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07 Earnings Call Transcript Good morning.My name is takia and i'll be your conferenceoperator today.At this time, i would like to welcome everyone to the ralph lauren online steinmart inc.Third quarter financial results conference call.Madam, you may begin yourconference. Good morning.Thank you for joining us.I will provide abrief recap of our third quarter performance and share my perspectives of howwe see our business going forward.Please keep in mind that i have been in mycapacity as ceo for just two months, so what you will hear today is evolving. After my comments, you'll here from jim delfs, our cfo;Billmoll, our chief merchant.We will then take questions, at which time jay stein, chairman of the board, hunt hawkins, chief administrative officer, and mikeray, senior vice president of stores, will also be available for questions andcomments. Our third quarter performance was unacceptable.We wereunable to drive sales, resulting in our worst third quarter comp performance inrecent history. November sales are trending significantly below last yearand below plan, and we expect the pressure to continue, given the intense levelof promotional activity both pre and post thanksgiving by other retailers. We will liquidate inventories as expeditiously as possiblein the fourth quarter so we don't burden 2008 with 2007's merchandise.Ourplans for next year are still in their initial stages but they are being builtand in a much more conservative assumptions until we have solid indicators of aturnaround in business. I don't have to tell you how difficult the currentenvironment is for retailers in general and for companies catering to our corecustomer in particular.Our target customer has not been tempted to shop forapparel, either because the fashion doesn't excite her or she is worried aboutthe economy or both. Meanwhile, our competitors have already gone toextraordinary lengths, including deep discounts off of regular pricedmerchandise to attract customers, making it especially difficult for aneveryday low price retailer like stein mart. Additionally, we have experienced softness in what hastraditionally been a stein mart strength our geographic concentration in thesoutheast.Our core region has come under increasing economic and weatherpressures and are business has suffered accordingly. We have started to see some slight improvement in the southflorida business but it's being offset by the overall regionalunderperformance.We also continue to have problems with our home business thathas continued to track well below the company trend. Fixing this area is a priority but in a soft housing market, this does provide additional challenges.We are looking at alternatives tomaximize the productivity of the home square footage. Since my arrival at the end of september, i have focused ona top to bottom review of the business.I have spent time in a number of storesand with the corporate division.I have spoken directly with customers andpersonally solicited additional input.I have also enlisted some of our thirdparty partners and other stakeholders to provide their viewpoints as to thestrength and the weaknesses in our business. This process is far from over but there are some actions weare taking. We are focused on ralph lauren donna maniche lunghe polo top line and reversing the negative compstore sales trend we have been experiencing for some time.We have redeployedour marketing dollars.The new branding campaign that the company had embarkedon earlier in the year did not drive customers into the store, so we havestepped away from our television base branding to an aggressive promotioncampaign to be more competitive.As a result, you are seeing a much strongervalue message in every communication from us and both inside and outside ourstores as we reinforce the message with signage.We are using direct mail toour preferred customers and purchase lists, e mail and special targeting to ourcredit card customers, and we will use tv and radio for our 14 hour sales.Thiscorrection has cost us on the expense side but was necessary to advance ourgoal. But i also want to tell you that i'm not polo ralph lauren donna willing to lay ourpoor performance off on marketing alone.We are looking at every aspect of ouroperation to assess where we are succeeding and what needs to work. We are pulling back on our new store opening plans todedicate all of our efforts to returning our core business to profitability.Inaddition, we are reevaluating our merchandise mix and the productivity of eachcategory. We are continuing to ensure we present a strong valuemessage in our store and media.We are evaluating the productivity of eachsquare foot of selling space.We are focusing our capital spending on thoseareas that provide the most immediate and greatest return.We will also becutting costs commensurate with our trend of business. We assure you that we will leave no stone unturned inlooking into the heart of the stein mart business and revalidating every aspectof our operations.This will not happen overnight but i look forward to keepingyou informed on our progress as we continue to develop our strategy goingforward. I thank you and i now turn it over to jim delfs, our chieffinancial officer. Thanks, linda.In the course of our presentation thismorning and in response to your questions, we may make statements as to certainmatters that constitute forward looking statements.Additional informationconcerning those factors that could cause actual results ralph lauren donna hoodies to differ from thosein the forward looking statements can be found in our current report on form10 k for the year ended february 3, 2007. For the third quarter of 2007, total sales decreased 1.7%from the third quarter of 2006, while comp store sales decreased 6.3%.Pleasenote that total sales for the 13 weeks and 39 weeks ended november 3, 2007 arecompared to total sales for the 13 weeks and 39 weeks ended october 28, 2006, aone week shift for each period. Comp store sales, on the other hand, are compared for theequivalent 13 and 39 week periods, thus comp store sales for the 13 week and39 week period ended november 3, 2007 are compared to the equivalent 13 weekand 39 week period ended november 4, 2006.The effect of the one week shiftpositively affected total sales by approximately $6.7 million for the thirdquarter and positively affected total sales by approximately $7.3 millionyear to date. For the third quarter, gross profit declined to $86.2million, or 25.9% of sales, compared to $89.3 million, or 26.3% of sales in thesame period last year.Merchandise margin was flat due to increased markdownsoffset by increased markups.Occupancy and buying costs increased 40 basispoints, primarily from lack of leverage on lower sales. Selling, general and administrative expenses were $97.2million, or 29.2% of sales as compared to $92.6 million, or 27.3% of salesduring the same period last year.For the third quarter, sg expensesincreased $4.6 million when compared to last year.Store operating expenses forthe non comp group of stores increased $2.3 million while operating expensesfor the comp stores decreased $3.3 million. Advertising increased $3.5 million and depreciationincreased $400, 000.Costs associated with the transition of the president andceo were $2.4 million.Share based compensation totaled $1.8 million in thequarter.That amount is net of a $500, 000 reversal of previously accruedperformance grants, since our results do not now support such awards.Theincrease of $300, 000 over the prior year's third quarter is included in cost ofsales at $200, 000 and in sg at $100, 000. Other income grew to 1.7% of sales in the third quarter ofthis year from 1.1% of sales last year.The increase is due to the addition ofcredit card income this year. For the third quarter of 2007, we incurred a net loss of $2.7million, or $0.06 per diluted share, as compared to net income of $237, 000, or$0.01 per diluted share in the third quarter of 2006. For the first nine months of 2007, total sales were flatcompared to the first nine months of 2006 while comp store sales decreased3.1%.Gross profit declined to $277.3 million, or 26.7% of sales in the firstnine months of 2007 compared to $280.9 million, or 27% of sales in the sameperiod last year.Merchandise margin was flat as increased markup was offset byincreased markdown. Occupancy and buying costs increased 30 basis points, primarily from lack of sales leverage and increased share based buying costs.
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