Burlington Stores Inc (BURL) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth-quarter and full-year fiscal 2009 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, September 11, 2009.

I would now like to turn the conference over to Bob LaPenta, Vice President and Treasurer of the Burlington Coat Factory. Please go ahead.

Thank you, operator, and good morning. We appreciate everyone's participation in this morning's conference call to discuss Burlington Coat Factory's fourth quarter and full-year 2009 operating results. I am Bob LaPenta, Vice President and Treasurer of the Company. With me today are Tom Kingsbury, our President and Chief Executive Officer; Todd Weyhrich, our Chief Financial Officer; Marc Katz, our Chief Accounting Officer; Charlie Guardiola, our Executive Vice President of Supply Chain; and Fred Hand, our Executive Vice President of Stores.

We will begin with a review of our operating results followed by a discussion of the business conditions and business performance. Tom will then discuss the team's top priorities which were outlined on the last call. After the prepared remarks, this group will be available to answer questions. This call may not be transcribed, recorded or broadcast without express permission. A replay of this call will be available for one week.

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 fourth quarter and full year ended May 30, 2009. 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.

We will not discuss our results for the fourth quarter and full year ended May 30, 2009 compared with last year's fourth quarter and full year ended May 31, 2008. I will now turn the call over to Todd.

Thank you, Bob, and good morning everyone. I will spend a few minutes on our financial highlights and then address the specifics of some key P&L line items.

We are pleased to announce that net sales increased $148.6 million or 4.4% to $3.54 billion during the year. During fiscal 2009, we opened 37 new stores and closed one. New and non-comp stores contributed sales in the year of $265 million and our same-store sales decreased by 2.5%. Even though we had a comp decline for the year, we were able to achieve some truly remarkable financial metrics.

Specifically, our adjusted EBITDA for the three months ended May 30, increased 12.9% to $31.6 million from $28 million last year. Year-to-date adjusted EBITDA of $294.8 million is up 8.4% versus last year. Inventory management remained very strong resulting in our average inventory per store decreasing 18.2% versus last year.

Our total debt at the end of fiscal 2009 decreased $34.3 million to $1.45 billion despite opening 36 net new stores during the year and investing in our DC consolidation and information systems. We have significant liquidity. At May 30, we had $235 million of available borrowing capacity on our ABL. As of today, we have no borrowings outstanding on the ABL and have $392 million of unused availability. This compares with $203 million of availability at this time last year.

I will move on to some specifics regarding the operating performance for the fourth quarter and the fiscal year ended May 30. Gross margin for the quarter was 35.5% versus 38.3% last year. Roughly half of the gross margin deterioration was due to higher shortage results. Similar to last year, we decided to take additional markdowns in Q4 that resulted in a higher markdown rate than last year. We are committed to taking a conservative approach in our inventory management and have continued to take the appropriate level of markdowns resulting in more current season inventory and less aged goods.

Gross margin for the year was 37.9% versus 38.3% last year. For the year, the decrease was due primarily to the higher shortage results. We have implemented a shortage task force consisting of members from all areas of the organization designed to implement action plans to address the root causes for shrink.

Our SG&A expenses as a percent of sales for the quarter decreased by 262 basis points versus last year. SG&A expenses decreased $10 million despite 36 additional stores. We are obviously very pleased with this accomplishment.

As discussed on previous calls, the Company embarked on several efficiency initiatives during the third and fourth quarter of fiscal 2009 which resulted in a reduction of our cost structure in excess of $70 million during the back half of the fiscal year. Major areas contributing to the $10 million reduction in Q4 were a decrease in comparative store payroll of $17.7 million, partially offset by increased occupancy cost of $8.9 million related to the new stores.

SG&A as a percent of sales for fiscal 2009 decreased 70 basis points versus last year. SG&A expenses increased $24.4 million to $1,115.2 million. The increase is the result of increased occupancy expenses of $47.5 million related to the new stores partially offset by a decrease in payroll and payroll related costs of $17.4 million and a one-time decrease in vacation expense of $6.7 million.

Interest expense for fiscal 2009 decreased $30.3 million to $92.4 million. The decrease is primarily driven by a reduction in average interest rates on our ABL and term loan. Average interest rates for both our ABL and term loan were 4.3% during fiscal 2009 versus 6.6% and 7% last year. Adjustments to our interest-rate cap agreements to fair value also resulted in a reduction of interest expense of $4.2 million.

During fiscal 2009, the Company incurred impairment charges of $37.5 million related to our long-lived assets of 37 stores and $294.6 million related to our trade name versus $25.3 million of impairment related exclusively to our long-lived assets last year.

Other income decreased $6.9 million to $6 million during fiscal 2009. The decrease was primarily attributable to our recording a loss in our investment in a money market fund of $4.7 million. As I mentioned earlier, our adjusted EBITDA for fiscal 2009 was $294.8 million, a $22.8 million increase from last year. Merchandise inventory at year-end was $641.8 million compared with $719.5 million last year again, as I mentioned earlier, an inventory per store decrease of 18.2%.

Accounts payable as a percent of merchandise inventory at the end of the year was 35.8% compared with 46.8% for the prior year. Given that AP contraction is normally not a good thing it's important to note that this was done intentionally. Given the strength of our business performance and the cash generated, we were able to advance pay approximately $135 million of merchandise payments as part of our working capital management. During 2010, we expect to have the highest borrowing capacity since Bain acquisition. Our plan anticipates that the working capital management work just mentioned coupled with our expense and inventory management initiatives will result in very low ABL usage for the rest of 2010 -- of the 2010 fiscal year, and this provides us with a very strong liquidity cushion.

Our total debt at the end of the year was $1,449.5 million compared with $1,483.9 million last year. The $34.4 million decrease in total debt was due mainly to decreased borrowings on our ABL. As I just mentioned, we believe we have more than adequate borrowing capacity to deal with any potential trade credit contraction related to limitations within the factory community.

Our 2009 fiscal year CapEx spend totaled $89.4 million net of a landlord contributions of [$38.7] million, which is a decrease of approximately $11 million compared with our original plan. For fiscal 2010, we are estimating CapEx of $86 million net of landlord allowances of $14 million. This includes store projects of $46 million net of the $14 million of landlord contributions; $14 million related to supply chain; and $26 million related to IT and other initiatives. During fiscal 2010, we plan to open between eight and 11 new stores exclusive of three relocations.

I would now like to make a few comments regarding our fiscal 2010 financial plan. We have a conservative sales plan based on the uncertain economic environment. Our inventory receipts and expense plans are built around that conservative sales plan. We are investing incremental store payroll and store clean and maintenance dollars versus last year. This was done to support our store experience initiative which Tom will discuss in more detail in a few moments.

We ended 2009 in great shape from a covenant compliance point of view and we believe that additional cushion will be generated in 2010 despite the tightening of the covenant requirements.

I would now like to turn the call over to Tom Kingsbury.

Thank you, Todd. Good morning, everyone. In addition to Todd's comments, I would like to provide some additional information about our full-year sales performance and an update on our key priorities. As Todd said, total sales increased 4.4% during the year and our comparative store sales at decreased 2.5%. Our performance continued to be stronger than the broader retail averages and specifically the department store and specialty store categories.

Within our merchandising categories, we were pleased with the performance in shoes, accessories and youth. Categories that underperformed the Company average were ladies sportswear, men's clothing and coats and outerwear.

By geographic region, the Plains, Great Lakes and Northeast were strong and sales from the Far West, Rocky Mountains and Southwest were weaker. Improved inventory management has resulted in a more current inventory position with 18% less inventory on an average store basis. We continue to believe strongly that our customer is excited about our business model providing outstanding values associated with well-recognized national brands.

I'd like to comment on the three priorities I stated on the last conference call. Our first priority is merchandise content and is designed to ensure that we deliver a consistent flow of trend right national brand at outstanding values. Within this philosophy, we are focused on reaching a broad customer base with a good, better and best strategy with a priority on fashion categories that cater to our core female consumer.

During this economic climate, we have gotten more access to great nationally recognized brands at tremendous values. We are excited about the growth of many of these national brands within our mix. We continue to be an aggressive with taking markdowns on older merchandise. We ended 2009 with significantly more of our inventory between zero and 90 days old compared to last year.

Our second priority is the store experience. As Todd mentioned, our 2010 financial plan includes incremental store payroll for such things as early-morning recovery and overnight stocking crews. This will ensure goods are moved quickly from the store docks to the selling floor. In addition, we have added incremental expense and capital for a chainwide store housekeeping initiative, a 25-store refresh program and upgraded lighting retrofits in 80 stores.

We are working on enhancing the customer experience by making it easier to navigate and shop our stores and plan to implement a new signing program in all of our stores by November 1.

Our third priority of receipt management. It is targeted to ensure that we have the right goods in the right store at the right time. As I mentioned on the last call, we are managing receipts based on a receipt to reduction ratio with the objective of staying more liquid and buying more opportunistically in season. This allows us to take full advantage of the very good supply of merchandise that is currently available.

In closing, I would like to thank our store and corporate team for contributing to a year that resulted in an 8.4% increase in adjusted EBITDA. The results from our expense reduction inventory management initiatives exceeded our expectations. The incremental savings created by these initiatives affords us more borrowing capacity and allows us to invest in the very important store experience initiatives.

In addition, I would like to thank our 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'm going to conclude our prepared remarks. Operator, we are ready to begin the Q&A session.

Thank you. (Operator Instructions) Bill Reuter, Bank of America Securities.

Good morning, this is Robert speaking for Bill. My first question is about the same-store sales trend throughout the first quarter. I was wondering if you could comment if there is any strengthening or weakening in that data?

Well, we knew that the first quarter was going to be tougher than the other quarters this year. We planned it appropriately. We beat our plan actually for the first quarter. But last year was really our strongest performance that we had throughout the year. So we anticipated that it would be tougher. So if we can execute the priorities that I outlined before, I feel that we can have improved performance going forward.

Okay, and then we are saying a lots of apparel companies showing decreased inventory levels. Are you seeing more or less product available as a result of this?

We really haven't had any issues in terms of obtaining product overall. Yes, people are cutting back but the availability is still really there and we have had no problem getting goods when we needed them.

Okay. And then -- so you saved $70 million in the back half of 2009, fiscal 2009. What can we expect for savings going forward in the first half of 2010, if you can provide any commentary on that?

Robert, obviously as we head into the first two quarters of 2010, we've got some headwinds based on what we did in Q3 and Q4 of 2009. The things to keep in mind is that one, we are reinvesting some dollars in store experience initiatives that we talked about. And two, within that $70 million, there were some one-timers in there that obviously we won't anniversary. That is pretty much the best level of detail I can give you at this point.

Okay, that is helpful. And just lastly, I was wondering if you could talk about what you found out from a shrink perspective? And do you anticipate any additional savings or changes in those levels going forward?

Robert, I will go ahead and take that one as well, this is Marc Katz. As we just talked about the $70 million of SG&A savings, that was really what we were focused on as a sales support team in the back half of last year. In Q2, we talked about hitting $45 million and we delivered over $70 million and that is what we were really focused on delivering.

Given the economic environment, unemployment rates, and the fact that we were so focused on that it wasn't surprising that our shortages also increased in the year. With that said, we now view shortage as an opportunity to improve the income versus 2009 in 2010. Bob talked about a shortage task force that we have. It's made up of executives from the stores, loss prevention, loss prevention, supply chain, finance IT and merchants as well. And we are all actively working on it.

It is simple things, Robert, it's things like just increasing store awareness through improved communication and daily meetings. It really all starts with store managers. And the store managers talking about it every morning and making it a priority that typically translates into more of a priority for all the rest of the stores' folks.

We are looking at our loss prevention store audit program. We have redesigned that to increase the frequency of our store visits so we'll have more of a presence in our stores. We are looking at everything from merchandise tagging standards and as well as enhancing DC audit programs. So those coupled with a number of other things that we are working on, we do expect a better result in 2010.

Okay, that is all I had. Thanks for taking the questions.

Grant Jordan, Wachovia Securities.

Good morning, thanks for taking the questions. First, can you describe the tables and why it fell in Q4 and what we should expect going back into Q1?

Okay, this is Todd, I will take that one. I think most of the folks on the call are aware that we obviously have our credit agreement that supports our ABL and our revolver. And part of the requirements of our credit agreements is that we pay down our term loan for one-half of the excess cash flow that we produce in a year as defined. And what we are really trying to accomplish here for 2010 is making sure that we put ourselves in the position to have the absolute most borrowing capacity and the most liquidity as possible in 2010. And the way for us to accomplish that is to make sure that we are not paying down any debt earlier than it needs to be paid down.

And so basically what we did is by working capital management, we reduced what the excess cash flow calculation generated thereby reducing what our pre-payment of debt was. And what that does then is obviously allows our ABL availability this next year to be much higher. So basically all we did is we paid things literally a couple weeks early and just shifted them into May. And that changed the excess cash flow calculation. But where we ended up when you get back into the first quarter is basically a normal accounts payable level.

The other thing I would address related to that is there has been a good amount of noise in the market about some of the factors. And the long story short on that is there was a good amount of noise back in primarily the June and July timeframe. But we haven't seen any substantial pressures from any of the factors for the most part with one exception everyone seems to be supporting at levels very consistent with last year and with our reduced receipt, that puts us in even a better position than last year from a factor support standpoint. But our trade support from our vendors and what that is doing to our payables is negligible.

So our plan for this next year anticipates that our trade payables are going to stay very consistent with what they have been in the past and to the extent there is any disruption from factoring support because of some of the issues in their operations right now, we have more than adequate availability to cover that.

That is helpful. So obviously the world was a somewhat different place back in May when you made these decisions. Where we sit today, would you envision Burlington doing a similar strategy at the end of this fiscal year to move around the term loan cash flow sweep?

Well, given what our plan is this year, we are anticipating a very large amount of cash flow generation again in 2010. And we don't currently have a plan to do that but obviously as we approach the end of the year and depending upon where we are at with our discussions on our ABL which I think most of the people are aware terminates in next fiscal year in 2011. So obviously we are going to start some discussions on extending that or replacing it at some time during this year. We will make that decision as to working capital management when we approach that timeframe. But obviously that is at our discretion and we will certainly do what is best for all parties.

Okay. That is very helpful. As I think about Burlington's business particularly as it relates to the competition from some of the mid-tier department stores, the market has it pretty well that most of the mid-tier department stores are much more conservative on inventory this fall and holiday season. So we would expect them to be much less promotional. Would that play well to you? Do you expect to pick up market share because of that factor?

Well, I think that our everyday low price strategy is really our strength overall. And the customer can really come into our stores and understand that they are going to get a good deal every single day. You never know what is going to happen with the competition even though their inventories might be lower, you can never really know exactly what the promotional activity is going to be. I would assume everyone is always going after market share so they are going to continue to be aggressive. But I just think that our current model, everyday low pricing really is a strength overall I think day in and day out.

Okay. And my last question, as it relates to the shrink obviously the actual shrink was higher than what you were accruing for throughout the year. I would assume your accruals for this fiscal year will be higher than last year. How much will that weigh on gross margins going into this year?

Grant, I guess the best way without telling you what we are accruing to is we are accruing to a two-year average. And, yes, quarters one, two and three will result in a higher accrual than what we had last year.

How much of a drop in gross profit in Q4 was attributable to that catch up in shrink do you think?

Slightly over half of the margin deterioration in Q4 was because of shrink.

And not just shrink in Q4 but that was the catch-up for the year (multiple speakers) based on your accrual.

That's right, Grant. One thing to keep in mind is we take all of our physicals at the very end of the year. We are not on a rolling cycle.

Great, that is all I had.

Karru Martinson, Deutsche Bank.

Good morning. Historically you guys have taken permanent reductions in the fourth quarter I think when we moved that around. I'm sorry in the first quarter and then we moved it around to the fourth quarter. Is that something that we are going to see going forward here?

We are just going to whatever the business dictates, to be honest with you, that is how we are going to approach it. Our objective overall is to keep our inventories current. And if that is something that we will need to do next year at this point in time, that is something that we would possibly consider. But obviously we don't know what is going to happen as we get into fourth quarter next year. But we are going to do whatever the business dictates to make sure that we keep our inventories current as we come out of every single season.

Okay. So we didn't see any permanent reduction markdown like we have in the past in the fourth quarter?

Actually, we did take some accelerated markdowns, which is what I think you are referring to. We did take some this year. We are not going to give the amount, it was a material number but it wasn't as big as the year before.

Okay. And in terms of the IT spend, the $26 million. Could you provide some color or granularity on that? What do we expect to have achieved at the end of the year after that spend?

Okay. This is Todd. There is a number of initiatives in there and normally we don't go into a high level of detail in that. But what I will say is we are obviously finishing the work that we are doing as it relates to the distribution centers and the warehouse systems. So obviously by the time we get to the end of this year, we expect to be right on the new systems up and working the way we want them to, which will be a huge contribution to the business and already has been with what we have done so far.

We also have some initiatives that are anticipated will help us in terms of our allocations and stores. And there are a number of other initiatives which will help us in again, expense control. We have some systems that we are putting in to help us with back-office efficiencies. But those are really the main items.

We are also working on some labor scheduling software during the course of this year. But that is expected to really not have any impact in terms of financial results until we get into 2011.

Okay. And just in terms of the SG&A savings, maybe I misheard. I thought I heard you say that you would have some headwinds in the first half of the year. I would have thought these would have been beneficial tailwinds to you guys.

Good news. Do you want to call it headwinds or tailwinds? It is good news going (multiple speakers)

Okay, that is what I figured. It had to be a positive here for the first half maybe not to the same $70 million magnitude but certainly a benefit nonetheless.

That is right. And again, two things to keep in mind is one, we are reinvesting in the store experience; and two, we did have one-timers baked into that 70.

And just in terms of the magnitude of the one-timers, could you refresh us on that?

We don't want to give that detail out.

I think the way maybe to think about it is our fiscal plan for 2010 while we have a very conservative sales plan and we think it is absolutely appropriate for the environment that we are continuing to work in, we are anticipating that our adjusted EBITDA is going to be in the same range as what we experienced in 2009.

Okay. Thank you very much, guys.

Colleen Burns, Oppenheimer & Co.

Hi, good morning. Just following up on the SG&A, how are you looking at SG&A for the year given the reinventing of these expenses? Are you planning SG&A to be flat with last year, up?

Again, going into the details of that is not something we typically do. I think what makes sense to just articulate again is we obviously started our expense savings last year in the back half of the year. And again, there is one-time items in there that we are not going to anniversary. And so we do have some opportunity here in the first half of the year. We continue to look at a number of other areas where we can continue to refine how we run the business and find additional efficiencies. And those are all items that are built into our plan for 2010 which again, even with soft sales assumptions for 2010, we do expect similar bottom-line performance at the adjusted EBITDA level.

Okay. And then just following up on a shrink, do you think any of that could have been attributable to some of the DC consolidation you were doing in the fourth quarter?

I think it would be the minimal, I wouldn't think that would have had much to do with it.

Yes, we think about what normally happens with shrink during down cycles. What we experienced here is not unusual. And we knew we obviously had some risk related to it during the course of the year. But I think as Marc articulated earlier, we think it -- more has to do with just the economic situation, unemployment, what normally happens with shrink, whether it is from customers or employees. But our changes within the supply chain were not such that we think there would have been any significant change in that area.

Okay. And then just on the new warehouse management system. When is the majority of that work being done? Is it coming in now in the first and second quarter or is some more at that going in and being implemented in the back half of the year?

That work really began last fall. And it will be completed in this fiscal year. So all of the warehouse management system changes as well as all of the physical changes to warehouses and the consolidation will be completed back in the third of Q3 and early Q4 this year.

Okay. And then are you doing that by category like women's, men's? Are you rolling it out by region?

It is really a regional approach.

Okay and then just lastly. There was a comment in the 10-K that mentioned a slight decline in initial margins, which surprised me. What is driving that? And kind of what is your expectation for those margins looking out into 2010?

I think the best way to think about that is we have had over the last couple of years increases in our initial margins for a period of time. And as we are working in the environment that we are working in, obviously it's important for us to be priced right initially. And so there is a number of things that Tom has talked to that we are trying to do on the merchandising side in terms of taking markdowns earlier, more aggressively, making sure we are addressing aged goods and really being more timely in terms of getting inventory valued correctly.

And so what we are trying to do is make sure we are priced appropriately with the inbound goods and that markdowns are taken when they should be taken. And again, we are being more aggressive on that, taking a more conservative approach to the balance sheet. What that ends up in terms of our initial markup is as we are trying to price items more sharply coming in, the initial markup is down a little bit. So there is nothing in that result that we talked about in the K that is different than we expected it to be.

Okay. And then sorry, I'm just squeezing in one last one. I think you talked about shifting a little bit more to open to buy this year. Can you talk about maybe just overall how you are thinking about that how much you are planning to shift or anything, any other color you can give? Thank you.

If you're questioning the concept of just staying more liquid and buying closer to the timing of need as opposed to pre-buying, is that the question?

Yes.

Okay. I think over the last couple of years, we have probably moved a little bit more towards buying goods earlier than maybe we did in the Company's history. And as we are taking a look at what the competition is doing and looking at what our model has been, what has been successful about it, one of the key things that we are doing and especially in this environment where there is a lot of goods available -- and Tom talked to that earlier -- there are a number of vendors where we are able to get more goods from, brand names that we were limited on before and some brand names we couldn't get before. As all of those are becoming more and more available because of other retailers having less purchases, all of that bodes well for us to watch our trends and then buy what is working and obviously focus on the parts of the business that are trending well.

So in order to do that we are purchasing less up front and trying to keep ourselves more liquid as we move through the season. And I think in general that is probably as much as we can say about that. Getting into the details of percentages that are pre-bought and bought in season is probably not appropriate level of detail to go into here.

And I would imagine those margins in season are better or your buys are obviously getting a better buy than you would preseason. Is that correct?

Well, I think that you have much more of an education as to what is good. And in theory, yes, the margins would be better because you have more knowledge in terms of what is working and what is not working. So that is the reason we really want to make sure that we stay liquid and we have money so we can take advantage of all those opportunities. And there is a lot of opportunities out there today.

Great, thanks for all the color.

Emily Shanks, Barclays Capital.

Good morning. I wanted to ask a follow-up around the $135 million of advance pay payables that you paid down. Were you able to extract any benefit from the counterparties on this by way of margin support because of the early payment?

It wasn't by way of margin support. Basically what we did is with the economic situation, we have had a number of vendors at different times over the last nine months be interested in us, paying early for an additional discount. So basically what we did in this working capital management initiative was contacted the folks that in the past have been interested in that and asked if they were interested in it. And so we did get a substantial amount of anticipation discounts for paying early. And then there was again a sizable amount of that $135 million that we literally paid right at the end of the month, which would have been paid basically a week later. So we did receive some benefit there.

But we are working very much in cooperation with the vendors to make sure in the environment we are in, it is important for us, we have a lot of borrowing capacity and we have a lot of ability to be flexible with our vendors. But we are wanting to make sure we are doing this in a way that is in partnership with the vendors so we are maintaining the best relationships we can going forward.

So those that wanted to take advantage of that we gave them that opportunity. And the other amounts that we paid we paid without additional (inaudible).

Okay, that is great. So it was not a positive benefit to your margins then in the quarter?

No, and it would be certainly as you buy items for less, it doesn't come into your margin until you sell the goods. So right at the end of the quarter, there would be no impact on the quarter. It would be in the following quarters as those goods are sold. And again, the dollar amount we are talking about that there were anticipations on was very small.

Got you. Thank you for the clarification. And then around shrink, thanks for all of the detail around that. Just to be clear, if you do your physicals at year end, you therefore -- are you able to track what shrink is on a quarterly basis?

No, your physical happens one time a year and that is when you do to your physical comparison to what is on your books. And when it happened throughout the year, you really don't know. So what you do the following years is you just accrue based on the best history you have and what you think within your history is going to be the best indicator of what is to come.

Now, the one thing I will add to that is obviously with the knowledge we have of the detail of the shrink where it happened, when it happened or why it happened, I guess. As we work through with this task force, we are obviously going to see where we have opportunities and we are obviously already working on that. As we work through that, we may have a little better clarity going through this year than we have had in the past. But the vast majority of your information about what shrink is going to be comes from the physical report process and that will remain at fiscal year end. We feel pretty comfortable with the amount of shrink that we have embedded in the plan.

Okay. I was just curious because I was trying to figure out how you would be able to track the progress of the shrink improvement if you can't check it every quarter? How should we think about that?

You identify the root causes for it and you fix the root causes.

Okay. And then you just check it at year-end, I guess?

Every once in a while, you can do some cycle counting to validate. And you can do some incremental auditing for your LP audits, you can get some type of feel for stores that are operationally running a little cleaner than others. But that is about the best you can do.

Okay, okay, great. Thank you. And then just my final question. Thanks for the comments around the vendors. I just want to see if you could comment specifically around CIT if you are seeing them continue to underwrite your accounts receivables? And just any comments around CIT in general.

Sure, this is Todd, I will take that one. We have had as I think everyone on the line is aware very good long working relationship with CIT and they are the largest factor in terms of support to us. While there has been an awful lot of noise in the market related to CIT, the reality behind it is their support has not changed at all during this entire process. And as is normally the case here at the beginning of our new fiscal year, we are in contact with virtually all of the factors. And I think we have talked to all of them now at this point with maybe just a couple of exceptions.

So we have very current information on their support. But their support level has not changed, there are lines that they plan to have in place, they are currently doing their underwriting work now. But we continue to enjoy the same level of support we have had in the past. And frankly while there it is again a good amount of noise during the July timeframe when I think there was some bond repurchase activity going on and there was more question about CIT, we had again, a lot of noise but we didn't have very many vendors that we ultimately had to do anything different with. And basically where we stand now, there has been very little discussion related to CIT.

So the point is we continue to have the same level of support, we expect that going forward. Obviously that could change. But the thing I want to make sure everyone here understands is that our borrowing capacity and our unused availability on the line, we can easily absorb any foreseeable change in [trade] support whether that be CIT or factors in general or other pressures. We have an awful lot of flexibility due to our unused line availability right now.

Great, thanks for all the details. Good luck, guys.

Andrea Cullen, Ares Management.

Good morning, gentlemen. We just wanted to ask on the gross margin deterioration since half of it was from shrink, can you give a little bit more color as to the other -- the balance of that deterioration. Was it mostly discounting?

Well, as we said earlier, we did have some acceleration of markdowns out of Q1 back into the quarter. That is a piece of it. And the other item that I want to be sure everyone is understanding, we mentioned several times we are taking a very, very conservative approach on inventory management. And we mentioned it on previous calls since Tom has been here. There is a high focus on making sure that aged goods are marked down in the appropriate timeframe and that we have them valued correctly. And again, we are taking a much more conservative approach on inventory valuation.

And so it is basically those items in tandem that are causing the deterioration. The idea being that setting inventory properly and all of the things we have done in terms of expense and working capital management and debt management put us in a position of strength and ability to execute the plan we have for 2010. We think we are set up very well for 2010.

Okay and then as you have seen an unprecedented sort of flow of goods come into your universe, have you noticed over the course of the past year a shift in your customer mix at all?

Yes, I think we definitely have had a shift. I think we are capitalizing on some of the downfalls of the department stores right now. If you look at where a lots of our growth is coming from is through those consumers that make more money than our average household income that we measure to. Yes. I think that, yes, we are able to take advantage of what is currently happening in the competitive set.

Okay, and I know tat this has been -- a few other people and have asked this. But just to sort of go into it a little bit more, we are hearing obviously that obvious people have prepared for a much lower level of spending throughout the retail complex. Are you thinking or seeing anywhere in the near future that potentially there is going to be less goods available to put in the store? That you will have the opposite effect of what you had last year at some point where there was an unprecedented flow into the -- from goods and then there potentially would be less merchandise available for you to sell?

As I mentioned before being in this business for a long period of time, there is really never really a lack goods in the market place. We can really find it. Everyone is cutting back, as I mentioned earlier. But for what we need, there is going to be ample supply of product. I don't think that is going to be an issue, whatsoever.

Okay, thank you very much.

Harold Citron, Creditintell.

Good morning, gentlemen.

I apologize, --

Operator, after this, we have time for one more question after this one.

One more question after Mr. Citron?

Yes.

Thank you.

Okay. Good morning, gentlemen. A couple of quick questions here. Can you give us a current availability number on your revolver?

Yes, our current availability as of this week is $392 million and that compares very favorably to the same time last year where it was $203 million.

203, right?

Right. Last year it was $203 million; this year it is $392 million.

Great. A question with the push for maximum liquidity in 2010. From the way it is sounding, your adjusted EBITDA is going to fall as you said relatively similar to where it did in 2009. Given that your term loan covenant continues to decrease throughout fiscal 2010, is part of the maximum availability or push to free up all of your debt a means of meeting the reduced covenant?

We are really at a point now where watching covenant clearance is not the focus that it was earlier for one very simple reason, the cumulative effect of the inventory reductions, the expense reductions and the timing of when we are buying goods, which again is closer to need, we put all of that together and what that does to our availability this next year and our borrowings, obviously our ABL borrowings are going to be very low this next year.

And so we were trying obviously to create the maximum liquidity this next year. But what that has resulted in is we expect our covenant clearances in 2010 to be dramatically higher than they have been any of the two years that I have been here. And we intend to end this next year at similar covenant levels with what we had this year or higher. And that is with the reduced ratios.

So you were already averaging about a one turn clearance. And so you are saying you're going to continue that one turn clearance or even higher than?

Higher.

Okay. Question regarding the overall debt, about $1.4 billion that you have from the LBO. We are starting to see some IPOs from retailers in the deep discount channel, the dollar stores, Dollar General, Dollarama, starting to test the waters with equity. Is that something that you guys might look into either if not in this year but next year as a means of reducing the debt?

Yes, I think it is too early to be having discussions about that. The one thing I will say is with the ABL coming up in 2011, obviously in the next couple of quarters, we will begin formal discussions which we have not at this point. We have very good relationships with all of the banks that are in our facility right now. And so we don't anticipate there being any issue with being able to extend or replace the ABL in appropriate time frame. The longer term capital structure changes I don't think at this point are probably an appropriate topic for this call.

Okay. Last question here. Since the LBO, you guys have expanded the store base by about 20-some-odd%. Is there a long-term vision at this point for the store base growth?

I will take this and --

I will add to that, this is Fred Hand. Our strategy to grow the stores remains to be consistent as it has been in the past. We are looking for opportunities to expanding. I can't go into the details as to what number of stores we are looking at to expanding every year. But that strategy has not changed. So we are very much looking to grow the stores and the number of stores that we have.

Okay. So it is more going to be along the lines of a low single-digit store base growth for the next year or two?

It is really going to be -- it all depends on what opportunities we are able to capitalize on. Given the economic condition and what we are looking at, the number could grow but I hesitate to give you a quote as to what number or what digit it is going to be. But I can tell you that it is going to be very aggressive. We are looking for the opportunities to grow.

Okay. Much appreciated for your time.

Okay, last question, Operator.

Thank you. Carla Casella, JPMorgan.

Hi. One question on merchandising for seasonal. Can you talk about what percentage of your merchandise you expect to be seasonal items for Halloween and then also for the Christmas season and how it may differ from last year including any focus you may have on toys?

I don't look at much of a change in terms of seasonal product as we go forward. It would be comparable to last year overall. And in terms of toys, we think that again, there won't be any significant change in our strategy in the toy business as it stands today. Things emerge and things -- as we look out into the future and it looks like it is going to be good we may have a different approach. But at this point in time on everything you just asked, its going to be pretty much comparable to last year. We don't see a whole lot of growth there.

Okay. And then during the holiday, a seasonal 30% is the business particularly or is it greater or --?

We really don't give out those -- we really don't give out this kind of percentages overall.

Okay, okay, great. And then also as we have visited some stores, we hear a lot about the labor savings initiatives that seem to have some traction. Can you just talk a bit about are there any targets in terms of what labor could be as a percentage of sales or where you are in terms of getting to your targets?

Again, this is Fred Hand. We are very pleased with what we've been able to run as far as our business being more efficient without sacrificing service to our customer. I am not able to quote the percent of labor cost that we operate under. However, I will elaborate on the fact that last year in the third quarter we implemented opportunities to save additional payroll without sacrificing customer service. We introduced a new stored management model, which enables us to provide consistent management coverage by sales volume tier. We began allocating payroll to stores based on sales per hour expectation rather than dollar amounts.

We allocate payroll base on patterns of sales and making sure that we have the coverage where we need them in the store based on our customer traffic flow. And we closely monitor our new higher rates by state to make sure that we are competitive and yet in [grade], commensurate with the experience of the applicant.

There is other measures that we have also taken in managing and controlling our expense. But the underlying common denominator here is that everything we do we make sure that in no way shape or form it is going to interact in a negative fashion with service or what the customer experience is expected to be in our buildings.

Okay, great. Thank you.

Thank you. There are no further questions at this time.

Thank you very much operator and thank you everyone for participating in our fiscal year-end earnings conference call. That concludes this call for today.

Thanks everybody.

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