Burlington Stores Inc (BURL) 2009 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).

A rebroadcast of today's conference will be available beginning January 16, 2009 at 12:00 Eastern Time through January 17, 2009, 12:00 Eastern Time. To access the rebroadcast, please dial 1-800-633-8284, or 1-416-977-9140 and enter reservation number 21408969. As a reminder, this conference is being recorded Friday, January 16, 2009.

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

Thank you, operator, and good morning. We appreciate everyone's participation in this morning's conference call to discuss Burlington Coat Factory's second-quarter 2009 operating results. I am Robert LaPenta, Vice President and Treasurer of the Company. With me today are Jack Moore, our President of Merchandising, Planning, Allocation and Marketing; Todd Weyhrich, our Chief Financial Officer, Mark Katz, our Chief Accounting Officer; Charles Guardiola, our Senior Vice President of Supply Chain; and Fred Hand, our Executive Vice President of Stores.

We had planned to introduce our new CEO, Tom Kingsbury, on today's conference call. Unfortunately, due to a family emergency, he will not be able to attend.

We will begin with a review of our operating results, followed by a discussion of the business conditions and business performance from Jack Moore. Jack will then discuss the team's top priorities, which were going to be part of Tom's discussion. After the prepared remarks, this group will be available to answer questions.

This call may not be transcribed, recorded or broadcast without expressed 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 second quarter ended November 29, 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 in the Company's other filings with the SEC, all of which are expressly incorporated herein by reference.

I will now discuss our results for the second quarter of 2009 compared with our second quarter of fiscal 2008.

Net sales increased $55.8 million to $1,002.4 million for the second quarter ended November 29, 2008 compared with the same quarter a year ago. Same-store sales declined 2.1% for this three-month period. The Company opened 33 net new stores since the end of last year's second fiscal quarter. Net sales from those stores contributed $72.4 million to the current second fiscal quarter. Additionally, the Company entered into a barter agreement which contributed 10.7 million in net sales to this current second quarter.

During November 2008, the Company exchanged $10.7 million of inventory for certain advertising credits which are to be used over the next six years. This exchange resulted in $10.7 million charged to sales and cost of sales.

Cost of sales increased $45.8 million for the current second fiscal quarter, compared with the same quarter a year ago, to $602.9 million, primarily from the increase in net sales and the barter transaction. Cost of sales as a percentage of net sales increased to 60.2% during the current second fiscal quarter from 58.9% in the prior year's fiscal second quarter. The increase in the cost of sales percentage was due to increased markdowns related to fall seasonal product and the barter transaction. The barter transaction resulted in $10.7 million of net sales recorded with no corresponding gross profit. Jack Moore will give more color around the additional markdown in just a few minutes.

Selling and administrative expenses increased $27.8 million during the current quarter ended November 29, 2008 compared with the prior year's quarter ended December 1, 2007. The increases in occupancy and payroll and payroll-related expenses from the additional 33 new stores we opened from last year's second quarter were $19.7 million. There was also an increase in benefit expense of $6.5 million, which was the result of an accrual reduction taken in last year's fiscal second quarter for $6.5 million, due to a reduction in employee incentives.

Depreciation expenses amounted to $31.3 million compared with $30.8 million for the second quarter in 2009 and 2008, respectively. Amortization expense related to net favorable leases and deferred debt charges was $11.1 million compared with $10.6 million for the second quarters 2009 and 2008, respectively.

Impairment -- there were no impairment charges for the three months ended November 29, 2008. Impairment charges of $6.8 million during the prior year's second quarter pertained to certain long-lived assets related to ten of the Company's stores.

Interest expense was $27.8 million and $33.7 million for the three-month periods ended November 29, 2008 and December 1, 2007 respectively. The decrease in interest expense was primarily related to lower interest rates on our ABL senior secured revolver and our senior secured term loan facility. The average interest rates on the ABL line of credit for this year and last year's second quarter were 4.7% and 7.2% respectively, and for the same periods for the term loan of 5.1% and 7.8%, respectively.

Other revenue, which consists of rental income from lease departments, sub lease rental income, layaway, alteration, and other service charges of miscellaneous revenue items, declined $1.2 million to $7.9 million for the current fiscal quarter. The decrease is due primarily from the Company no longer charging dormancy fees on outstanding store value cards, but instead recording breakage income which is recorded in other income net.

Other income net, which consists of investment income, gains and losses on disposition of assets, breakage income, and other miscellaneous nonoperating items, decreased $1.6 million to $0.3 million for the current second fiscal quarter compared with the corresponding quarter a year ago. The decrease is primarily related to a write-down of our investment in the reserve fund of $1.7 million and a decrease of $0.4 million in nonrecurring insurance recoveries. Partially offsetting these decreases is the reporting of $0.8 million in breakage income.

Income tax expense was $13.1 million for the three-month period ended November 29, 2008 and $16.8 million for the similar period last fiscal year. The effective tax rates were 41.9% and 42%, respectively.

Adjusted EBITDA for the current second fiscal quarter of $107.3 million decreased $17 million from last year's second fiscal quarter's adjusted EBITDA of $124.3 million. The decrease in adjusted EBITDA was primarily the result of decreases in gross margin rate from 41.1% to 39.8% and to the increase in selling and administrative expenses in this year's second fiscal quarter compared with last year's fiscal quarter.

Merchandise inventories at November 29, 2008 were $928.4 million compared with merchandise inventories at December 1, 2007 of $870.9 million. This increase was due to the net 33 additional stores that were opened in the last 12 months. Inventory per store decreased 1.6% from last year's second fiscal quarter.

Accounts Payable as a percent of merchandise inventory at November 29, 2008 was 66.3% versus 71.9% for the comparable period last year. The decrease in the ratio is due to merchandise receipts being more heavily weighted in the beginning of the quarter versus last year and to the calendar shift related to last year's quarter that ended on December 1, which impacts rent accounting. The number of AP days outstanding remained unchanged from last year.

Long-term debt at November 29, 2008 was $1,449 million, compared with $1,399.4 million at December 1, 2007, an increase of $49.6 million. The increase in long-term debt was primarily due to an increase in the ABL balance for the above-mentioned periods of $52.3 million. The increase in the ABL borrowings was due to $26.1 million in investments in the reserve fund and to inventory and CapEx for new stores opened this fall. At November 29, 2008, the Company had unused availability on its ABL line of $488.5 million.

I would like to note that, at the end of our fiscal month of December, the Company had completely paid down the ABL borrowings and had additional invested cash of over $90 million.

Our 2009 fiscal year CapEx spend has not changed materially from our last call. The Company expects to spend approximately $85 million, net of landlord contributions. CapEx related to store projects of $41 million -- $24 million related to supply chain, and $20 million related to IT initiatives. For fiscal 2009, we have opened 30 net new stores with 6 remaining in the spring.

I will now discuss results for the six months ended November 29, 2008 compared with the six months ended December 1, 2007. Net sales increased $84.1 million to $1,709.4 million compared with the same six months a year ago. Comparative store sales declined 1.1% for this period.

Cost of sales increased $41.2 million for the current six-month period, compared with the same prior period. Cost of sales as a percent of net sales decreased from 61.6% to 61% for the same comparative periods. The decrease in our cost of sales percentage is due to fewer markdowns and better initial markets this year compared with last year. The decrease in markdowns is the result of a shift in the timing of markdowns of $16.9 million, which were accelerated into the fourth quarter of fiscal 2008. These were partly offset by $11.5 million of incremental markdown reserves for fall seasonal product.

Selling and administrative expenses increased $42.6 million year-to-date compared with the same period last year. The increase is primarily from occupancy charges and payroll and payroll-related expenses from new stores of $34.8 million and an increase in advertising expense of $5.7 million and an increase in benefits of $4.4 million.

Adjusted EBITDA for the six months ended November 29, 2008 was $124.7 million, a $5 million increase from last year's similar six-month period of $119.7 million.

Finally, for some time, in an effort to better align our resources with our business objectives, the management team has been reviewing all areas of the business to identify efficiency opportunities to enhance the organization's productivity. This will result in a $45 million reduction in our cost structure for the last two quarters of this fiscal year. We are currently anticipating no store closures beyond those previously disclosed.

I would now like to turn the call over to Jack Moore.

Thank you, Bob. Good morning, everyone.

In addition to Bob's comments I will provide additional information about our second quarter and an update on the key focus areas we've discussed during the past several conference calls. But first, an update on the sales for the quarter.

While we experienced a drop in our comparative store sales during the quarter versus the previous quarter from a plus 0.2% to a negative 2.1%, our performance continues to be stronger than the broader retail averages and significantly stronger than the department store and the specialty store categories. The customer continues to respond to our business model -- outstanding values associated with the right, desirable product mix with well-recognized national brands.

Above average categories during the quarter were shoes, accessories, and our youth apparel. Below-average categories were home, sportswear and men's. By region, the above-average regions were our Plains, Great Lakes and Northeast. Below-average regions were the Far West, Rocky Mountains, and Southwest.

As stated earlier, our gross margin was 130 basis points lower than last year. There were two key reasons for this decline. During the quarter, we bartered $10.7 million at cost of spring and summer sportswear merchandise for advertising credits. This transaction accounted for 40 basis points. Also, we ended the quarter -- we reviewed our ending inventory position of fall and winter product categories. We reserved $11.5 million at cost in incremental markdowns to ensure that we can move through this product in a timely manner. These are markdowns that in previous years were taken in later periods.

The following is an update on the general business conditions and a few key focus areas. As I stated on the last call, the most significant issue facing us and all retailers is the general slowdown of the economy and the ultimate impact on consumer spending. For the foreseeable future, we believe the consumer will be very cautious, but will respond to strong values. The second quarter proved this to be very correct, and we will continue to anticipate this climate going forward.

We firmly believe that our business model of providing great everyday values with desirable product and nationally recognized brands is a strength in this type of economy. Again, our results, compared to our competition in the various retail categories, prove this to be correct and we will continue with this focus.

During this period of challenge, our primary focus will be to maximize sales by executing our business model and to do this by managing our inventories conservatively and diligently. Our priority will be to keep our inventories fresh and new, with less aged merchandise.

We'll continue to strengthen our planning, information and technology functions. We are working to refine and simplify our processes. Our primary focus is to improve our understanding of our customer, how she is responding, and to improve our ability to buy and to allocate based upon her needs.

During the past quarter, we introduced a new marketing campaign. The initial test results and feedback have been strong. We will continue to refine and develop strategies that focus on delivering our message effectively and therefore more traffic to our stores.

As I mentioned at the beginning of the call, Tom was going to be here to discuss the team's top priorities. I am more than happy to fill in for Tom. The three priorities are merchandising content, the store experience, and receipt management.

Our first priority is merchandising content. It's designed to ensure that we continue to deliver a consistent flow of the hottest brands and styles available in the market. To reach a broader audience, we will stay focused on delivering exceptional values that fit within a good, better and best pricing strategy. We will continue to prioritize those fashion categories that cater to our core female customer, including sportswear, accessories and shoes, while protecting our core competencies, especially coats and outerwear.

Our second priority is the store experience. We will continue to enhance the visibility and clarity to the quality and breadth of our merchandising offerings by enhancing our merchandising presentation standards and in-store signage. The team has spent considerable time evaluating store payroll to ensure are appropriately managing floor coverage to our customers' needs. Finally and most importantly, the store experience will continue to be rooted in a mindset that views the business through the eyes of the customer.

Our third priority involves receipt management. We will continue to manage our receipts in a conservative manner. This affords us the ability to buy more receipts in season opportunistically, to take full of vantage of the very good supply of merchandise that's available in the market. As we continue to execute our model of delivering value and a constant flow of fresh, fashion-oriented product to our customer, we believe we will improve our sales, increase our market share, and deliver our planned gross margin rate.

In closing, I would like to thank our teams. All of our teams, corporate and stores, have been focused on our customer and our objectives, and work very hard to deliver these results.

In addition, I would like to thank the vendor community. We continue to receive outstanding support and involvement. They are excited about our growth story, and they continue to assist us in developing strong merchandising strategies.

With those comments, I am going to conclude our prepared remarks. Operator, we are ready to begin the Q&A session.

Thank you. (Operator Instructions). Grant Jordan, Wachovia.

Good morning. This is [Mike Shulas] in for Grant. Do you feel the need to use promotions in this environment, or were the markdowns in the quarter more of a one-time event to your inventory?

As we stated in previous calls, our business model is to be priced as an everyday pricing model, and to ensure that our additional pricing is always very, very strong. So we've always avoided being a high/low retailer. Therefore, we spend a lot of time working, Mike, on what our initial pricing should be, making sure it's strong. If we discover that merchandise is not moving through at an acceptable rate, we take aggressive markdowns. That's why we intentionally took very aggressive markdowns in the second quarter and also set up the reserve at the end of the second quarter.

Okay. So should we expect similar markdowns for Q3?

We can't disclose anything about Q3 at this point. Our operating model has been always to be strong in initial pricing, aggressive with markdowns, and we will continue to do so.

Okay. Then you mentioned the $45 million in projected cost cuts. Now, you said that was -- does that include the already planned store closings?

Mike, I'm going to go ahead and take this question. This is Marc Katz. I will give you a little bit more color around the $45 million.

The first point that I really want to make about this is that the reduction at our cost structure is work that has been going on for many months. These decisions were made very carefully to ensure that, in the end, we run the business more efficiently without sacrificing our ability to serve our customers. This was an initiative that included all members of senior management. It included reductions across virtually all business functions.

The $45 million is savings to our financial plan, Mike, for the rest of the year which obviously runs December through May. As far as your question related -- no, there are no store closings that are baked into that $45 million.

Okay. So have you already identified those areas? Like, how confident are you in your ability to meet that target?

We are very confident. A lot of work has gone into this, Mike, numerous discussions, a lot of analysis, and we are confident with that number.

Okay. Then just the last question -- have you had any discussions with your lenders about the total leverage covenant?

This is Todd. There have been no discussions on it. As I think we stated in the press release and Jack mentioned, we are anticipating finishing the year on our margin plan with hat our projections look like here going forward, and obviously we're looking at numerous scenarios going forward. But with our results year to date, with the planned changes that Marc just spoke to and with the performance that we expect to get the rest of this year -- and I would just reiterate on the margin line the vast majority of what Jack is talking about in terms of margin change is really timing between the back half of the year and the first half of the year. When we put all of that together, we don't see anything in the near term that would indicate any issues with our covenants.

Emily Shanks, Barclays Capital.

Good morning. This is Jason Trujillo in for Emily. My first question relates to incremental fall markdowns. Was this done to manage inventory based on demand or because of competitive pricing actions?

This is Jack again. The incremental markdowns -- this is not the reserve action that we took, but the incremental markdown taken during the second quarter was intentionally done to make sure we were priced very, very well going into the holiday season. That's a pretty typical thing we do every year. There are certain key times of the year that are absolutely critical that your pricing is very, very strong, very competitive and very aggressive. I think, in light of how aggressive the holiday season was, as we all know, it was the right thing to do.

All right, thank you. That's very helpful. Then on your market share gain mentioned in the press release, specifically what sort of metrics do you use to measure this? Which retailers do you think you are taking share from currently?

Well, basically because we are a growth retailer and we are adding new stores, our market share gain is coming from our new store growth. Also, our comp sales are better than the broader retail averages, and that's also helping us grow our market share.

As far as who we are taking market share from, we really don't speculate excessively on that. We let the customer vote with their pocketbook. We are a value player; we are a brand player. The customer has so many options right now that, quite frankly, we're just focused on our business formula.

All right, great. Thank you. Then just lastly, regarding the staff reduction mentioned earlier, how does that break up between corporate and store-level staff?

Well, we haven't and don't plan to give that clarity. There were reductions in both corporate and stores that were included in that number, and we just haven't provided the breakout.

Then just to follow-up on that, do you intend to alter the number of employees on the floor level at the stores? Can you go into that at all?

Yes, I can give a little color on that. Obviously, the stores represented a fairly good-sized piece of the savings that we are talking about, and it was multifaceted in terms of where those saves came from.

We've mentioned on prior calls that we continue to define new SOPs and rule out various SOPs within the stores. We did do a thorough review of the store management structure and we've really taken a look at each task and all of the daily operations that happen within the stores.

All right, great. Thank you very much. That's all.

Karen Eltrich, Goldman Sachs.

Based upon the comments that you said kind of stating the obvious, that we are in an incredibly promotional environment, you have all of your retailer competitors discounting like crazy, trying to get rid of inventory. How are you balancing that and what are you watching, in terms of promotion, to kind of encourage the trade down when really the retailers have already traded down pricing for the consumer? So, what are you doing to drive traffic into the stores? How are you watching pricing against the department stores to make sure that you are staying competitive?

This is Jack again. Basically, it's been an extremely competitive environment for many, many years. It just accelerated here in the last few months. A lot of the challenge you have is that most of our competition had a lot of inventory. They priced it very aggressively to move it. We knew this was happening; we knew this was coming. We worked very hard to make sure that our initial pricing was very aggressive right out of the box. I think that's why our performance is better than the average. We continue to just watch pricing very closely every day, every week.

The customer is very, very smart. She finds value. She finds what she wants. She knows what we carry. When we have the right content at the right price, we don't necessarily have to compete against the high/low folks in the way they promote. The customer will seek us out and she will buy our great product at great prices.

Well I guess then as a follow-up, how much leverage are you finding on the buy, so to speak, when you're making those purchases? How much can you measure where things are being priced in the market right now?

There is a lot of inventory available in the market. If you work the market hard, which our buying team does, it's very obvious to us what the go price is when we purchase things. We are being very, very selective about which deals we go after. When you have more supply, you can be very, very conservative on the prices you pay for them. It's just a day-in/day-out thing that merchants do. When you work with your vendor community very, very closely, you know what's good and you know when to pull the trigger.

Great. You guys mentioned obviously, in the environment, you'll be conservative with your cash. You are obviously attacking expenses hard. Can you give us a sense of kind of what level decline of inventories and CapEx you'll be managing to?

Our intent is to be very conservative on our inventories, as we've stated, our same-store inventory levels right now are down about 1.6% at the end of November. We are not going to disclose how it's going to look going forward, but we are going to continue to be very, very conservative.

Are we talking single digits? Double digits, or --?

Again, we are not going to disclose that. I do appreciate you asking, but again, we are going to be very, very conservative.

This is Todd. To answer the question on CapEx, we've given the information related to the current year, and next year obviously we are not through that planning cycle yet for 2010. We are working on those plans as we speak. We will continue to move forward with all of the logistics initiatives that we talked about previously. Those are important to the Company in a lot of respects. The number of new stores next year will be significantly less than this year, and we are currently looking at a number that will probably be in the range of ten new stores. Other than that, that's about all the color we can give at this point.

Great, I appreciate that. Thank you.

Tom Carroll, Imperial Capital.

Good morning, guys. We took an inventory write-down in the fourth quarter of 2008 that benefited the first quarter of 2009. Do you expect the same type of effect with the most recent write-down, where this current quarter will be benefited?

As I stated earlier -- this is Todd -- the mark downs that we took and that we have talked about here previously, some of them were a little more -- being a little more aggressive going into the holiday season. There was a piece of it that frankly -- is we are making sure we're taking a very conservative approach to inventory valuation, and so we had an additional reserve that we booked at the end of the quarter.

There will be -- and the way to look at it and I think the way that we are thinking about it internally here -- because obviously we project the results forward and how we plan to come out for the rest of the year -- is that we plan to be essentially on our original planned markdown rate, so a lot of what we have talked about here in mark downs really is just timing between the quarters.

Okay. Then December, we were down 4% in comp store sales. Can you just kind of give us some color on what December looked like? Was their strength, periods of strength in how we kind of ended December?

This is Jack again. We are not going to discuss anything more about Q3. The next conference call, I will give you a lot of color, but unfortunately the way our timing is of our quarters and the fact that we end Q2 at the end of November, we know puts you in an awkward position trying to get a view of the holiday. But at this particular point, we are only disclosing sales.

Okay, excellent. Obviously, the covenants are something that I think everybody is focused on there. I mean, is there any additional color that you can give us some comfort about the end of 2009 and going into the 2010, how we're going to meet those covenants? I mean obviously you have 38 new stores. Do you expect those to contribute in 2010? Could you speak to that a little bit?

I could speak very briefly to it. Obviously, the new stores -- and I think we've said this on previous calls -- are contributing pretty much right out of the box, so they undoubtedly will have additional contribution at those stores.

As we've gone through the exercise here for the last many months of looking at the business and how we make it more efficient, Marc talked to the savings initiatives and our confidence in those, and in addition as we look at how the consumer is responding to what we're doing from a pricing strategy and a markdown strategy, and what our sales results have been and what they are now, as we project forward through the end of the year, we are rejecting no issues with covenants. Obviously, if we had an issue within the next operating cycle, within the near future at all, there would be a disclosure requirement for that. Clearly, we don't have one. We've looked at this long and hard for a number of months. At this point, we see no issue on the horizon.

To follow-up on the earlier question, there has not been any reason to have any discussion with any of our lenders because we don't see a problem.

I got it. Thank you.

(Operator Instructions). Colleen Burns, Oppenheimer Funds.

Good morning. On the mark downs, the $11.5 million that was [to accelerate] in the second quarter, I think that had 120 basis points impact to gross margin in the quarter. That should be a positive benefit to the third quarter, correct?

Again, this is Jack. We are not disclosing how it will impact Q3. We do appreciate the question. Again, we will provide you more color during the next conference call. But as Todd stated, our long-term plan is to run this company on our markdown percent to plan, to achieve our gross margin rate to plan. This was an attempt to make sure that we properly evaluate our inventory at the end of the quarter to make sure that we were positioning our inventory well going forward.

Okay. Then you referenced in your prepared remarks about the planned gross margin rate for the year. Can you say whether -- any more color whether that is up, flat?

Yes, as you know, we don't give any forward guidance on that level. Realistically, I think you can take from the other comments we've made about the consistency of the model, the application of the model, what's available for goods and what sort of margin expectations we expect to get out of those. Our margin has not moved around a whole lot over the last couple of years, and you can build your models around that.

Okay. Then just on the $45 million of cost save that you expect in the back half, do you expect most of that to hit in the fourth quarter as opposed to the third quarter?

Actually, no, it's probably going to be -- it's pretty well split, yes.

Have the actions already been taken for those $45 million or so of cost cuts?

Yes, the majority of those actions have been taken.

Okay. Then just lastly, I believe December comps last year were better than January and February, given the warmer weather in November. Can you maybe tell us what December comps were last year for comparison purposes?

We are looking it up real quick to make sure we are extremely accurate here. (Laughter)

We will bring that -- as soon as we've got the number, we will bring it back on if you have another question.

No, that's it for me. Thanks.

Carla Casella, J.P. Morgan.

In addition to her question on the $45 million cost savings, is that all SG&A?

Predominately SG&A. There's a little bit in gross margin that came out of supply chain.

Okay. Then you mentioned the revolver was 0 at the end of December. Is that typical? Would it have been at 0 last year at the end of December as well?

Yes, we were completely out of the line last year in December as well.

Okay, so typically then, as you start paying payables, it will probably come back up in the third quarter, we shouldn't expect it to stay 0?

Correct.

Then just one maybe more theoretical question, but your payable days, as we calculate them, are -- I know they are stable and you haven't seen any changes year-over-year in the payable days, but I'm wondering why they are always more than what we are seeing at the other department stores. Is there a difference in the way that your purchasing works, or anything you can point to that's different?

I can't respond -- this is Jack -- I can't respond to what other department stores are doing, but these terms are very consistent to historical how this company is run. Basically our model is to negotiate very, very hard upfront and get the best possible deal upfront, whether it be discounts, number of days, the initial cost price, etc. We continue to be primarily focused on that as the primary driver to getting our cost basis as low as possible.

Okay. Then one last question on your merchandise front -- do you see any major shift in your floor sets, going forward, from certain areas of apparel that you may expand, or coats or anything in the home area that we should look for as we are looking at the stores?

Not significant shifts in square footage. We are always constantly tweaking square footages between zones. But basically, like I said earlier, we have a real focus on the female customer and growing our categories associated with her personal purchases. As that business grows, we are constantly evaluating what we have to do to continue to attract that customer into our store. But we are a very big box and all of our categories of merchandise have a strong opportunity to grow. So, it's a constant evaluation, nothing major going forward.

Okay, great. That's all I have. Thank you.

Thank you, Carla.

Larry Petrsoric, UBS.

Good morning, gentlemen. I just want to ask you a point of comparison versus some of your competitors. Marmaxx division of TGX and Ross stores both reported flat comps for the month of December. I was wondering if you could comment as to whether or not you see them as a direct peer competitor and how you may have positioned promotion and price wise versus them this holiday season, or anything that could explain some of the divergence in results.

Again, this is Jack. Again, I can't discuss anything as it relates to December. To answer part of your question, though, we've got a lot of respect, and yes, Marmaxx and Ross are very significant chief competitors. We watch them very closely, as I'm sure they watch us very closely. You know, we are the three major players in the off-price arena, and we are also the three major players when it comes to establishing very strong, everyday value in the types of branded fashion goods that the three of us compete in. I will be able to disclose probably more during our next quarterly conference call.

Okay, thanks.

[Ben Feyder Ratner], Canyon Capital.

Can you provide some color on the value of the 41 stores that you own, and how bad would things need to get for you to consider a sale-leaseback transaction?

This is Todd. You are correct in the number of stores that we own. Realistically, we do the same thing as everybody else does; we constantly look at our asset base as to what might be appropriate at any given point in time. At this point, we are not contemplating doing anything, and if we were, we would wait until we had a transaction in place before we would disclose it.

Again, I go back to my earlier comments. Given everything we have in our current plans and projections, we don't see an issue on the horizon. We have very good liquidity for as long out as you want to look. From a covenant standpoint, again, with everything we're doing, we don't see any issues in the near term.

In terms of the valuation of those 41 owned stores, can you provide any color on that?

No, that's not a disclosure that we make.

Another question relates to the cost saves. What do you expect the annual impact will be in fiscal 2010?

Yes, Ben, clearly the annual savings are greater than $45 million. We have not completed our 2010 plan, as Todd had alluded to earlier, so I can't tell you the impact to our 2010 plan. What I can tell you, to give you a little bit more color, is that some of those savings were one-time items. They are obviously only applicable to the month ending, the month they are implemented, excuse me. So that being said, the annual impact is not quite at the $90 million.

Okay, thank you very much. That's all I had.

But before we go to the next question, somebody earlier had asked about comp-store sales in Q3 of last year. We were down 6%.

Operator, the next question, please?

Arthur Roulac, Citigroup.

Most of my questions have been asked. One follow-up -- do you have any sense on how you're thinking about CapEx next year?

This is Todd. Beyond what I said before, I don't think we can add much color to it. Obviously, we are keeping our CapEx to the items that truly are very clearly going to add value. That's not that that's a whole lot different than it's been before. It's just we have a smaller number of new stores in the base, and we are very focused on the initiatives that we currently basically have underway and just to finish next year because they are items that will have a big impact to our financials going forward. So I think the short answer is CapEx next year will be less but it will take until we get the plan done for this next year before and we are in a position to give you a projection before we can give you any kind of a number.

Thank you.

Andrea Cohen, Aries Management.

Good morning, gentlemen. Can you talk a little bit more about the barter transaction? Was it a dollar-for-dollar exchange, and is this something that you think that you'll be doing in the future?

Yes, this is Bob LaPenta. It was -- this is a transaction that is sort of one-off. We look at specific inventory situation, and had an opportunity to barter that dollar-for-dollar for advertising credits that we anticipate using over the next six years. So, it was a way to reduce inventory at no cost to the Company. There is no gross margin loss in terms of dollars, but because the accounting for it requires you to record the sales in your sales line and the same amount in your cost of sales amount, there is margin rate erosion, but there is no actual margin dollar erosion. You know, if it's the right opportunity and the right thing to do, we would look at it again but it would be done on a very specific review of the inventory.

When you say it bought you advertising, what type of advertising did it buy you?

This is Jack. We don't disclose the specific type of advertising. What I can tell you is it is very similar to the structure of the deal that we did in the summer of 2007. The company that we do it with is a subsidiary of the company that does all of our media-buying services. We were very pleased with the results that we got from the first barter we did a little over a year and a half ago, and we have approximately six months left on that barter transaction. We've really -- we strongly believe we received very fair value.

Okay. Then in terms of your purchasing ability, are you seeing a higher end of product available to you at prices potentially that you would have paid for maybe low-end brands now, given the dislocation in the market?

Again, this is Jack. I wouldn't characterize it as higher-end product being available at lower-end prices. Everything, because there is such an abundance of supply out there, everything is being priced very sharply in comparison to the other brands in those categories. In some cases, the sizing and color content is outstanding. In some cases, it's a little bit more piecy. You have to judge the merits of each buy on exactly what the content is, the timing of the content, the quality of the content and how much you think you can sell. But similar to other situations out there in the economy, there's definitely a large supply. How long it will last, we don't know, but we think it will last for the short term.

Okay. Then, I know that there's been a lot of questions on your margins and that you don't give guidance, but it looks to us that your gross margin has sort of been in the 37.5% range for the year. Obviously, it's lumpy through the quarter. Is that the right way to think about what your target gross margin is?

This is Todd. As I stated earlier, we don't give targets that are forward-looking, but again, I think you can take the comments that Jack had about what we are trying to execute, the fact that the mark downs that we took were largely timing items and that we're looking beyond our planned rate, given there's no major changes in our model this year, our planned rate, you can draw some conclusions about how that should look versus last year.

Okay, thank you.

[Holly Bounds], Merrill Lynch.

Good morning. You said that you see no issues with covenant compliance in the near term, but will you tell us where those ratios were at quarter end?

We normally don't disclose what the ratios are. I mean, the basics of the calculations are included in the public documents for the credit agreements, and they are readily calculable from there, but don't make the disclosures specifically.

Josh Givelber, Nomura.

Just on your new stores, you gave the sales number but I didn't write it down. What was that again?

Josh, this is Bob LaPenta. For the 33 net new stores that were open since last year's second fiscal quarter, they contributed $72.4 million in sales in the quarter.

You also said that they have an immediate impact. Does that mean to say that they are EBITDA-positive?

This is Todd. They do contribute very, very early in their life. Obviously, with brand-new stores, you've got a good bit of preopening costs that happened on the front side of the stores, but once you are past that, they contribute positively.

When do they kind of start to run rate at kind of their kind of mature levels?

Yes, we don't, for a lot of reasons, don't get into the details of the trends on the new stores. We think it's important for folks to know that they contribute early on, but the details of what the maturation process is, we don't want to get into that.

Okay. Then just on the covenant calculation, I know you don't give that but is the EBITDA that you gave, like the adjusted EBITDA in your press release, is that the bank EBITDA?

This is Bob LaPenta again. Yes, it's the adjusted EBITDA that's in the press release is the number that is used to calculate the coverage ratios.

Then just kind of a weird question -- I mean, with all of these retail bankruptcies, there is probably a lot of space out there. Does your sponsor -- I mean would they change their strategy and try to roll it out a little bit faster by putting more money in?

We've had no discussions on that front. Frankly, what we're doing, there's going to be a lot of change in retail in these coming months. We are being very conservative in our capital management, and we are being very patient as it relates to real estate opportunities. I think we all know intuitively, and certainly we see it in the press, that we expect there will be a lot available. But there is no change in the plan at this point.

Great, thanks.

Jim Kelly, FCM.

In the press release, you mentioned that you expected that taking advantage of opportunistic buys would help you hit your internal gross margin rate for the year. I was curious if you could please help me connect the gross margin, your inventory turns and the purchasing cycle to help me understand how that might occur. Are these opportunistic buys that you expect to make in the future and they have an immediate impact on cost of goods, or does it take a while to spin through based on inventory turns and accounting?

This is Jack again. We don't discuss specific numbers, but the way the process works, because of the amount of merchandise available, our intent is, of our total spend, spend more opportunistically in season for immediate or short-term delivery. A vast majority of the opportunistic buys are at higher margins. Therefore, it does impact your mix.

Based upon our turns, it basically a buy, any buy, goes into your cumulative markup and you see the effect over the time it takes you to turn your inventory one time. So basically it is an annuity that comes into your inventory and gives you immediate impact, as well as impact up to one turn. So it's very positive.

You guys have a lot -- you appear to have a lot of confidence in the SG&A savings and other savings that you described for the back half of your fiscal year. Can you please clarify whether those are actual cost savings, and whether there are any cash costs to achieve them?

No, very little of it results -- I think where you're going is were there capital expenditures required to get some of those?

Either capital expenditures or severance, or other kind of actual expenses that might -- is this a net number, the $45 million, is that net of any costs? Well, actually, it would be helpful if you would just provide a little bit more color so we could conceptualize what that general source of these savings (multiple speakers).

Yes, there's no real CapEx required to get to those savings. As we've disclosed, the total severance number that was involved was less than $2 million. That's an add-back to adjusted EBITDA. So I guess, to answer your question, we are very confident in the $45 million.

Is this something that you guys had been planning on for a long period of time and just recently disclosed, or is it something that you've decided to do -- that you decided to do during the quarter?

No, no, no. This is work that's been going on for many, many months. I think you know there's a lot of new senior management folks that have joined the team. As people have come in with best practices from other retailers that they've picked up, they have started to think about and implement various savings initiatives. So, I've been talking about this since the day I started with Todd. So it's a process that's been going on for some time.

I would just tell you that, over the course of the last three or four months, we put a little bit more structure, documentation behind it.

Yes, and the other thing -- this is Todd -- that I would add to it is I don't look at this as being any different than the things that we've been talking about in logistics for a number of quarters now. Charlie was further ahead in terms of implementation than we are in the other areas, but with the new management team, this has certainly been a focus, knowing that we had a lot of opportunity here.

Tina, I think we can take one more question.

Ian Wallace, River Run.

Not to beat the cost savings into the ground, I just want to make sure I understand. So you expect to realize $45 million in the second half of this year. Ballpark, that's $20 million in the current quarter and $20 million in the subsequent quarter. Then for fiscal 2010, the annualized rate of realized savings, you know, is something less than $90 million but more than $45 million. Are those (multiple speakers) --?

That's accurate. That's accurate, Ian.

Then with respect to mark downs, those do reduce your EBITDA for bank covenant purposes?

Yes. I mean, the margin -- the adjusted EBITDA that you see in the press release, that is the adjusted EBITDA that goes into the covenant calculations. Just to tie it together, as we discussed before with where we are projecting to end up the year -- and that's a combination of everything, from sales through margin, the expenses and so on -- and given that the markdowns that we talked about were largely timing, we anticipate essentially having savings in the back half of the year to make up for some of those, but some of the expenses we booked in the second quarter.

Okay. Then with respect to the cost savings, I guess you said more of that is going to show up in the SG&A line than the gross (multiple speakers) marginally more. Can you give us a little bit more granularity? I mean, it's a huge number, and numbers like that aren't typically lying around as far as, like, where that came out of?

I don't know if this helps you. The overwhelming majority is SG&A.

Okay. All right. Thank you.

Okay. Thank you, everybody, for participating in our conference call. This concludes the call, operator.

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