Burlington Stores Inc (BURL) 2008 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Burlington Coat Factory third fiscal 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 today Friday April 18, 2008. It is now my pleasure to turn the conference over to Mr. Robert LaPenta, Vice President and Treasurer. Please go ahead, sir.

Thank you, Alex, and good morning everyone. We appreciate everyone's participation in this morning's conference call to discuss Burlington Coat Factory's third quarter 2008 operating results. I'm 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 Weyhrich, our Chief Financial Officer.

We will begin our call with a review of our third-quarter results followed by a discussion of the business conditions and business performance from Mark Nesci and Jack Moore. After the prepared remarks this group will be available to answer 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 everyone that information provided on this call is primarily related to the Company's results of operations for the fiscal quarter ended March 1, 2008. 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.

Now let's go to the quarter. Net sales, during the three months ended March 1, 2008 net sales decreased $0.2 million compared with the three months ended March 3, 2007. The primary reason for the decrease is that the Company's comparative store (technical difficulty) declined 6% in the quarter related primarily to weakened consumer demand and to a lesser extent in some limited divisions some temporary out of stock issues. The decrease in comparative store sales were partly offset by 19 new Burlington Coat Factory stores which opened during fiscal 2008 and contributed an additional $36.7 million to net sales for the current quarter.

Other revenue, other revenue which consists primarily of rental income from leased departments, sublease rental income, layaway, alteration and other service charges decreased to $8.1 million in the current period from $10.8 million a year ago. The decrease is primarily related to a decrease in layaway alteration and dormancy in other service fees of $1.9 million and a decrease of $0.7 million related to rental income from leased departments that have been converted to Company run departments.

Cost of sales. Cost of sales decreased $9.9 million or 1.6% for the current fiscal quarter compared with the third quarter a year ago. The dollar decrease in cost of sales was due to lower initial costs on purchases. Cost of sales as a percentage of net sales decreased to 62% in the current fiscal quarter compared with 63% in the similar quarter a year ago. The percentage decrease in cost of sales reflects improved markup on purchases during the quarter.

Selling and administrative expenses. Selling and administrative expenses increased $17.2 million or 6.7% compared with the prior year three-month period. The increase in selling and administrative expenses is due to the reversal of $9.4 million of accruals in last year's third fiscal quarter related to certain employee incentives. An increase of $5.5 million in occupancy related accounts due to an increase in the number of stores and operation during the current quarter compared to prior year's quarter and an increase of $2.6 million related to advertising expenses.

The Company made a similar reversal of certain employee incentives in this year's second fiscal quarter 2008. As a percentage of net sales, selling and administrative expenses were 27.7% in the current quarter compared with 26% in the prior years quarter.

Depreciation. Depreciation expense amounted to $32.4 million in the current quarter compared with $34.2 million in the prior year's comparative quarter. A decrease of $1.8 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 $10.8 million and $10.7 million, respectively, for fiscal 2008 third quarter and fiscal 2007 third quarter.

Impairment charges. The Company recorded $0.5 million in impairment charges this quarter. There were no impairment charges in last year's third quarter. The impairment charges relate to long life assets at six of the Company stores. The impairment charge for this quarter is the result of a decrease in the results of operations for these six stores over the twelve-month period ended March 1, 2008 which resulted in a decrease of expected discounted cash flows below the net carrying value of the long life assets of these stores.

Interest expense. Interest expense was $29.9 million and $31.7 million, respectively for this fiscal year's third quarter and the prior fiscal year's third quarter. The decrease in interest expense was the result of lower interest rates and lower average borrowings on the Company's ABL senior secured revolving facility combined with changes in the fair market value of the Company's interest rate cap agreements which are recorded in interest expense. Borrowings net of repayments related to the Company's ABL senior security secure revolving facility amounted to $2 million during the quarter. Since the buyout date, the Company has paid down approximately $150 million in debt excluding accretion.

Other income net. Other income net consists of investment income, gains and losses on disposal of assets, breakage income and other miscellaneous items. Other income net increased $4.8 million to $8 million for the current fiscal quarter. This increase is due primarily to the Company recording breakage income related to store value cards of $4.7 million during the quarter and an increase of $2.4 million of miscellaneous income which was the result of litigation settlement around debit cards. This increase was partly offset by a decrease of $2.2 million related to insurance claims that were received in the fiscal 2007 three-month period a year ago.

Income tax expense. Income tax expense was $17.1 million for the quarter ended March 1, 2008 compared with income tax expense of $15 million for the similar period a year ago. The estimated annual effective tax rate for fiscal year 2008 is 39.7% compared with last year's rate of 39.2%.

Net income. Net income amounted to $26.8 million for the current fiscal quarter compared with $31.1 million for the similar period a year ago. The decrease in net income of $4.3 million is due primarily to an increase of selling and administrative expenses offset in part by improved margin from improved initial markup and an increase in other income.

Adjusted EBITDA. Adjusted EBITDA in the current fiscal quarter was $121.3 million compared with last year's third quarter of $129.5 million. The decrease in adjusted EBITDA is primarily a result of the Company generating $4.3 million less in net income for the quarter ended March 1, 2008 compared with last year's third fiscal quarter net income of $31.1 million and a decrease in the add-back related to the Company's merger related costs of $3.9 million in the three-month period ended March 3, 2007. For the current quarter the Company did not have any add-backs for merger related costs.

Store growth. During the three months ended March 1, 2008 the Company opened four and relocated three Burlington Coat Factory stores. Additionally the Company closed two MJM Designer shoe stores. To date, the Company operates 397 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 provide a brief overview of business conditions and I'll describe some of our operating growth initiatives. Generally speaking, consumer confidence is low. Our comparative store sales decreased 6% turned up with which reflects the microeconomic pressures on our consumers from higher energy prices, tighter credit markets and a prolonged slump in the housing market.

Given these headwinds, we're managing expenses while still focusing on improving our customer experience to position us to benefit when these economic pressures ease. Consistent with our past practice of disciplined expense management, we have identified new ways to reduce costs in non-merchandise procurement and have also identified mid to longer-term opportunities to reduce supply chain and store operating costs.

We will be reworking part of our supply chain network and plan to rollout new standard operating procedures in our stores to create efficiencies. Prudent capital spending has allowed us to remain true to our growth strategy. In addition to the 19 new stores we opened this fiscal year, we're looking forward to opening our 400th store this fall. We plan to open approximately 30 new stores this fall including two stores in Puerto Rico which is a new market for us.

As I stated on previous calls, we're building a strong management team to lead the Company during this period of growth. During the quarter, we welcomed an Executive VP of stores who will help drive more consistent execution in our stores to empower our managers and store associates to focus on consumer service. We also brought in a Senior Vice President of Strategy and Finance and a Chief Information Officer who will both be pivotable in enabling the the organization to manage insightful, strategic timing and accurate decisions to drive profitable sales.

As previously mentioned, we're in the process of implementing a business intelligence tool to improve the quality of information that our management team and merchandising teams receive. We are also in the process of identifying process changes that will enhance our ability to plan the business and allocate product more precisely. We expect the foreseeable future to be challenging from a macroeconomic perspective and we're planning conservatively our inventory levels and expenditures. Nonetheless, we will continue to invest in the necessary resources to support our long-term growth strategy.

At this time, I would like to personally thank all of our employees for their dedication and commitment to excellence. I'll 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 third quarter performance. As stated earlier like most retailers the most significant issue facing all of us this past quarter was the general slowdown of the economy. We believe the consumer is being very cautious.

While we feel that our performance in the future will improve due to internal initiatives, we believe we need to approach the near-term in a very disciplined manner. We're managing our inventories well and will continue to invest in businesses that are tracking strong. At the same time we will maintain a very conservative approach to stock levels and any downtrending businesses.

The second issue that impacted our business in the third quarter was performance of our key traffic driving businesses -- the coats, outerwear and cold weather categories. While we had a good December performance in these areas come our performance in January and February was up against some very strong performances from the previous year.

Last year January and February followed a very unusually warm November and December and therefore we experienced very strong sales. This category is a significant business for us plus it impacts our ability to generate traffic. In general, our strengths were our women's sportswear businesses, accessory and shoe businesses and our youth apparel businesses. Our underperforming businesses were our home, baby depot and men's businesses.

As stated in previous conference calls, we're managing the business with a consistent point of view to deliver great brands at everyday great values. We will continue to focus on a few key priorities.

Number one, building our teams by adding talent to specific areas of the business. As Mark noted, we have added some outstanding talent to our team that will have a very positive impact on our merchandising content and store experience. Number two, executing against our core business model to deliver trend right brands at great everyday values. When we deliver the right content to the customer our results are very strong. We continue to take steps to further strengthen our planning function. We are working to refine our processes to assist us in allocating the right merchandise to the right store at the right time. And we continue to manage our inventories to ensure that we can chase great market opportunities that frequently present themselves in this type of economy.

Number three, creating meaningful marketing messages to our core (technical difficulty) drives target traffic to our stores. We are in the process of selecting a new creative media team and evaluating our media buying plant. Also we're planning on conducting some significant consumer insight studies. From these initiatives we plan on improving our brand messaging and the methods of delivering those messages while leveraging our marketing spend.

Like Mark said again, I would like to thank our team for working hard to execute the right things to drive the business. And also I would like to thank the vendor community for their continued support. With those comments, I'm going to conclude our prepared remarks. Operator, we are ready to begin the Q&A section.

(OPERATOR INSTRUCTIONS) [Reade Kem], Merrill Lynch.

Thanks for taking the call. I was curious, Mark or Jack, whether you could just discuss -- you cited some of the categories in the weather comp but if you could maybe just comparing yourself to some of the other discount retailers out there why your comp was down? Was it really the weather orientation or is it -- it doesn't sound like it's so much the (inaudible) stocks you had, it may be just the fact you are more geared towards outerwear or maybe it has to do with your specific consumer. If you could just talk about that?

In January and February it was definitely the weather. We are Burlington Coat Factory, we sell a lot of coats, a lot of cold weather goods and we had a normal January and February as far as weather but it was much colder a year ago and because of the previous months prior to last year it was much warmer we saw a lot of pent-up consumer demand a year ago. Our out of stocks are improving, we're very pleased with how our merchants are managing the business. And we are building some nice momentum.

On the out of stocks when do think that will be completely past and was that in the home and baby areas that you cited as being a little bit weaker?

Like I said in previous conference calls, we did have out of stocks in our baby depot business. Those will be basically a non-issue as we speak. The home business as many retailers who are reporting home businesses is generally very tough. It is lagging our average but we have got some exciting things starting to happen so we're going to keep on working on it.

Back to your consumer, do you think there is something different about your consumer compared to other discounters? Maybe it's a lower income consumer that may be -- meaning that they're under more pressure?

I think the consumer is definitely under more pressure. You've got to remember we are a little bit of a hybrid between the value department stores and the off-price segment. And I have got plenty of categories where we buy the right merchandise and it's the right brands at great values. We have done extremely well. In other categories, if I don't have the right merchandise I don't do quite as well. But I do think the consumer is under a lot of pressure right now. But (multiple speakers) this kind of environment gives us a lot of opportunities to do the right thing. So there's a lot of good market goods out there to get.

Last one for me. I was just curious, you cited in your Q 21 new leases outside of the Value City stores. And I was just wondering what you think the capacity is for the Company to maybe even take that up further as you see other locations becoming available or other retailers maybe even going out of business -- any thoughts there?

Yes, I mean as a rule of thumb, historically, we (technical difficulty) advantage when those opportunities come about. We will continue to look at them. We are absolutely screening them to make sure that they are the right locations. We continue to find that there's lots of opportunities are coming about that -- there seems to be a lot more noise in the real estate market today that seems new opportunities are developing as we speak.

But to be frank with you, we're going to continue to be very prudent. We feel confident that we do want to open these 30 stores. Obviously, we actually plan to target that we could do more than 30 this year. That's still conceivable. There's still spring deals that are rolling in that are not completed yet. So it could rise but again we're going to be very prudent about it.

Grant Jordan, Wachovia Securities.

My first question -- it looks like on the card breakage there is about $4.7 million of a gain in the quarter that was added to EBITDA. My thinking about that (inaudible) that that's kind of a onetime item?

It's not a onetime item. It was an initial pickup from the liabilities that were transferred to the [new store value card corporation] so essentially what happened previously was the value cards were issued in 44 states and we would record dormancy income in the states that would allow us to do that. And since we have now restructured that and we're issuing all the cards out of one store where gift cards are not escheatable, we identified what that breakage income piece is and accrue that as we issue the cards. So we will continue to have breakage income and it will be consistent probably with what we recorded in dormancy income in the past. Now to the extent the sale of value cards goes up that number could go up in the future.

So, this quarter, I mean am I thinking about it right that maybe there was like $2 million of additional income in that number that you would not have normally recognized?

When you say in this quarter -- in fiscal quarter three?

Yes, the one we are (multiple speakers)

Yes, there was a onetime pick-up from the initial transfer. But you know that was offset by the decrease in dormancy (technical difficulty) that we did not report. But net net there was a bigger pick-up as a result of the change in this quarter only.

Right. The second question kind of talking about your consumer on the competitive landscape, clearly the end of last year and what I suspect going into this year it seems that the mid-tier department stores have become very promotional in some ways maybe decreasing the value between Burlington Coat and a traditional mid-tier department store. Can you talk about if you've seen anything specific and how your consumers are reacting to the very promotional nature of department stores and kind of how you compete in that sort of environment?

I watch the cadence of our competition really quite closely. And candidly I don't think they are doing anything more than what they have done in the past because they do a lot already especially the high-low guys. I will tell you there's more inventory in those stores and therefore there's more inventory offered at a lower value which is a good thing for the consumer.

And again when we're competing against people who do the the high-low rhythm versus an everyday pricing model we just have to make sure we are priced extremely well the first time when the product goes into the store. Again, like I said earlier where we have done it well we've got the right brands and the right trends at the right price our business is strong and where we don't have the perfect content it's a little bit weaker. It is a definite market share battle out there.

As you think about that, how do you -- is there anything that you do different as that market -- as I look at the environment it's certainly like you said -- there's a lot of inventory on the floors. I think that cadence should continue to be pretty difficult throughout the year. Is there a way -- is it just a matter of trying to buy inventory at it cheaper level therefore your prices are cheaper relative to the other guys?

That's fair. The opportunities are abundant right now and Jack's team is doing a (inaudible) job of acquiring those purchases. And it is pricing that product accordingly to the market and obviously we shop all of our competition literally weekly. And to the extent that we do that a lot of it is on the buy side. Those opportunities are available to us.

My last question -- you have talked for the last couple of quarters about a lot of the systems initiatives and how you believe that should be a positive driver over the long-term. Can you just give us an idea in terms of where you are maybe percentagewise in terms of getting all these systems in place so that you can recognize the benefits? Are you 20% of the way rolled out?

As it relates to the BI tools that we're putting in, those are going as planned and I think that is the system that is going to give us the biggest benefit here in the next fiscal year. That tool is looking to roll out in the second quarter of next year and that will be the initial rollout which will give us much more granular and much quicker information for the merchants to make decisions on. There will be a ramp-up period over a quarter or so until we have full implementation. Mark do want to comment on the other systems?

Sure, I mean in the supply chain side for example, you know we are increasing our cube utilization of our trucks. These all creates obviously efficiencies and savings. That is rolling out currently as we speak and will continue to ramp. We are increasing our deconsolidation lanes again increasing efficiencies and that will begin roughly in another quarter and start ramping. We already commenced on our up Pac-Rim consolidation overseas which is our Pacific Rim consolidation to get better utilization on overseas rate freight inbound --begun.

So there's lots of these initiatives that the Company has identified and done an extremely good job of identifying them and now we are in the process of implementing Obviously.So the fruits of the labor will be earned but again they will be ramping throughout the coming year end in '09.

So a lot of that should start to provide some sort of impact in fiscal '09?

We should absolutely see some positive results in '09 from some of these initiatives.

Karru Martinson, Deutsche Bank.

I was wondering about the sustainability of gross margins here as you described (technical difficulty) battle out there.

There is more headwind and pricing pressure currently than probably we have experienced for several years. It doesn't necessarily mean margins have to go down. You don't really know that until you kind of get into the next season and you determine exactly what the impact is going to be on your markdown dollars. We have got a plan in place to keep our inventories conservative, to stay more liquid.

If we do that well, basically in-season buys typically have a little bit better margin than preseason buys. So a lot of it comes down to how we execute us much as how we plan. But it is a more challenging environment and I think all of you read the same newspapers we do about why it is out there. But it just requires us to be very disciplined and to focus and have the right partnerships within the vendor community.

Is Easter normally (inaudible) sales event for you does it kind of shift into March in March (inaudible) this quarter?

Easter is a great event for us. When you shop our stores you'll notice that we have a lot of dressy categories in our box. If you shop a lot of our competition in the strip center world they are mostly casual. We have a phenomenal girls dress business. We have a very strong men's suit business and little boys suit business. So Easter is a pretty significant event for us.

So that would have pulled sales out of April on a year-over-year basis into March, correct?

Basically, we're going to kind of reserve those comments for the next call but you have to look at March and April combined when you have an Easter that's shifted as dramatically earlier than it has in previous years. And the thing that gets kind of clouded in the Easter discussion is when Easter is in April it's really Easter/spring and when it shifts into March it's a little bit more Easter/pre-spring. And it's kind of hard to kind of de-clutter the noise around that. So you have to look at March and April combined.

In terms of the leases here, you dropped two of the locations and transferred over the other three and that dropped your purchase price by about $7 million it seems like. Were these locations must-haves or kind of what was the rationale behind that?

I'm sorry. Repeat the question again.

You mentioned that you dropped your aggregate purchase price to $9 million from the $16 million that you were planning on spending for the leases that you got and that was the result of two locations that you dropped and you transferred three locations to the landlords. I was kind of wondering what was behind that thinking. Did those get re-pulled? It seemed to be a fairly sharp drop in the price that you're paying for just five by locations that you're shifting here.

That's really a cost saving device. We're keeping those locations. What we did was flip the locations to the original landlords and we're leasing them back so the expenditure for the acquisition went down by $6 million.

Okay and are the new stores performing in line with your expectations?

Yes, we are actually fairly satisfied with them.

Do you feel you have the capacity here to ramp up your new store openings really beyond that 30 number? What's the max you you feel you can do here?

No, that is fair. The answer is yes to it. We have been building structure to support such growth and that's one of the investments we did start making in the business that should start paying off. And the answer is yes and we could ramp up. It's conceivable. We could conceivably get up to 50 this year. There is no -- those are not done deals yet.

But again, we're going to be very prudent and the object here is to grow the chain prudently and you know and to the extent that there is the majority of these leases are really the TI improvements are funded into the leases today. You know it's not being funded out of our CapEx budgets. We plan to continue doing that as much as we can.

Do we have a CapEx budget for next year?

We do but we don't usually give that information out.

Emily Shanks, Lehman Brothers.

I was hoping you could expand it a bit more. I think you were asked on out of stocks and you had cited the baby depot business. Were there any other categories that you would cite as notable for out of stock? And then on the flip side, are there any categories you felt you were overstocked in?

Good question. No, there were not any other significant categories where we had out of stocks. Typically we're measuring the December/January/February time period here -- when you get into December there's always little surprises of things selling out quicker than you would have liked -- bestsellers. And then there's always things left over you don't want to have.

I will tell you, I'm very proud of how the merchants have been managing their business throughout the fall season into the early spring. And in those few pockets where we have had overstocked situations we have been managing them down thoughtfully. In those areas where we have been chasing business we have also been doing some good things. So overall I feel pretty good about it.

Okay, I know back when you brought the -- you first entered the high yield market there was a lot of discussion around inventory systems improvements and so forth. I think you may be referenced it slightly. Could you bring us up-to-date as to where you stand on inventory systems improvement and how much more there is to come?

The biggest improvement we have made early on has been in our planning allocation team. Like I stated last call, we have hired a gentleman to run that organization. He's very experienced, I'm very pleased with that. We're hiring several key people to support him so we are building the planning aspect of our Company. We have been implementing a new system (inaudible) for the planning processes and other things such as what Todd alluded to with our business intelligent tool will also add efficiencies and quickness to our decision-making process. So we're making really good progress.

Great, should we expect most of that stuff to be implemented over the next two to three quarters or is this four or five quarters?

Typically traction has already happened. Planning is a process as well as systems. We have already improved the process that we planned our spring businesses on. We have instituted some more changes for our fall planning process. As the systems come on they typically tend to leverage the things you're already doing on the process side of it. This is one of these things where you get nice incremental improvement month after month, quarter after quarter.

As Todd had mentioned to on the BI tool it's going to start ramping in the second quarter.

Okay great, that's helpful. And then if I could just one last question. In looking at what accounts payable did as a percent of inventory in the quarter it looks like the leverage of that is down slightly. I'm just curious what is the right way to think about that and have your vendors changed any of the terms?

No, terms have not changed significantly. It's more just a function of the timing of the payments. You had inventory received earlier this year in the third quarter because you had earlier Easter so you had some payments coming a little bit earlier.

Tom Carroll, Imperial Capital, LLC.

Just wondering how much of the $75 million in net CapEx this year for 2008 has been used as kind of the outlays there for the 30 new stores this fall? Is it a good amount that has already been outlayed for those 30 new stores?

No, the CapEx for this year is for the stores that we opened in '08.

Entirely, okay. As far as I think we've talked in the past about the average revolver balance you are expecting this year to come in below 200, and you did. Do you have any expectation for next year what you expect the average revolver balance to be?

That's something we won't disclose but as we continue to de-lever the Company you can expect to see that average balance decline like you have seen it decline over the last couple of years.

Excellent. As far as getting up to that 50 number as a possibility, is that stuff you just have on the radar or is it stuff you kind of have in the can and can pull the trigger on quickly if you decide to do so?

Well we are working them as we speak. So the balance is not concluded. So, you know we haven't finished all those leases. It's conceivable that many of the deals we are working on as you can imagine they don't fall into the period (inaudible). It's conceivable that those could roll into the next fiscal year. So they're in the process of being worked on.

Michael Shrekgast, Longacre Fund Management, LLC.

I was just wondering with regards to CapEx I know you have $65 million of CapEx year-to-date but I know that's -- I believe that's a gross number and then I think you had said in the filing maybe it was $47 million. Where is that difference and where does that cash come through? Is that coming through non-cash rent?

So first of all, net of landlord allowances for the first nine months, we have about $47 million spent in CapEx. So, what was the second part of the question?

I was wondering where that would flow through because the CapEx comes to $65 million year-to-date right?

Sure, the net comes from TI allowances that we get from our landlords and that gets recorded as a long-term liability. And then that gets amortized over the life of the lease.

Okay and then with regards to the stores that will be coming on can you tell us roughly -- I think you said you're going to be opening up 30 stores in the fall. How many stores will you be paying rent on that won't be open at that point?

I don't believe -- very, very few if any.

Essentially, you're pretty much just taking ownership of these right before you're going to open them or within let's call it a month or two (multiple speakers)

Maybe -- there might be a few months that considerably are going to be paid before.

And then one other thing -- with regards to the inventory management, if there -- I assume the point of putting in all these inventory systems is to improve inventory turns. Is there a goal you guys see within say two years where you can get inventory turns up a half a turn or a full turn?

I really don't approach it that way. Inventory turnover is basically the output of a lot of smart business practices and if your sales are good, turnover should go up. If you're managing your inventories thoughtfully it should go up. If you're keeping your markdowns and control in your (inaudible) goods the [control] should go up. So it's a lot of things. We expect turnover to go up but I'm not going to publicly disclose what percentage. I think over the long trendline it should go up if we are doing the right things.

Can you tell me how much debt you can pay off if it did go up?

No.

[Rosemary Sisson] (inaudible) Partners.

With regards to product availability I was wondering if you could possibly contrast what you're seeing now or in the quarter that just ended with what would have occurred last year both in terms of the amount of availability, the quality, and maybe even as well as the cost you might have to pay for it.

The opportunistic buys out there are growing. The vendor community has to also keep growing and doing business. They're trying to figure out ways to do that. We have been slightly narrowing our vendor base over the last year in order to become bigger and more important with certain people so that we can get first opportunity on some of the goods quicker. As you probably to know, it is a matter of just staying close to the market, being in the market a lot and I anticipate there will be lots of opportunities going forward. And that's typically the case in uncertain times.

Right, I was kind of curious as to (technical difficulty) you're talking about narrowing your focus for the vendors. I was curious as to whether there might be new opportunities for bringing on vendors that maybe you could not have brought on before in a healthier retail environment that might attract new customers to your store base.

Oh definitely. If you have been reading the paper and I'm not going to talk about any specific vendor but there's lots of changes happening in the branding of this business. Brands are always being created. A lot of times they start at the high end and then they maturate through the process into the middle and into to the low. There's a lot of new changes. And when there's a lot of changes when you're an opportunist (technical difficulty) like we are, it really makes you excited about the opportunities going forward.

Good question, Rosemary. And as Jack had mentioned, Jack has been having (inaudible) consistently to bring on new vendors and we have added a significant amount of new vendors actually over the past two years and we hopefully will continue to do such. A lot of these vendors are you know are new and upcoming vendors often as well. And they are new guys that are coming out of the box and they will be in department stores as well by the way which gives the credibility at the end of the day. So we continue to go after those.

Can you let people know about -- is it part of what you're doing with the media strategy that you have to let people know about this? (multiple speakers) do feel that is necessary?

I will tell you that there is a desire on our part to continue to market ourselves. We do (technical difficulty) much more of that off-price world than we do conventional retailing even though we are that hybrid of sorts. So there is a desire on our part to try to promote more of our goods with brand recognition where we are allowed to do such. Now that's a continuing process of the off-price world to allow us to do such because (technical difficulty) selling products essentially below department stores there's a lot of sensitivity around it.

In many occasions I can tell you in certain business segments, we are being given permission to do such and we will push that accordingly and promote it accordingly. But again, I don't want to mislead you in any way. There is sensitivity around this and overall the business -- a lot of brands where we still so tend to be somewhat silent from a marketing perspective.

Understood. One last question then -- you were talking about shopping the competition on a weekly basis and being very aware of the pricing and the competitors in the department stores and what not. Do you have a -- is there a general sense of where you want to be priced with similar items relative to department stores? I know it's below but is there a certain (multiple speakers) bogey that you have?

There's a lot of art to the science of determining where your prices should be. And typically you would be surprised. You can really track it pretty consistently between upper-end department stores, mid-tier department stores, the off-price segment. You get a feel for where the categories are going, whether the key price thresholds. You're always watching where there's little subtle changes and how one vendor or retailer might take it versus another. It's one of these things where there is consistency and pattern but you have to have a high level of awareness and you have got to be tracking it frequently.

[Colleen Burns], Oppenheimer.

Most of my questions have been answered but just follow up a little on kind of the comp store sales decline. Have you changed your advertising at all or is there anything differently that you're doing or plan to given the traffic, the decline in traffic given the environment?

For the quarter we're talking about our advertising was not significantly different than last year. As I stated in the prepared comments, we are going through a very exhaustive creative media review and a buying service review in order to determine what we should be doing going forward. There's a lot of changes out there.

When you look at the media mix, the impact of the Internet, and all the different ways a message can be received by the consumer, the world is changing very very quickly. The PDAs, the cell phones, there's TV screens everywhere -- the elevators. There's just a lot going on and we know we have to evolve and change.

Do you measure your advertising? I think I heard your name mentioned a couple of times on radio recently. I don't know if that is new or not. Do you try to measure to see if it's actually being effective?

We do, obviously. There are services that go out there and help you monitor the effectiveness of your ads and again we are under a lot of review right now in this area. So you happened to pick an area that is one of the initiatives that we embarked on. We're still learning, don't claim to have all the answers to date. There are some things -- we're doing a lot of testing I can tell you that. There's a substantial amount of testing being done.

We have taken a shot at cutting back on some of the FSIs and increased other media spend and in test environments and we're going to continue doing a lot of that. Even whatever learnings we do get out of the reviews that we're going through when we do hire a new agency both on the media side and the creative side, we will still test those. Obviously we don't want to have to make a dramatic change and [the only other] changes really in the mix as Jack had mentioned. So those are things that we are definitely going to want to be tweaking more and testing more.

Right and with regard to the mix I know you talked a little bit, Jack, about not investing in categories that were downtrending categories. I am assuming you are referring to home. Is there anything else there that would -- downtrending categories you don't plan to invest in?

Well, invest is not the right word. Home is very important to us. But it is a challenging category and there is business to be done out there. You just need to figure out how it is changing, what you have got to do to change it. So, we're working real hard. We have got parts of home that are fine. We have other parts that are not so well. So it's basically we know we have to evolve that strategy to be more relevant to the consumer. And when we find traction we will invest aggressively and where we're not having traction we will be very conservative until we figure it out.

We don't want to mislead you. We're not going out of the home business by any extent. If anything this is one that's being focused on and work is needed to make a difference but we're certainly not going out of the home business.

Thanks for the color. And then just lastly with regard to the discount notes (inaudible) cash pay. Can you give us an update there? Do you plan to leave those outstanding? Do you any plans to refinance those notes currently?

There's no current plans to refinance or pay down those notes. They turn cash pay on April 15 and we will begin to pay the cash payments semi-annually on the same dates that's the senior notes are pay.

[Read Kem], Merrill Lynch.

I just had a few follow-ups if I might. I was curious on the new leases outside of Value City. I understand the Value City stores are largely comparable to your existing base but the 21 new leases through '09, would you characterize those as maybe higher quality like class B strip centers? If you could just give us some qualitative color on that.

First of all the mix of them is pretty similar in the sense of what's going into the strips and what's going into the malls, maybe slightly more in malls in this case than the Value City group at least in terms of what type of centers they are. And yes, I would say overall we probably would rank more of these in that B group than we would have in that Value City group.

Another small one -- the lease departments, if you could just tell us what's going on there? Should we assume that those departments track the overall course of your business and as the percentage of net sales in that line item likely to trend similar to what it did in the third quarter?

Yes, they are very similar.

Yes, they are very similar. You know, in stores where we had better traffic their sales were better. In stores where our traffic was down a little bit, their sales were down a little bit. They track very closely to the store average.

Maybe one for Bob. I was wondering on the borrowing base if my facts are straight correct me if I'm wrong. But it looks like your availability compared to last year came down a touch. I was just wondering is there any difference in terms of advance rates or anything going on there in terms of your availability?

No, it is the same formula we had last year. It's probably just a function of the inventory at that time of the year compared to last year and the receivable balances at that time of year versus last year.

And my parting question just going back to Jack, it sounds like the categories you called out in the quarter -- your strategy of maybe going deeper with certain vendors is working out fine. But any other observations you can make on that? I mean, as some folks shop the discount channel they like the variety. You're obviously going with maybe a little bit less variety. If you could just comment on how that is going?

It really depends upon the category, Reade. If we can get (inaudible) in a certain category, we're going to go deep fast. If we have to be wide in other categories because there's maybe not a predominant brand or vendor and the customer expects more breadth then we will stay wider.

Similar to what I said in previous conference calls, the real thing I'm working on is I'm trying to make sure the store experience improves over time with by managing the space, the vendors and the categories very thoughtfully so that when the customer does walk in she understands we stand for.

Got it. Good luck. Thanks.

We have time for two more questions.

Karen Eltrich, Goldman Sachs & Company, Inc.

With your expansion into Puerto Rico I'm curious how long that (inaudible) under consideration, what the competitive landscape is like there and how large of an opportunity you are looking for.

Sure, we had actually been looking at Puerto Rico prior to the sale of the Company. So, you know we had made numerous trips over the years to try to get into Puerto Rico. To be frank with you, our building into Puerto Rico is also because Puerto Rico is having some difficulties as well, some difficult times. And again that is not unusual for us. We normally benefit from some of those opportunities as we mentioned the merchandise it's also in real estate.

So in terms of the competitive landscape, I mean there is one particular off-pricer that's out there with a number of stores and there certainly is your conventional retailing. Macy's has a store there for example in the department store business. And we feel it's really conducive for us. I mean, it's really what we would say is our customer. They love brands and the consumer there is very brand conscious. They certainly love fashion. We tend to be much better in the fashion end of the business as opposed to what we call that very casual end of the business or basic commodity business as I would refer to it as.

So we look forward to it, we plan to open the two stores as we mentioned. We are looking at several other sites as we speak. I don't think Puerto Rico will hold 20 stores. It may hold six to eight (technical difficulty) possibly if we had a guess today what we think it will look like and as we plan, we will continue trying to see if we can roll some more in.

Great and final question. For the decline in the quarter was it more traffic or was it more ticket?

It was traffic.

[Adam Elsner], Credit Suisse.

I was wondering -- you gave a lot of good color on the initiatives you put in place. Is there a way to summarize what you believe is some of the realized benefit through the nine months year-to-date and potentially what the run rate benefit of either the combination -- if you don't want break them out -- the combination of your vendor initiatives and supply chain initiatives, system initiatives. Is there a way to think about it -- just the total to quantify your year-to-date benefit versus the run rate benefit?

We would have to invite you to be a member of the executive team to do that (multiple speakers). There's a lot of analysis on that.

Yes -- no, we really don't project that (technical difficulty) we do recognize that there are opportunities in the business and we're going to continue flushing those out obviously. There's many more that we didn't mention to be frank with you that are constantly being reviewed as we speak. So there's a lot of new management that has come in and I want to congratulate them because they brought a lot of great things to the table.

It's all now up to us to execute. And we are well into baking this cake right now. So we are steadfast, we're basically trying to focus on making sure there's enough people to support all the initiatives and execute them well and we should deliver good things. But as far as making projections, we don't do that.

Yes, I was more or less trying to think about what was achieved year-to-date and if we could take it from there but it sounds like --

We really don't give color.

how about in terms of your upfront purchase? It's around 50% of your buying has been upfront?

It depends.

(multiple speakers) yes, it really depends upon -- and I typically don't give out an average because the average can I think then be misconstrued. We have got areas where you buy 100% upfront because it's highly imported, it's commodity, it's basic, it's replenishable -- socks, underwear, things of that nature. And then we have got other categories -- we try to stay extremely liquid.

I think the takeaway here should be that we are being very focused on keeping liquidity in all the divisions that it applies to.

Are you right now in the peak of your sort of preseason buy decisions?

Again it really depends by category. If you said today where are we at? Younger, faster businesses, there's a little bit of buying done for the back to school into September period. Businesses as extreme as men's suits you typically bought out through November. It really depends upon the supply chain and how much time it takes to work the merchandise through the process. As Mark said though, in general what I can tell you is we are more liquid today than we were a year ago.

Okay, and just thinking about it in sort of a hypothetical, not that this is what you are forecasting but in the conditions where let's call it consumer environment just gets (inaudible) and gets worse -- if you kind of look at your playbook under that scenario and you think about it more under a cash management scenario, how would you order your flexibility in that regard? Would you first look to flex store payroll, then look at corporate overhead and then finally look at CapEx? What sort of inflection point would it actually have to take for you to cut back on your CapEx (multiple speakers)?

I think we have a lot of flexibility here and as I said before historically we have always managed extremely well in difficult times over the history of this Company and we plan to continue doing that. Yes, CapEx and payrolls and there's lots of other expenses in the business that we feel we can react to very quickly. Many of them we're taking under consideration today and making some changes.

So we are preparing to make sure that if it does get worse out there that we can pull the trigger very, very quickly. And then as I said in inventory, Jack has done a great job of making sure we increase the liquidity going into the season so that if we do need to make cuts there we're going to do that as well.

That was your final question. I'll now turn the call back to you to. Please continue with your presentation or closing remarks.

Thank you, Alex. That concludes our conference call for today. We appreciate everyone's participation in our conference call. Thank you and have a good day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everyone.