as well as a lessening impact from the cashback policy; is that correct?

As far as stockouts going forward, we're not going to make any comment about that going forward. I think Marcus talked about the fact that we are annualizing the change in our return policy. And we have seen a diminished impact in September since we are starting to overlap and we should see pretty much flattening out after that.

Okay and then just in terms of -- is there a rate in which you have to grow, in order to kind of keep your margins constant given that expenses tend to creep up?

As long as we are growing we should be able to manage this very well. In retailing you typically grow or you slowly die. And the fact that we are adding new stores is exciting. The fact that we find plenty of opportunity in many of our categories for growth is exciting. We have got a lot of vendors working with us very closely to improve their mix in our stores. So we strongly believe we've got a lot of positive momentum.

And then just in terms of kind of other times retail has kind of slowed down a little bit, have you guys been a net beneficiary or are you -- when it rains out does everyone get wet?

No, I mean it's very situational. We've got a lot of different categories in our stores. When retail is soft and there happens to be more supply of goods available in certain categories and those goods are very desirable, that impacts us very positively.

When business is soft, if it's hurting some of our key vendors and impacts the way they do business, that hurts us a little bit like it hurts anybody else. So it's very situational.

Operator, we have time for one more question.

Operator, we have time for one more question.

Very good, sir. Thank you. Our next question is a follow-up from Grant Jordan, Wachovia Securities.

Great, thanks for taking the last question. Just a follow-up on some of your discussions about your vendors. I know during the roadshow you talked about how Burlington Coat doesn't require a margin guarantee from your vendors as being a positive and differentiating factor. Can you just talk about if that is still the case and if you have seen any of your competitors follow suit?

I won't answer it from our competition's point of view; I will let them to that. But our objective is to negotiate the best price up front, pass that savings along to our customer. When opportunities come along in season again, the same objective, negotiate the best price and pass along great opportunities to our customer. It's a real important part of our business model.

Okay and you don't see that changing?

No, I do not.

Thank you very much, everyone for participating in our first-quarter conference call.

Operator, that concludes our comments for today. Thank you, sir. Ladies and gentleman, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.