Adrienne Tennant - Friedman, Billings, Ramsey & Co.
Okay. Thank you very much. Good luck for holiday.
Michael L. Henry
You are welcome.
Operator
Your next question comes from Kimberly Greenberger of Citigroup.
Kimberly Greenberger – Citigroup
Thank you. Good evening. I had a question -- could you look out to 2009 and just talk to us about what sort of cuts you think you might be able to make in your SG&A numbers next year? And within your $30 million CapEx budget, could you just give us some rough guidance on are there any new stores in that number, how many refreshes are you doing, and is there a possibility that you might engage in more aggressive store closings for the Pac-Sun brand?
Michael L. Henry
Okay, there are several things in there. I will try to touch on each one of them. Don’t let me off the hook if I miss one.
As it relates to 2009, we are not making any comments about any specific assumptions on expense lines, margin lines, sale lines at this point. We are still in our budgeting process as we sit here today. What I would say about expenses though is when you look at our results from this recently completed third quarter, as well as the second quarter, we had been able to get SG&A down on a dollar basis year over year when you take out the non-cash charges of impairments and depreciation, and we continue to look at every single item in our business, looking for opportunities to further reduce expenses and we intend to do that. I’m just not going to get terribly specific about it right now.
As it relates to CapEx, we stated it will be $30 million for next year. There are just a handful of new stores, about a dozen relocations, and only four or five refreshes as we sit here right now, but we are continuing to work that number. We’ve had a great deal of cooperation from our landlord partners in realizing that it is tough out there in a variety of regions and we’ve worked with them to defer as many refreshes as we can at this point, and we’ve even been renegotiating certain other things as it relates to new stores and relocations, so that is -- those are numbers that are still in flux, so that’s just at a moment in time. Keep that in mind.
And as it relates to closures, we have taken a look to see, you know what, does it make any sense to close 100, 150 stores at any particular point but when you consider what would likely be from all indications relative to the demo process we just finished a few months ago and clearing our business partners of what would it take in today’s environment to do anything like that, they’ve estimated it would be at least two years worth of occupancy on each location that the landlord groups would likely want from us to exit the leases early. And when you take that into account, and Adrienne had asked a question about number of stores that are cash flow negative and there are only a couple of dozen and some of those are very minimally cash flow negative, so when you take into account the asset write-offs, cash flow performance of the stores as they are relative to that two-year occupancy penalty we’d have to pay to close, it just doesn’t make much sense at all for us to close any stores early. As a matter of fact, there are only seven in the analysis that we did that you could suggest it would make any cash flow sense to close early. One of those stores closes this month here in November; another closes two months from now in January, just in our normal course of how we are going about things. So that would leave five out of our entire population of 940 that it would make any good cash flow sense to close early.
Kimberly Greenberger – Citigroup
That makes a lot of sense, Mike. I’m just looking back at your store openings in 1999 and 2000 and I would guess that if you have an opportunity to close stores at lease expiration, you’ve got somewhere north of 150 stores coming due in their leases over the next 18 months to 24 months. Doesn’t it make sense to take a harder look at those stores and potentially think about getting out of some of those leases without any money due to the landlords?
Michael L. Henry
Certainly and that’s where we have stated previously on several occasions that we would expect to close 30 to 40 stores per year in the normal course of business over each of the next three years because there are approximately 100, 120 stores per year that will come up for consideration for renewal. There are also refreshes in there, there are new store considerations that we have in there that we need to reevaluate in this current environment -- do we think they are very strong performing locations for us, accretive locations for us? And so as we have these renewals come up, as we have kick-out clauses come up from stores we even opened two or three years ago, we are taking a very hard look at each and every location and if it is not accretive to us on a four-wall basis or a cash flow basis to a sufficient level where it would improve the overall performance of the business, then we will be closing those and that’s where we previously said that that population of 30 to 40 a year will come from.
Kimberly Greenberger – Citigroup
Great. That’s very helpful. Thanks so much.
Michael L. Henry |
