Mike Henry: At this stage we’ve said inventory would be flat per square foot to up slightly by the end of the year. One of the things you have to remember as we have been shrinking footwear and shrinking accessories is that we have been funding that with the increased penetration of denim and certainly the key product categories that are working within our apparel assortment particularly in junior’s but also denim on the boys’ side. There are certain investments in inventory that we need to make to be able to drive better business going forward as we become more apparel focused.
Adrienne Tennant (Friedman, Billings): What exactly is the shift for the third quarter?
Sally Frame Kasaks: It’s just some timing delivery shifts.
Michael Henry: There are certain receipts for the holiday season that will be coming in right there towards the end of the third quarter.
Adrienne Tennant (Friedman, Billings): Can you cancel anything at this point?
Sally Frame Kasaks: We are always manipulating our inventory. This is the planned discussion to get us into Q4 but honestly, we are shifting and maneuvering. We do that on an ongoing basis.
Janet Kloppenburg (JJK Research): Could you give us some information on how the rest of the country is doing versus some of the trouble markets? Do you think that the young men’s business was where you wanted it to be in the strong market for the back-to-school season?
Sally Frame Kasaks: There is one thing we have to understand; we’re going into our biggest weekend this week and so I don’t really want to talk about markets because with this back-to-school, some of our stronger markets are the latter markets quite honestly. We’re balancing a lot here and I can’t speak to that in any informed way sitting here to-date even if I were to look at the numbers.
In the young men’s, we’ve been very pleased with denim and aspects of our top’s business.
Janet Kloppenburg (JJK Research): Wouldn’t you expect that comps should improve everywhere, including the South West and Florida markets as we move deeper into the season and therefore your guidance could be viewed as conservative?
Michael Henry: It’s possible they could improve. As we sit here, we are down eight and from a peer compared perspective; actually we have tougher compares next week than we do this week. For every comment one way about certain markets, there are other data points that can go the other way and it remains to be seen. We positioned our guidance to say basically if things don’t get better, this is where it looks like we would land and we are certainly making every effort to make our business to perform better than that level.
Paul Lejuez (Credit Suisse): What is the CapEx forecast for next year?
Mike Henry: It will probably be in the $70 million to $75 million range next year and for the next couple of years. One thing to realize is that where we opened 100 plus stores back in the late 1990’s to early 2000, those leases will be coming up for renewal.
We have almost 100 leases coming up for renewal next year, about 120 the year after that and nearly 140 the following year and in each of those leases a good number of them have clauses and they are going to require us to do something to refresh the store. Thus in contemplation of that, much of our refreshed program in future years will be driven just strictly off of the lease terms.
It requires us to do something in the store and our job in that regard is to make sure we’re making prudent decisions of what we’re spending, in which locations and making sure that we’re getting an appropriate return on those investments. However, broadly at this stage, the $70 million to $75 million range makes sense for each of the next three years.
Crystal Kallik (D. A. Davidson): You’ve been specific as far as where the SG&A percentage rate is for the second half and so certainly implying a fair amount of deteriorations to the gross margin. How should we think about the order of magnitude when we’re thinking about the gross margin in the second half?
Mike Henry: The great order of magnitude is going to be in the merchandized gross margins. We are contemplating that the promotional environment will continue and certainly for a negative high-single comp we are going to have to spur certain promotions to make sure that inventories do stay clean. The great majority of it is within merchandised margins. At this comp level, occupancy would likely deliver 150 to 200 basis points per quarter.
We will continue to have distribution leverage. At this time last year, we would have had two distribution functions in operation; we just have the single Olathe center in operation at this stage. We expect to have anywhere from 30 to 50 basis points of distribution leverage in the back half even considering this comp rate. Occupancy will probably de-lever 150 to 200 and then you’ll have distribution offsetting in that just a bit.
Crystal Kallik (D. A. Davidson): You’ve just made aggressive buybacks in Q2 but it sounds like in general you’re taking a much more cautious tone. Given the cash balance, should we assume that you’ll probably tamper the buyback activity for a while?
Mike Henry: We do have the $50 million buyback authorization. Certainly, as we look at potential comp performance being in the negative high single-digit range, we do plan to be cognizant of what our cash needs are and trying to protect that cash balance so that we can go ahead into next year in a healthy position. The assumption that we would end the year with $50 million to $60 million in cash does not contemplate buybacks in the back half of the year.
Dana Telsey (Telsey Advisory Group): Can you talk about the performance of the remodels relative to the base level of stores and also the impact of private label, Bullhead versus the brand? How do you see the mix transitioning over the next year?
Michael Henry: The refreshes continue to outperform the rest of the chain by 10 to 12 comp points on average and they continue to deliver 200 to 250 basis points improved gross margin performance that remains true versus the chain as a whole. It also remains true even within the difficult regions when you look at some of those initial refreshes that we did in California in particular or Arizona and Nevada. Even within the depressed economic area the refreshes still outperform the other stores in those regions by 10 comp points. That’s been a consistent data point as we’ve gone quarter-to-quarter and it remains true.
Dana Telsey (Telsey Advisory Group): What’s different about this period of weakness compared with the other apparel retailers? What are the differences and similarities?
Sally Frame Kasaks: Our denim business is strong. Therefore Bullhead, which is our own brands, is fairly doing very well and though we do have some national brands mixed in with the assortment, Bullhead is being a win for us both in young men’s and in juniors’.
Our objective is to continue to grow proprietary in the junior business, attended margins, speed, fashion, all of that aspect that we’re committed to and in young men it’s just certain items and categories that we will build on. Our men’s mix is where it’s going to be; we’ve got a couple of points that we might switch by season. On balance, we will continue to grow penetration of our junior proprietary. Denim is really one of the major drivers right now in that area and we’re generally pleased with that.
We have some fundamental strategic initiatives in the business and we are continuing to adjust that and it’s a little bit tougher as you’re going through this. This is kind of a slight turn in the business in terms of how we’re approaching it. As we said, the headwinds are probably making it a little more difficult.
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