Crystal Lanigan Kallik (D.A. Davidson): Can you walk us through the $50 million in cost savings that you are expecting this year in terms of how much of that actually hit the P&L?
Edward L. Larsen: The $50 million all hits the P&L. A lot of it is cost of sales, a lot of it you will see in this huge gross margin improvement we are seeing in the third and fourth quarter. In addition, we have significant marketing savings in the back half. We have improvement from our reduction in corporate staffing that we executed in June.
Our operating cash flow for the full year is going to be over $230 million and with CapEx of $75 million, our free cash flow is going to be over $150 million and our definite needs would be the $80 million repayment of the acquisition debt and about $28 million in dividends. We therefore have ample excess cash flow.
Barbara Wyckoff (Buckingham Research Group): Where are you in your hiring process in the design, merchandising and marketing world?
Trudy F. Sullivan: We’ve assembled a great team and we are pretty much done. There’s always some hiring that’s going on below the senior levels but our senior leadership team in both product and marketing is really done in both brands.
Brian Tunick (J.P. Morgan): The J. Jill business is masking some impressive improvement at the Talbots division and the market would love you to make the tough decision on the business. Can you talk through what is going on and when will you make that decision if things continue to be challenging?
Trudy F. Sullivan: The message we are really trying to put out there is that things have been challenging but our recent trends are actually quite promising and we made the tough decision to get this brand in great shape going into fall and we are quite pleased with what we are seeing in the customer response for the last several deliveries. We’re not talking about a one-delivery trend here. We have a deeper trend going and the direct business has been consistently well-maintained.
As far as we are concerned, the rational for J. Jill being in our portfolio is as strong as it ever was. I have a lot of confidence in Paula and the team that she’s put together and they have done some significant turnaround in the last six months and they are starting fall in a very strong place.
Remember Paula’s opening comments that they are getting a 19% greater unit sell-through on virtually 20% less inventory. We are really starting to see it turn around. At the store level, I would encourage you to go into the stores. They look really strong for fall. It’s not predominantly a markdown story which in the last six months if you went in there, they had tremendous penetration of very cheap markdowns. That’s not the business that we are in. We are feeling better about J. Jill than we felt in quite some time.
Paula Bennett: We started the year in February with a strategy to focus on four things: one was to change the look and feel of the full-priced stores to drive full-price selling which you’d see if you went into the stores; secondly to manage our inventory flow and levels to support full-price selling; third was to build a brand right product offering, which we are well on our way to doing; and fourth is to optimize our customer base. Those are the four initiatives that our team is focusing on every day. They are all very important and we are making progress in each of those areas.
Trudy F. Sullivan: We certainly haven’t had a consistent track record of delivering on this brand but you have to understand that it’s a new day there with a brand new leadership team. We’re starting to see some real light at the end of the tunnel and we know we have to show that we can do this in the next two quarters and we are committed to that.
Betty Chen (Wedbush Morgan Securities): There is some increase in circulation for Talbots, even though it is going to be down a little bit at J. Jill. Can you therefore talk about the marketing plans as a percentage of sales this year versus last year?
Trudy F. Sullivan: We actually kept our powder dry in both brands for the back half where we really felt it would align with product improvement.
Edward L. Larsen: At the Talbots brand, our total marketing spend, which includes all marketing and which includes catalog, is down about $9 million. The actual media, which would be TV and print, is down about $17 million and that’s offset by additional spending in web and catalog circulation.
At J. Jill, the total marketing spend is down about $6 million and that is a decreased catalog circulation, although prospecting is up, total circulation is down a little bit. The total company spend is down about $15 million.
Betty Chen (Wedbush Morgan Securities): Following the postponement of the purchase of the J. Jill receivables, what is the impact on the full year guidance and is it being offset by the cost-savings?
Edward L. Larsen: We did plan to purchase those effective the end of September. We did have some finance charge revenue in our guidance for that. We did have quite a bit of expense in there also, to start this business up. That therefore goes away. It was a net income of about $2 million but that is more than offset by changes we made to the Talbots, terms of the Talbots card, which we changed effective August 1 and that will offset that shortfall so we are in good shape.
Analyst for Todd Slater (Lazard Capital Markets): On the $50 million cost reduction that you expect to see in 2008, how much have you seen in the first half and how much do you expect to see in the second half?
Edward L. Larsen: We’ve had good product gross margin improvements in the first half on the Talbots brand so we definitely have seen some of that in the first half. The majority though will be in the back half.
Analyst for Todd Slater (Lazard Capital Markets): Could you talk about August trends in terms of merchandise margins? Are you seeing them up in the 500 basis point range like you expect for the third quarter?
Edward L. Larsen: We are.
Jennifer Black (Jennifer Black & Associates): Are you changing how you allocate the merchandise so the best stores get the merchandise?
Trudy F. Sullivan: We are really undergoing significant changes in how we plan the allocation of products and so you are right. We actually just cannot go on based on our historical allocation method. We are trying very hard to make significant headways on allocation and slow back to sales really starting with the third quarter.
|
More:
