Q4 2008 Dress Barn Earnings Conference Call - Final.(Broadcast transcript)

OPERATOR: Good afternoon, ladies and gentlemen, and welcome to Dress Barn Inc.'s fiscal 2008 fourth quarter and year-end financial results conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Mr. David Jaffe, President and CEO of Dress Barn, Inc. Please go ahead, Mr. Jaffe.

DAVID JAFFE, PRESIDENT, CEO, DRESS BARN: Thank you. Good afternoon, everyone. With me on the call today are Armand Correia, CFO; Keith Fulsher and Lisa Rhodes, Chief Merchandising Officers for Dress Barn Stores and Maurices Stores. Before our prepared remarks, Armand will make a few introductory comments.

ARMAND CORREIA, CFO, SVP, DRESS BARN: Thank you, David. I would like to remind everyone that our discussion this afternoon may include forward-looking statements which are subject to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company's filings with the Securities and Exchange Commission. I would now like to turn the call back over to David Jaffe.

DAVID JAFFE: Thanks, Armand. To start with an overview, the trend throughout the year at DB Inc. continued in the fourth quarter. Maurices registered a plus 4 comp increase and was also plus 4 for the year. Dress Barn improved somewhat to a minus 5 but was still minus 7 comp for the year. Maurices solid comp performance coupled with strong margins and cost control enabled the division to reach its operating income plan for the year. On the other hand, the weak comps at Dress Barn led to deleveraging that significantly reduced operating income below the prior year's levels. As a result, DB Inc. recorded earnings per share of $0.34 for the fourth quarter and $1.15 for fiscal 2008. While we are disappointed that this is approximately a 20% drop from last year, the strategies we put in place helped to mitigate the loss and to enable us to meet Wall Street's expectations for the quarter.

Going into fall, the weak economy continues to impact our Dress Barn business but the business is improving, partly as a function of easier comp comparisons and is currently posting no decline in comparable store sales. However, Maurices is up against tough comparisons and is currently down in the mid single digits. The backdrop for the business and our stock is obviously dominated by the turmoil in the financial markets and the continued problem in the economy. That having been said, there is some good news that is perhaps being missed. The drop in energy prices and the relatively steady interest rate environment are good things for our customers and business.

While consumer remains hesitant and fall is likely to be challenging, we believe that our focus on cost control, careful merchandising and measured investment is the right strategy. Our inventories and expenses are appropriate for the business condition and we are planning prudently for both the holiday and spring seasons. I'll now turn it over to Armand for review of our financial performance.

ARMAND CORREIA: Thank you, David. Thank you and good afternoon, everyone. Looking at our fourth quarter results, net earnings were $22.1 million or, as David said, $0.34 per diluted share compared to a record net earnings of $33.6 million or $0.48 per share for the same period a year ago. I would note, however, that this performance did exceed analyst consensus views of the quarter which were $0.30. The year-over-year decrease in quarterly net earnings was primarily sales related. Quarterly net sales increased 1% to $382.3 million versus a year ago quarter. The increase reflected the overall growth from new stores but offset by a comp store sales decline of 2%.

Sales results were mixed by division. Dress Barn stores' quarterly sales decreased 5% versus last year to $238.5 million, reflecting a comp store sales decrease of 5%. By region, the northeast had the better performance while the West Coast had the weaker performance. Regarding some of the key Dress Barn store sales components, sales transactions decreased 4% last year while average dollar sales remained flat at $63.59 with units per transaction also flat to last year at 3. In contrast, Maurices' quarterly sales increased a solid 12% versus last year to $143.8 million. The increase was primarily driven by new store growth along with a comp store sales increase of 4%. All regions posted an increase in comp store sales with the midwest region the stronger performer. Key sales components for the Maurice stores were all positive compared to last year and more than offset a traffic decline of 4.5%. Average dollar sales increased 6.5% to $46.31 which included a 6.5% increase in average unit price to $16.64 with units per transaction flat at 2.8.

Moving to gross profit, our rate for the quarter came in at 39.5%, declining 360 basis points compared to last year. Here's how this breaks down. 250 basis points was from merchandise margin and 110 basis points on buying and occupancy costs from comp sales deleverage. Within the merchandise margin, increased markdowns accounted for 220 basis points of the 250 point merchandise margin decrease.

By division, gross profit for Dress Barn stores was 38.1%, a decline of 510 basis points to last year. Here's the breakdown. 320 basis points from merchandise margin, primarily due to higher markdowns, and 190 basis points from buying and occupancy cost deleveraging. Gross profit for Maurices' stores was 41.8%, a decline of 120 basis points to last year, with the breakdown being 90 basis points on merchandise margin, again primarily from higher markdowns, and 30 basis points from buying and occupancy costs primarily from new stores, increased occupancy costs.

We were pleased with our ability to control SG&A expenses during the quarter. Our SG&A spend for the quarter was $101.9 million, 2% above last year despite a 5% increase in the net number of stores. SG&A as a percent of sales came in at 26.6%, an increase of 20 basis points versus last year's 26.4% and reflected good expense control, given the deleverage from the decrease in comp store sales. Quarterly operating income was $36.7 million, or 9.6% of sales. This compares to a record operating income of $51.9 million or 13.6% of sales last year.

The breakdown by division. Operating income as a percent of sales for Dress Barn stores for the quarter was 8.2% compared to 14.2% last year. The decrease of 600 basis points to last year was primarily sales and gross profit related. Maurices stores operating income came in at a healthy 12% of sales compared to 12.7% last year. The decrease of 70 basis points to last year was primarily in gross profit from the higher markdowns. Our quarterly effective tax rate was 39.6% compared to 37.4% last year.

Our quarterly weighted average diluted shares outstanding of 64.5 million shares declined 8% from last year's 70 million shares outstanding. This year's decrease of 5.5 million shares was due to a decrease of 2.7 million shares less from the conversion feature of our 2.5% convertible senior note along with a decrease of 2.2 million resulting from our share buyback during the early part part of the year. And, third, a decrease of approximately 600,000 shares in share-based compensation.

Now briefly reviewing our fiscal 2008 results. Net sales were $1.444 billion versus $1.427 billion for fiscal 2007. Comp store sales declined 3% with Dress Barn stores decreasing 7% and Maurices increasing 4%. For the year, …