Burlington Stores Inc (BURL) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Burlington Coat Factory second quarter 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 January 18, 2008.

I would now like to turn the conference over to Mr. Robert LaPenta, Vice President and Treasurer. Please go ahead,

Thank you operator. And good morning. We appreciate everyone's participation in this morning's conference call to discuss Burlington Coat Factory's second quarter 2008 operating results. I am Robert LaPenta, Vice President and Treasurer of the Company. With me today are Mark Nesci our Chief Executive Officer, Jack Moore our President of Merchandising, Planning, Allocation and Marketing and Todd Wywick our Chief Financial Officer. The agenda for the call this morning is as follows - - I will start with a review of our financial performance for the quarter. Mark Nesci will then discuss the state of the business and then Jack Moore will provide an overview of merchandising results and strategies. 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 the information provided on this call is primarily related to the Company's results of operations for the fiscal quarter ended December 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 risk 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 here in by reference.

Net sales. During the three-months ended December 1, 2007, net sales decreased 38.2 million or 3.9% compared with the three-months ended December 2, 2006. The primary reason for the decrease is that the Company's comparative store sales decreased 8% in the quarter. Related primarily to unseasonably warm weather during September and October and weaker consumer demand. The decrease in comparative store sales was partially offset by 15 new Burlington Coat Factory Warehouse stores which opened during fiscal 2008 and contributed 32.9 million to net sales for the current quarter.

Other revenue. Other revenue which consists primarily of rental income from lease departments, sublease rental income, layaway, alteration and other service charges decreased to 9.1 million in the current period from $12.1 million a year ago. The decrease is primarily related due to a decrease in layaway, alteration and service fees of 2.4 million and a decrease of 0.5 million related to rental income from lease departments that we're converting to Company run departments.

Cost of sales. Cost of sales decreased 43.3 million or 7.2% for the current fiscal quarter compared with the second quarter a year ago. The $1 decrease in cost of sales was due to the decrease in net sales during the quarter, lower initial cost on new purchases and reduced freight cost. Cost of sales as a percentage of net sales decreased to 58.9% in the current fiscal quarter compared with 61% in the similar quarter a year ago. This percentage decreasing cost of sales reflects improved markup on new purchases and reduced freight cost during the quarter.

Selling and administrative expenses. Selling and administrative expenses decreased 9.2 million or 3.2% compared with the prior year three-month period. The decrease in selling and administrative expenses is due to an $8.7 million reduction in accruals for certain employee incentives, a decrease of $4.4 million related to merger transaction costs that were recorded in last year's second quarter and a decrease of comparative store payroll of $7.7 million this quarter compared with the prior fiscal quarter. These decreases were offset in part by an increased number of stores in operation during the three-months ended December 1, 2007 compared with the same period of the prior fiscal year and increased cooperate-related expenses as a result of the Company filling open management positions. The Company made similar accrual reductions to employee incentives totaling 9.4 million during last years third fiscal quarter. As a percentage of net sales, selling and administrative expenses were 29.4% in the current quarter compared with 29.2% in the prior year's quarter.

Depreciation. Depreciation expense amounted to $30.8 million in the current quarter compared with $34.6 million in the prior years comparative quarter. A decrease of $3.8 million is primarily due to the $13.9 million in computer equipment assets that 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 $10.6 million for fiscal 2008 second quarter and $10.9 million for the fiscal 2007 second quarter.

Impairment charges. The Company recorded $6.8 million in impairment charges this quarter compared with $3.7 million in last year's second quarter. The impairment charges relate to long life assets at 10 of the Company's stores. The impairment charges for this quarter is the result of a decrease in the results of operation for these 10 stores over the 12-month period ended December 1, 2007 which resulted in a decrease of expected discounted cash flows below the net carrying values of the long life assets of these stores.

Interest expense. Interest expense was $33.7 million and $35.2 million respectively for this year's second quarter and the prior fiscal year second quarter. The decrease in interest expense was the result of lower average borrowings on the Company's ABL Senior Secured Revolving Facility and to changes in the fair market value of the Company's interest rate cap contracts which are recorded in interest expense. Repayments, net of borrowings related to the Company's ABL Senior Secured Revolving Facility amounted to $114.7 million during the quarter.

Other income net. Other income net consists of investment income, gains and losses on disposal of assets and other miscellaneous items. Other income net increased $1.2 million to $1.8 million for the current fiscal year. This increase is due primarily to insurance claim recoveries recorded during the current three-month period of $1.2 million compared with insurance related losses of $0.8 million in the similar period a year ago.

Provision for income tax. The income tax expense was $16.8 million for quarter ended December 1, 2007 compared with income tax expense of $13.4 million for the similar period a year ago. The estimated annual effective tax rate for fiscal year 2008 is 37.8%, compared to last year rate of 38.3%. In the current quarter taxes were provided for at a rate of 42% to to adjust to this annual effective tax rate of 37.8%.

Net income. Net income amounted to $23.2 million for the current fiscal quarter compared $11.7 million for the similar period a year ago. The increase in net income of $11.5 million is due primarily to improved markup on new purchases and decreases in depreciation expense, selling and administrative expense and interest expense offset in part by lower other revenue, by other revenue income and an increase in impairment charges.

Adjusted EBITDA. Adjusted EBITDA in the current fiscal quarter was $124.3 million compared with last year's second quarter of $116 million. The increase in adjusted EBITDA is a result of the Company generating $11.5 million increase in net income for the quarter compared with last year's second fiscal quarter. This was partially offset by an add back related to the Company's merger related cost of $3.9 million In the three-month period ended December 2, 2006. For the current quarter the Company did not have any add backs for merger related costs.

Store growth. During the three-months ending December 1, 2007, the Company opened 10 Burlington Coat Factory stores. As of December 1, 2007 the Company operated 394 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. Good morning, everyone. During today's call I will provided specific comments regarding our performance during the second quarter and the more general comments about the state of our business. During the second fiscal quarter of 2008 comp store sales were down 8%, were attributed our soft sales primarily to unseasonably warm weather during the first two months of the quarter, reduced consumer demand caused by tighter credit markets and higher fuel prices throughout the quarter and some out-of-stock issues in our baby and men's divisions; however, our sales in November were more favorable as the weather turned cooler.

Now some general comments about our business. We've been strengthening our management team with new additions and leveraging existing talent. Our management team is working together to develop strategies to insure our business is well positioned for long-term growth. During the transition and leadership of our merchandising division, we did experience some distraction to our business. Now that Jack is on board, he is working aggressively to strengthening the merchandise team in order to improve comp performance.

During this fiscal year our management team has continued to improve upon our historical excellence in expense management. We have reduced expenses in our store operations and supply chain by leveraging efficiencies and streamlining work flows. In particular we have continued to reduce freight costs by moving even more of our inventory through our distribution centers. We have significantly exceeded our original goal. This reduction in freight cost coupled with improved negotiation with our suppliers has aloud the Company to maintain and improve the Company to maintain and improve margins despite soft sales.

We have made and will continue to make investments in people, infrastructure and our stores. To strengthen our infrastructure we're implementing a business intellegence tool to improve the quality of information that our management team receives. We're in the process of refining and improving our existing information technology systems that support our finance through operation and merchandise areas. In our stores we have greatly improved our in-store marketing with banners and signs. This spring we are displaying large fresh colorful banners featuring men's, ladies and children's trend right fashions to improve the customer's in-store shopping experience. In our Real Estate area we are focussed on refining our Real Estate strategy to better prioritize potential locations in our target markets, as a result we are targeting to open over 40 new stores in fiscal 2009.

I'm excited about the Company's future growth. I would like to personally thank all of our employees for their dedication and commitment to excellence and at this time, I would like to turn the call over to Jack Moore.

Thank you, Mark. Good morning everyone. In addition to Mark's comments I would like to provide some specific color about our second quarter performance. First the largest issue that impacted our business in the second quarter was the unseasonably warm weather that we experienced in September and October. During these months, our family coat business and other cold-weather related apparel represented over half of the drop in our comparative store sales. Since our coat business is a major traffic driver, the unseasonably warm fall weather also impacted sales in our other product categories.

Second, like other retailers we are experienced a slow-down in our business due to reduced consumer demand. Third, as we previously stated, one of our major initiatives is to improve our customer's overall shopping experience. We have heard from our customers that are stores are overcrowded with merchandise which makes it difficult to navigate our stores. To improve the customer experience we've been reducing inventory levels. This reduction in inventory has adversely impacted not all, but a few of our businesses. We have identified and started to address this issue, inventories are improving and we plan to be at the proper level sometime in the spring season. As Mark noted, we're managing the business with a long-term view. We continue to focus on the following - - number one, building our teams to add talent to specific areas of the Company. As an example, we recently hired a Senior Vice President of Planning and Allocation. This person has extensive experience in this discipline and will be very valuable in building this key function. We have an experienced merchandise team and we're looking to augment this team. We're currently looking to add seasoned and accomplished merchants to our buying organization.

Number two, executing against our core business model which which has deliver great brands and every day great values. Today's retail environment creates challenges but also presents opportunities. We are adding depth in key brands. We are focused on delivering every day value and taking advantage of great opportunistic buys that are frequently presenting themselves in this type of environment.

Number three providing additional analytical tools for the team. We're investing in technology, we're working hard to standardize improve existing processes and we're strengthening our overall planning and allocation teams. We believe that technology is very important lever. Technology helps drive our low cost culture and enables us to make quicker and more focused decisions. We want to make our processes simple and quick for our business owners.

Number four, creating meaningful marketing messages to our core customers to drive traffic to the stores. We are adding more print vehicles both direct mail and inserts and we are analyzing our marketing strategy to understand what our customers are hearing and responding to. From the learnings we plan to improve upon our current marketing plan.

During this challenging retail environment I'm proud of our team. They've worked very hard. Their responding and managing the business and they're focused on the core business principals. I also appreciate the support of our vendor community who continue to strengthen our key vendor relationships, they are excited about our growth and they're working with us as we change some of our supply chain practices that drive efficiencies and profitability.. With those comments, I'm going to conclude our prepared remarks. Jose, we're ready to begin the Q&A.

Thank you. (OPERATOR INSTRUCTIONS) One moment for the first question. And our first question comes from the line of Reade Kem of Merrill Lynch. Please proceed with your question.

Thanks. Good morning. I was hoping you would help understand the gross margin improvement you posted in the quarter a little bit more in terms of magnitude, how much of it came from the supply chain efforts, how much of it came from a better markup and was the product markup driven by just a lot of product on the market or just your usual sourcing practices, if you could just elaborate on that and I have a couple of others.

Reade, we do not divulge how much is supply chain versus negotiation with the vendors. I would tell you both is very significant. The negotiation with the vendors is more of an output of slightly narrowing our vendor base and growing with key vendors and therefore getting a better cost and on the supply chain side of it, as Mark stated, moving from mostly a drop ship model to a D.C. driven model has helped us significantly.

And I guess on the second part, is that an improvement that we should expect to continue to underpin gross margin even if your sales trend remains a little bit weak this year, given the environment?

At least short-term, yes. In today's environment, there are more opportunities presenting themselves. If we do a good job picking and choosing which opportunities and negotiating them, I think we should be able to deliver short-term some good margins on those. You never know what the final margin will be until you sell it. But this environment is one that presents challenges is definitely presenting some opportunities.

Anything I can add, Reade, on the supply chain side there are additional efficiencies that we're looking to gain. We cannot tell you when those will be rolled out but sometime during the course of next year we're hoping see some of that benefit but there are additional new supply chain efficiencies that weren't originally on the original list.

Okay. And then just another question just on the sales. If you could help us understand a little bit more of what was going on in terms of the categories. I understand the winter categories were weak because of weather but if you could talk about maybe your home business, the baby business areas where you may have seen some pockets of strength and were comps negative even in November?

Well to answer your last question first, we're not disclosing specifically what happened in November. Mark stated that it was better as the weather got cooler. Besides talking about the reduced inventory levels in our men's and baby business, we're not talking about any specific categories for competitive reasons. I think you can understand that. And basically both in the men's and baby's area, the reason we're highlighting those issues is they they are in eternally created not consumer created. We believe lowering the stock too much created out of stocks and therefore hurt our sales.

I think to take away there, Reade is that in those two divisions where Jack has mentioned and we focused on certain product within those two categories, those are fixable events, those are things that we look to remedy and are in the process of doing.

Okay. Just one more. I'll let it go but on the categories, I mean one of things that should be more resilient about your business is just maybe the trade down effect and I was just wondering it there were any categories that you may have seen customers that were coming in, it doesn't seem like it given the negative comp, but if you can elaborate, that would be helpful.

We had several categories, I can't be specific, that had very nice comps and they were categories if we had the right content, we did very well, if we had the right depth we did very well. And again in men's and babies that was a internal issue based upon, allowing the inventories to get a little bit too low.

Okay, thanks.

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

Great. I have got a couple questions. My first, I know you tend to be every day low price retailer. I'm just wondering, one if that hurt your comps in this past quarter and two, I'm looking at your website, you're running some pretty aggressive sales, if you've changed anything going forward given the current environment?

No we haven't changed anything as it related to the current environment. We feel our every day pricing model is very strong and, again, our customers expect us to have great prices when they come in and if we have great content that matches that we're fine. I'm not quite sure what you are referring to on the website, Grant.

There may be some clearance end of season product which we typically do every year at the end of each season that you may be referring to, but that's a normal operating mode that has been going for 20, 25 years.

So not changing your promotional stands. Do you feel like that hurt the comps?

Absolutely not. Anything to the contrary. We firmly still believe in the every day low price and as Jack had stated, it registers and we get recognition for that and it's a question of having the best brands and the values that are available and to be frank with you, in this marketplace, you saw the results from retailers and hear the same that we hear I'm sure, it creates that much more opportunities for us so we're aggressively scanning the marketplace looking for those opportunities for values.

Great. Maybe you can give us a little bit more color on the inventory flow issues you said you hope to be back up to normal by mid spring. What is causing that. Is that a systems problem that you cannot get your finger on what your trying to get out to the stores in time or just give us a little bit more understanding of what the problem is?

Sure, Grant. As we've stated earlier, we have received feedback from our customers that the store is a little crowded. We're reducing inventories to make it more shoppable. As we reduce inventories we went a little bit too far in a couple of areas so it's management execution. As you know, based upon our supply chain those decisions were made a while ago and you see the results of it several months after the decision's made and it takes several months to course correct those decisions and it's looking very good by mid spring. So we're that at confident that, at least from the amount of inventory, we've addressed the issue now, we've done a good job on what we've bought then we'll get even more sales increase.

Okay. And my last question, last year, if you can just help us understand how we should think about tax cash obligations this year. I think you paid out about $38 million last year. How do we look at that going forward?

Well, we are a cash taxpayer. We'll pay cash taxes again this year. And obviously it will be contingent upon how much taxable income we generate this year.

So is it just 40% of pretax less the amortization?

No. It will be -- if you look at our effective annual rate of 38%, which is Federal and State tax combined; it will be that rate times whatever our taxable income is. There is a big difference between book income and taxable income because of all the timing difference from the merger, the step up in the assets and the fair value of the assets that put on the books create significant timing differences but I think it's fair to say they'll be comparable to the tax cash that's you've seen last year.

Okay. That's helpful. Thank you.

Our next question comes from the line of Karru Martinson of Deutsche Bank. Please proceed with your question.

Good morning. I was wondering if we could get more color on the comparable sales through the quarter in terms of a monthly breakout.

We do not provide that and a appreciate you asking but for consistency reasons we haven't done that for quite a while and we continue to just talk about quarterly performance.

In terms of the quarter, I'm assuming that with the colder weather we did see trends though turn positive at the end and a pickup in sales and comps though, correct.

Well we said we had an improved November as the weather got colder.

I think if anybody followed our business, when the cold weather typically comes in, we do see a lift and that did take place and a lot of that cold weather product that we refer to that did not happen in September and October.

In terms of the 40-new store openings that your looking for is that with the 24 acquired locations from new stores in Value City or is that on top of that?

We're actually factoring 13 of the Value Cities in the fall of '08. We have 12 deals done aside from those 13. So some of those Value Cities are in that quantity and some may still fall out of that fall into another following year. So the product of the Value City deals are ongoing to some extent and we cannot assure or guarantees which ones will fall into what fiscal year, yet although we're working aggressively to finish these deals. We finished the deal with Value City but now we have to finish all these other covenant issues and restrictions that apply too each of the landlords in these difference states. The short answer is, yes, it's included but some again may fall into one fiscal year or even the following fiscal year.

In terms of the CapEx spend, was that build out going to be covered by the landlord allowances in general and also in terms of how should we look at maintenance capital expenditure going forward.

Well two questions. To answer the first question, we have adjusted our CapEx for the year. We expect to spend somewhere around 73, $74 million. That's or projection. And that includes any of the Value City stores that we will purchase. As far as maintenance CapEx, we would expect to continue to spend what we spend historically in CapEx in terms of remodels and repair and maintenance as the stores.

And just lastly, you mentioned you are experiencing the slowdown in consumer demand like everyone else. I was wondering, what you've seen in terms of the competitive response and how is the sales trends have been going forward?

Well I think every year during this time frame prior to Christmas, everybody gets very aggressive. That's been happening for years. I don't think we were any different and I expect it to continue when consumer demand slows down it's all about market share and the retailer who does the best job executing gets the market share. I see the environment very aggressive and whether it's good times or bad times, I always see that, so I do not think it's going to slow down.

Thank you very much, guys.

Our next question comes from the line of Emily Shanks of Lehman Brothers. Please proceed.

Good morning. This is Jason Trujillo calling for Emily Shanks. Just a few questions. Particularly with regard to supply trend initiatives. As far as the freight savings goes, have we seen the last of that roll-off in the last quarter or is there more of that to come in future quarters?

I'm sorry, you're going to have to repeat that. You broke up.

Oh, sorry about that. You can hear me okay now?

Yes.

With regard to the supply chain initiatives particularly with the savings from the freight initiative, have we seen the last of that roll off in this prior quarter or do we have more to see in the future quarters?

No. I mean we expect it to be ongoing.

Okay.

There are new initiatives that we are underway with and these are still in the infancy stages, we haven't rolled these out that I'm referring to now, that we believe more will be create add what we expected. The they were driven around the driving rate from the drop-ship modes. Those were around 70% of the inventory, we're exceeding 80% of the inventory at this time. That's the benefit we'll continue to see at least in the near quarters. Beyond that, we're working on new initiatives which we're not outlining today but I'm giving you some insight to it that we believe we should have some future improvements but those are yet to come.

Great. Thank you. That's very helpful. And then finally, with regard to CapEx, what is going to be the gross CapEx number, not including the landlord allowances?

The gross CapEx will be right around 100 to $110 million in that range.

Okay, great. Thank you very much.

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

Good morning, guys and great job in what was a very difficult environment last quarter. I know we've kind of talked about it on the last conference call, the last couple of conference calls, as far as the discount notes, I know the environment has gotten a little bit more difficult but can you give me an idea of how you're looking at those as we approach cash pay in October?

In April, the notes will turn to cash pay and we expect to begin paying cash interest on the notes.

Okay. There is no kind of -- we kind of talked loosely about the -- possibly a situation where you could get those taken out but that's not on the table right now?

There is no plan to do that, no.

Okay. Understood. Now as far as marketing, that will be your focus going forward. Can we expect that along with that being a focus, a significant increase in spend or do you think you can achieve it without that significant increase?

I don't believe we need to significantly increase the spend. As we stated, we are going through a very extensive review. If we believe at the end of the review we need to spend more, we will communicate it to people but at this particular point we are making changes within the current budget and percent to sales historically that we've run at. We think there is more efficiencies within the dollars. And as I alluded to in my comments, we're spending more time trying to clearly understand what our customer is thinking about it us and how to get that core customer to visit our store more often.

Sure. Okay. Most of my other question have been answered. Thanks, guys.

Sure.

Our next question comes from the line of Ted Bernstein of UBS Securities. Please proceed with your question.

Good morning. I was wondering on the reduction of employee incentives, can you give us more color on that and is it having any effect on sales and customer service.

To answer the first part of the question is that's just the normal process we go through at the end of every quarter to look at our employee incentive accruals across the board versus our progress toward the individual goals that those support and our projections for the rest of the years and as has been the case historically we make adjustments as necessary based upon where we anticipate the payouts are ultimately going to come out at the end of each of those plan years. I don't understand the last part of your question, could you clarify that?

I guess maybe if you could be a little bit more specific on exactly what the employee incentives are? Is it commissions or bonuses?

This really covers all of the employee incentives and getting into the details of the various plans, because we have numerous plans at corporate, stores, merchandising plans that are numerous plans that are behind the adjustments that we've made both this year and last year and we do not want to get into the details of those.

Okay. I understand that the warm weather in September and October accounted for about half of the drop in same store sales. What accounted for the other half? Was it decreased traffic? Decreased ticket?

We do believe there has been a reduction in traffic. But when warm weather happens, especially when you're core competency is coats and you're a coat authority, that business typically tends to either raise the sales of the other classifications or hurts them. And while specifically we're talking about coats and warm weather classifications we also alluded to the fact it hurt the entire store because it reduced traffic significantly.

Okay. And finally, in terms of the Holiday Season and the current environment, I appreciate the fact that you probably aren't willing to give too much color but if could you give us anything beyond just the general slowdown in consumer spending, that would be helpful?

Yes, Ted, I don't think we can. Unfortunate the call is through the first part of December and it would have to wait until the next call.

We still cannot talk about sales or projections but you know, as I said earlier, the uptick of this is that typically when this happens, there tends to be a major reaction in the marketplace and if you do not talk to vendors then you certainly would know that the vendors are certainly concerned. So the bottom line to that is it creates lots of opportunities for us so we're aggressively pursuing those opportunities is the best way y I can describe to you is our reaction to what's going on, not walking away from them and reacting the way some of the other retailers may be reacting.

So specifically the measures you can take to address or partially address the current environment are through negotiations with vendors.

Yes. Negotiation with vendors, better buys, more goods, better brands, better buys.

Thank you very much.

Our next question comes from the line of Carla Casella of JPMorgan. Please proceed with your question.

Hi. I have another question on inventory. Do you sell any of your inventory on consignment and if do you, what percentage of your total.

No. We do not sell any on consignment.

And any intention on private brands?

We have. If you walk our stores, we have a lot of merchandise that would not -- you would not consider to be highly recognizable brands. We're under a current review to determine how much we have of that product, could we consolidate it. I do think there is a price for private brands in our portfolio. It should not be a majority of our inventory. We need to be 80% plus national, highly recognizable brands.

Okay. Great. And in terms of your store leases, are they all individual leases or do you have a master lease agreement?

Our leases are all individual leases.

Okay. Great. Thank you.

We have 43 stores that are company-owned stores and the balance are leased stores, all individual leases.

Okay. Great. Thank you. That's all I have.

Thank you.

Thank you. Our next question comes from the line of Karen Eltrich of Goldman Sachs. Please proceed with your question.

Thank you. As you ramp up your new store development, maybe you can give us an update of how stores opened in the last 12 months are performing relative to the average and also what you learning in this process as again you build this pipeline in terms of how to advertise a new store opening, what kind of location seem to be ideal with relative to demographics, how you specialize in merchandising mix and the size of the store.

Well that was a long-loaded question.

Yes. Sorry.

That's quite all right. As far as the first part, as to how they're doing. Everything is relative. We opened this stores this last fall at various time through September, October and maybe a couple in November. We're relatively happy, how is that. The best I can describe it to you. And even with the understanding that in some of the marketplaces where some of the pain was being felt by many of us retailers I still think we excel fairly well. But like any stores, there is a scale, there is some at the bottom and a bulk in the middle and a part in the upper tier. It was a typical scale so I cannot say it was unusual other than the fact in September and October we lost, as he said earlier, in our main business, it wouldn't change in our new stores, a lot of the foot traffic caused by the warm weather. So those things we believe did slow us down in some of those new openings. But if we back that out and look at the rest of the chain, I would say it's pretty typical. What was your second question?

Sure. In terms of the learning curve and best practices if you do these new store openings and mistakes made and how to advertise and what location you're looking for?

There is not a whole change in terms of how we promote. There is a bunch of discretive revenue market and depending on the market and you got to realize we're a big TV advertising so we're buying TV and in essence we project sales in each of these markets. We have some tools that's help us project the sales. We're projecting the tools. I think we are getting better at it, we're not perfect but getting better. But in terms of desensitize, there are certain things we look at, which I don't divulge during this meeting but we look at our customer needs and how we feel those stores will perform and I would say we've refined it. I can tell you we've increased the pipeline by in essence going to a bigger broker network and we've hired somebody else in-house in addition to the staff and we're doing things more focused in terms of prioritizing that list. WE have identified X amount of locations, I would not give you that number, it's a large number, it's in the hundreds, of identifiable locations that we should target. Now it is a question of prioritizing, it is like anything else, when you go back to each of these markets, although you will end up prioritizing them, while a lot is based on historical performance where we have stores already. That we know we do extremely well next to or in the market place with. And it's all a question of whether there is available real estate in those market when's we go to that market and can we afford that real estate. There is a lot of factors that affect weather or not we hit that priority list in whether we want to open the stores but this do jump around and we're getting much better at it and we're much happier with the pipeline prior to the sale of the Company.

Great. Thank you very much and final question. For the upgrades of the technology, what is the magnitude of cost and the timing when you think you would be done of having it implemented?

There is a number of initiatives underway now and with everything else, we do not give projections on that. Given the newness of some of the initiatives there, their certainly more into the later years than the early years but the CapEx that is going to be incurred in the current fiscal year is in the projection that we provided.

Let me give you a little bit of color, we're not giving you the numbers obviously, but the business intelligence toll that we described, we're utilizing the other functions of the business, it clearly, we believe, will help us and aid us to manage the business with more analytical tools so we're viewing this as a big lift for us, but again this is something we're just at the infancy stage of implementing this right now so we're not ready to tell you when that will be in effect. But there is other things that we've done and finance we put a tool in called [Cognosce] that's in its early stages so it's another reporting tool. We have a task management software that was deployed and that was rolled out in a large group of the stores and has been extremely effective and it's a tool that helps us manage and audit and in essence prioritize what tasks need to be done in the stores. We've seen huge efficiencies and without a doubt that has created labor savings as a result. We intend to do the same on the front end of the store. We originally deployed this just in the back end of the store. So now everything that takes place on the selling floor of the store, including the cash register area, in all those area's we will roll out those new standard operating procedures and hope to see gains there. We planning a label scheduling system down the road and so there are a lot of tools that or technology tools that will help us manage the business and make us that much better of a retailer.

Great. Thank you very much.

Sure.

Thank you. Our next question comes from the line of Colleen [Burns] of Oppenheimer. Please proceed with your question.

Hi. Good morning. Regarding inventory, you touched on your end of season clearance inventories. Can you comment on where you stand on them today? Are they higher than last year, in line with last year?

Our inventories are lower than last year. We're cleaner than last year. I'm pleased with how the merchants have managed inventory flow in the last few months. I believe we're on the right path.

That's great. And secondly have you seen improvement shrink in the first quarter and was that a benefit to gross margin in the second quarter.

We do not evaluate shrink in the end of the year. We take a physical inventory once a year at the end of the fiscal year. So we're booking an estimated number based on last year's review and we'll update that in the fourth quarter.

Oh, okay. And then just lastly, I know you made the $11 million payment on the term loan this quarter and that takes care of your mandatory quarterly payments over the next couple of quarters but do you still plan to use free cash flow to repay revolver borrowings over the remainder of the year and does that remain your top priority of free cash flow.

Yes. We will continue to use any available cash to reduce the borrowings on the ABL which currently we're out of the ABL right now and we'll go back in at sometime during the year as we continue to build inventory for Easter, but the goal is to delever the business and we'll do it on an interim business with the ABL and then there will be a required cash flow sweep on the term loan at the end of the year and that payment will be made in August.

Okay great. That's it for me. Thanks a lot.

Thank you. Our next question comes from the line of Josh [Givelber] of [Nomura].

Just on the 40 stores, was that 2008 or 2009 fiscal year.

Well we opened them in fall of '08 but it's fiscal 2009. They start opening in fall of '08 but they're actually in fiscal '09.

How many stores are you opening this year.

We opened 15 in the fall and we plan to open another five this spring so 20 total stores in the total fiscal year.

And the CapEx number that you gave to Karru , was that for 2009 or

That's for the current year, 2008.

Oh, okay. And you said that the maintenance spend is about what it's always been. But what has is been? I just don't know.

It's been in that range. I mean in earlier we've spent more because we've -- we built distribution centers and acquired stores and so there have been other reasons why CapEx has been hirer than higher than that but it's driven by the number of stores that you open. If you're going to open 20 stores in a year or 40 stores, clearly that will impact your CapEx.

So I guess what I'm asking is you if you didn't open any stores what would CapEx be?

What would CapEx be excluding store openings?

That's correct.

You would spend probably in the neighborhood of 10 to $20 million in maintenance CapEx, remodeling and fixing stores, and then there would be home office, warehouse and computer requirements and those are -- those can vary based on the projects that you have and to the extent you're going to do different things.

Great. Thanks a lot.

We have a follow-up question from the line of Karru Martinson of Deutsche Bank. Please proceed with your question.

Just in a kind of a big picture, when do we Jack's finger print on the store. Were you happy with the inventories you had through the Holiday Season.

Typically when you come in as the head merchant, it takes a couple of months, but I do believe that some of the decisions I started making in June and July had some impact in the preholiday period. As time goes on it becomes -- everything is mine. So I do not try to put a stake in the sand that says spring season is mine and fall season wasn't mine, there are things that we did in the fall season that I drove and had positive impact, there are things that we missed and I was involved in that decision. So I do believe though, this is my watch now and going forward, it's 100% my watch.

And if we can think back to the last recession, through this quarter, has the consumer been reacting any differently this time around than what what you've seen in the past?

It's hard to answer that question. I would say that December in general seemed to act a little differently than things that we would have remembered at least on my behalf over the years. Jack can answer from a his perspective and it was unusual to see some activity and if you listen to the newscaster and listen to all of the periodicals and reading materials they were telling everybody how bad the business was and they shouldn't even wait for the sales and the closer it got to Christmas there would be better buys so there was a lot of activity, a lot of noise that I call it but how much effect that had, I don't know. I couldn't tell you.

And one thing to add, if you looked at everybody's comp announcements by the month of December, this was by far one of the toughest December in a number of years and in past years when we've had, in my opinion, down ticks, typically December wasn't as difficult this year and the down ticks kind of impacted other parts of the year. We're in the early parts of this too a little bit so a lot remains to be seen but I think it is important to characterize that the consumer is concerned and, again, if we are going to grow our business we have to execute and it's about market share.

Just on the December comps, when you looked at some of your competitors they were ahead of expectations in terms of T.J. Maxx, Marshal's, the Ross stores and so forth. I think someone else asked it earlier, are you seeing the customer coming down and trading out of that mid market to every day low price retailer like yourselves.

Any time business gets tough out there, typically the value players do better. I think that's why you saw the TJs, the Ross, the Costco's of the world did extremely well. People who have a very strong value proposition as a part of their strategy do very well. We're a little bit off price, we are a little bit value department store, our box is a little bit different so if you look at the department store sector you saw them probably get as significantly hit as they have in quite a few years, so again I think, this has been happening for several months, I think we saw a big message sent to all of us in the month of December that the consumer says basically if you want my dollar you have to work harder for it and give me more value and more fashion and more quality and again I think it's all about market share.

Thank you very much, guys.

And our next question comes from the line of Chris [Timchek] of do you Dune Capital. Please proceed with your question.

Hi, it's actually Guy Baron from Dune Capital. How are you?

Good.

I want to talk about some questions that have been touched upon before. Number one, on your senior discount notes to the extent that you generate free cash flow, which you are, are you restricted in any way from paying down, from redeeming those senior discounts notes using either free cash flow or balance sheet cash of which you have about $50 million. Are there any restrictions on that?

There are restrictions in the bank agreements. We would have to go and negotiate permission to pay out those notes.

Okay. And then my next question is, this relates to your cash tax situation. You have a pretty -- a pretty big deferred tax liability on your balance sheet. You can just talk about -- just talk to how that was created and what effect that has on your cash flow and your cash taxes?

Yes, the bulk of that deferred tax liability was a result of the purchase accounting that we did. We had a significant step up in assets when we did the purchase accounting and the offset to that was the deferred tax liability that we set up. And that will be released out as the assets are depreciated and amortized.

So that deferred tax liability is basically depreciated, it goes down as you use up -- I guess my question is does that mean that you -- your cash taxes are lower than your book taxes in that you're using up the deferred tax liability?

Yes. We will pay -- we will pay more taxes going forward as -- as years roll off and as those stepped-up assets are amortized and depreciation. We'll get book deductions but we would not get tax deductions for those assets.

Okay. I understand. Thank you.

We have time for one more question.

Ladies and gentlemen, as a reminder, to register for a question, press a one followed by the four.

Okay. If there is no more questions we'll conclude this conference call.

We do have a question coming from the line of Deanka [Carvello] of Goldman Sachs. Please proceed with your question.

Yes, hi. A quick question about the accounts payable on the balance sheet. It seems somewhat higher than unusual if you look at it from a days payable perspective. I was wondering if there was an answer to that. If you look at it relative to Q1 and Q4 and then also if you look at relative to Q2 of last year. I was wondering if there was a reason for that.

I think there hasn't been any significant difference in our terms with our vendors. They remain pretty consistent. I think the only difference might have been just in terms of sometimes the inventory flow may from period to period, you may see just a difference in just that payable inventory relationship. But there's been no change in terms.

Okay. Thank you.

And there are no further questions at this time.

Okay. Great. So thank you everybody for participating in our conference call and we look forward to hearing from you soon.

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