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Edited Transcript of BONT earnings conference call or presentation 14-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Bon-Ton Stores Inc Earnings Call

York Mar 14, 2017 (Thomson StreetEvents) -- Edited Transcript of Bon-Ton Stores Inc earnings conference call or presentation Tuesday, March 14, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Megan Crudele

ICR - IR

* Kathy Bufano

Bon-Ton Stores Inc - President & CEO

* Nancy Walsh

Bon-Ton Stores Inc - EVP & CFO

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Conference Call Participants

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* Jenny King-Dugan

BofA Merrill Lynch - Analyst

* Steve Ruggiero

R.W. Pressprich - Analyst

* Carla Casella

JPMorgan - Analyst

* Grant Jordan

Wells Fargo Securities - Analyst

* Holland Davey

Jefferies LLC - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Bon-Ton Stores Incorporated fiscal fourth-quarter 2016 earnings results conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Megan Crudele from ICR. Please go ahead.

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Megan Crudele, ICR - IR [2]

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Thank you. Good morning, everyone. Welcome to Bon-Ton's fourth quarter and FY16 earnings conference call. Kathy Bufano, President and CEO; and Nancy Walsh, Executive Vice President and CFO, will host today's call. You may access a copy of the earnings release on the Company's website at www.bonton.com or by calling 203-682-8200.

The statements contained in this conference call which are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, including those set forth in the cautionary note in the Company's earnings release, and all of which are described in the Company's filings with the SEC.

With that, I will turn the call over to Kathy.

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [3]

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Thank you, Megan. Good morning, everyone, and thank you for joining us today to discuss our fourth-quarter and full-year results for FY16.

Looking back on the year, we made progress across a number of strategic initiatives. While these advances have been largely matched by the ongoing challenges in the retail environment and unfavorable weather, we believe we took important steps to strengthen our competitive position within the industry. At the same time, we meaningfully expanded our gross margin rate and exceeded our net savings target for FY16. As we look forward to 2017, we will continue to build on our key strategic initiatives to further drive improvement in the business.

Summarizing our FY16 results, adjusted EBITDA came in at $116 million, as compared to $109.5 million in the same period last year. Excluding the consulting expenses and severance costs in both years, adjusted EBITDA was $122.5 million in FY16, as compared to $112.1 million last year. Gross margin increased 80 basis points to 35.5% for the year. We also exceeded the high end of our cost reduction goal by $7 million, with net savings of $31 million for the year, and delivered positive free cash flow of $4 million in 2016, versus negative $66.9 million in FY15. However, we are disappointed with our comparable sales decrease of 3.8%, which was largely a result of the persisting weakness in overall mall traffic trends, as well as the impact of unseasonably warm weather on our cold weather category. That said, we are pleased that we drove higher than expected incremental revenue from our growth categories including active, men's big and tall, furniture and home decor, as well as new brand introductions and private label expansions, which I will speak to shortly.

Briefly highlighting our fourth quarter results, comparable sales decreased 4.7%. Comparable sales trends improved from Thanksgiving through the end of December, and subsequently weakened in January. Negative traffic was partially offset by a low single-digit increase in AUR, and increase in average sales per transaction. Gross margin in the quarter expanded 145 basis points to 36.2%, reflecting lower markdowns and reduced distribution expense as compared to last year. Adjusted EBITDA for the fourth quarter was $101.6 million, compared to adjusted EBITDA of $94 million in the fourth quarter of FY15.

Finally, inventory increased 1.8% during the quarter compared to the previous year. We ended the year with higher than planned inventory due to lower than expected January sales, and our decision to pull forward spring deliveries, to take advantage of warm weather trends and early demand for spring product. If we excluded the acceleration of spring receipts, inventory would have increased just 0.3%, as compared to the same period last year. Overall, we remain focused on ensuring that our inventory is fresh, and the merchandise offering closely aligns with the shopping needs of our customers.

The team's achievements throughout 2016 are reflected in the progress we made in our omnichannel business, targeted marketing campaigns, compelling and differentiated merchandise assortment, and expense savings. Let me recap some of our accomplishments in each area, and discuss some of our go-forward initiatives.

Beginning with our omnichannel strategy, we focused on making it easier and more rewarding for our customer to shop with us, through enhancements to our online merchandise offering, site functionality, and fulfillment capabilities. We rolled out our Buy Online, Pick Up In Store initiative store-wide at the end of summer, and continued to focus on elevating the customer's experience in store with our Let Us Find It initiative. In addition, we expanded our store fill capabilities, enabling us to better satisfy customer needs while also making the most efficient use of our inventory. Finally, we made enhancements to our e-commerce platform to optimize the website based on the device our customers are using. We have also worked on back end functionality such as enhancing the speed at which customers can [assess] our products, and make it easier for customers to find our site through any search engine. As a result of these initiatives, our omnichannel sales increased in the double digits, while our mobile sales nearly doubled for the year.

Turning to our loyalty program. PLCC penetration grew to 55.1% at the end of this year, compared to 51.5% at the end of last year. We also launched our new LoveStyle Rewards loyalty program for non-PLCC customers late in the year, and signed up nearly 300,000 members by year end. Importantly, we are seeing strong incremental spending from LoveStyle Rewards program members.

Turning to merchandise, we focused our efforts on several growth areas including activewear; denim, which has seen a recent resurgence; fine jewelry; men's big and tall; contemporary plush; and furniture. We also introduced or further rolled out, a number of key brands including Under Armour, Polo, Vera Bradley, Calvin Klein, Tommy Hilfiger, and UGG, all of which were met with strong response. Under Armour apparel performed very well as we expanded our offering to all doors by year end, and rolled out Under Armour ladies', kids', and men's footwear and golf in select doors. We launched UGG in 60 doors in the fall, Vera Bradley in 42 doors, and relaunched Jones New York in 50 doors. In addition, we continued to deliver a compelling assortment of private brands that offer great quality, price, and exclusivity to our customers.

Another success in 2016 was our localization strategy. While this is still a small business, localized content enables us to differentiate our stores, and truly provide a hometown shopping experience. We launched our Close to Home program in the third quarter, which features locally made products, and expanded it to 45 locations by the end of the year with strong early success.

Turning to our store fleet. We were very pleased with the performance of our recently reopened Evergreen Park location on the Southwest Side of Chicago. This store has an all-new look and feel with brighter lighting, new traffic patterns to better highlight our offerings, and a number of great elements that enhance the presentation of our product assortment. For instance, we created a celebrity fragrance shop in partnership with [Carlix], and a Close to Home shop featuring locally made products.

We also added a number of new products in select categories that were not previously offered in this location, as well as brands that resonate with our customers in this market, such as J. Renee shoes and handbags, Sean John apparel, and Fashion Fair cosmetics. We saw strong performance that exceeded our expectations from 26 expanded furniture doors. We also continued to focus on enhancing our home offering, as we added a Home Store to our Edina location.

Now I would like to discuss our strategic priorities for FY17. We will remain focused on driving growth in our omnichannel business, refining our marketing strategies with an emphasis on traffic-driving initiatives, and continue to evolve our merchandise assortment to emphasize our growth categories. We are committed to inventory discipline that will continue to benefit gross margin in 2017. In addition to leveraging the benefits generated by our 2016 cost savings program, we are instituting an additional profit improvement initiative which we'll expect to generate net savings of $24 million to $26 million in 2017, excluding $10 million of expense associated with the 53rd week in 2017.

During 2017, we will work to complete the Home Store expansion and make our offering more robust. We ended 2016 with 65 furniture locations, and have seen strong response to our home and furniture offerings thus far. We will continue our furniture expansion with an additional 10 furniture doors in the first half of 2017, and converting one existing location into a furniture gallery. We will also introduce new categories such as area rugs and custom window treatments. Laura Ashley Home shop-in-shops will be added in 25 doors, featuring top of bed, decorative accessories, wallpaper and paint, allowing our customers to easily design their own special look.

We are excited to have recently launched Hallmark cards in select locations, and our initial results indicate that there's more opportunities for fall. In addition, we will be launching FAO Schwarz shop-in-shops featuring a broad collection of toys and gifts in select locations this fall, right in time for the holiday season. During 2017, we will further expand our growth brands, which continue to be our strongest category. We will rollout Under Armour Kids and footwear to all doors this year, and expand our offerings in brands such as UGG, Vera Bradley, and Jones New York, all of which have proven to be customer favorites.

Our focus on creating differentiation through localization also remains a key priority, as it not only differentiates us from our competition, it creates both goodwill and PR opportunities in local markets. We plan to more than triple our Close to Home shops in 2017, bringing in more localized content to 150 locations by year end. These new shops create a compelling treasure hunt experience, enabling us to further drive traffic in our stores. To ensure that we are sourcing from a broad selection of local vendors, we recently launched our Close to Home online sourcing fair, which invites local artists, designers, artisans, and entrepreneurs with established businesses and galleries to apply online to have their products sold in our Close to Home locations. While this initiative was just launched last month, we have already received over 600 submissions across our 25-state footprint, from some really spectacular local makers.

We're also doing some fun and unique events around this assortment, including a Meet the Makers series, where the artisans get the chance to interact directly with customers in their market. This effort has resonated well with our customers, and supports our position as the hometown store, and enables us to offer a constant flow of unique new products in our Close to Home shops. And we have expanded this initiative. We have received great local and national breadth, with media pick ups in 20 key markets, reaching more than 140 million people. We are also excited to see both locals and tourists stop by these stores to pick up items that highlight the local vibe, to keep for themselves, as well as to give as gifts to friends and family.

On the marketing front, we will continue to build on the successes of our in-store event strategy. For 2017, we expect to increase the number of special events, including beauty and style, which we plan to double for spring. While we recognize that overall traffic trends will remain a headwind, we believe that these initiatives will make our stores more exciting and entice her to visit often.

Our private label credit card members are our most loyal customers. In order to reward her for her loyalty, we are adding a VIP event in the spring and a second event in the fall specifically for our PLCC customers, as we saw a strong response to a similar event last year. We are working to update our POS system, and have launched a new app, both of which will facilitate easier and faster PLCC signups with greater privacy.

Turning to our store fleet. We are also working to enhance the experience in our stores, and plan to incorporate some elements from our successful Evergreen location into future store designs. We have three store remodels planned for FY17 that will feature a new lighting and traffic patterns to better showcase our merchandise offering, and will include an expanded vendor matrix, additional shop-in-shops, and our Close to Home assortment.

In addition, we are looking at opportunities to enhance our store positioning, and engage in customer outreach and targeted marketing programs in markets where competitor locations are closing. Thus far, we have seen positive trends in locations that overlap competitor closings, particularly in the cosmetic category, and we will further leverage opportunities in these locations. Importantly, we have become the sole provider of several brands in some midwestern markets, providing an opportunity to gain market share through new customer acquisition. We will remain focused on evaluating our leases as they come up for renewal, and we will consider all options available to us.

In summary, we have taken important steps to enhance our competitive positioning in 2016, and we will build on these initiatives throughout FY17. We will continue to emphasize our position as the hometown store, with the expansion of our omnichannel capabilities, our compelling merchandise assortment, and strong marketing program, all of which position us to drive improved sales performance. We look forward to updating you on our progress throughout the year.

With that, I'll turn it to Nancy to review our financial performance.

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [4]

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Thank you, Kathy, and good morning, everyone.

As Kathy mentioned, we are pleased to have made strong progress on a number of our initiatives during FY16, although we continue to face weak trends in the retail environment throughout the year. Turning to our fourth quarter of 2016 financial results. Comparable sales decreased 4.7% in the quarter, and total sales decreased 5.5% to $877.3 million. As Kathy mentioned, negative traffic trends and unseasonably warm weather in the quarter were partially offset by higher AUR, driven by product mix and less clearance. We saw continued momentum in our omnichannel sales during the quarter. Proprietary credit card sales as a percentage of total sales increased 400 basis points to 52.7% in the fourth quarter of FY16. These continue to be our best customers, shopping more frequently, and generating a higher transaction size than non-card holders.

Our gross margin rate increased 145 basis points in the quarter to 36.2% of net sales, due primarily to reduced markdowns, as well as lower distribution costs, which were partially offset by deleverage on lower sales volume. Our SG&A expense decreased $12.8 million or 0.5% to $238.8 million for the quarter. We realized non-customer-facing expense savings as part of our cost savings initiative. This was partially offset by higher medical expense and an increase in marketing investments. Overall, we are pleased to have exceeded the high end of our expense reduction target of $21 million to $24 million for the year, with $31 million in net savings during FY16.

As Kathy mentioned, we are instituting additional profit improvement measures in FY17, and expect net cost savings in the range of $24 million to $26 million, excluding $10 million of expense related to the 53rd week. The SG&A expense rate in the fourth quarter of 2016 was 27.2% of net sales, an increase of 10 basis points over the prior year due to lower sales volume.

Net income for the quarter was $44.7 million or $2.09 per diluted share. This includes non-cash asset impairment charges of $16.7 million or $0.78 per diluted share. This compared to net income in the fourth quarter of FY15 of $50.6 million or $2.42 per diluted share. Net income in the fourth quarter of FY15 includes severance costs of $0.19 per diluted share, costs associated with debt extinguishment of $0.06 per diluted share, long-lived and intangible assets impairment charges of $0.15 per diluted share, and a benefit related to an insurance settlement of $0.03 per diluted share. Adjusted EBITDA in the fourth quarter of 2016 increased 8% to $101.6 million, compared to adjusted EBITDA of $94 million in the fourth quarter of FY15, which included $3.9 million of severance costs associated with the Company's planned expense reductions, and $0.6 million of gain associated with an insurance settlement. Excluding the financial impact of the severance costs and insurance settlement, adjusted EBITDA for fourth quarter of FY15 was $97.3 million.

Turning briefly to a review of our full-year results. Comp sales decreased 3.8% and total sales decreased 4.3%. Our gross margin rate expanded 80 basis points to 35.5%. Net loss was $63.4 million or $3.18 per share, including $0.32 per diluted share in consulting expenses and severance costs related to the Company's cost savings initiative, and $0.85 per diluted share in non-cash asset impairment charges. This compares to a net loss in 2015 of $57.1 million or $2.90 per diluted share, which includes $0.32 per diluted share in costs related to debt extinguishment, $0.20 per diluted share in severance costs, $0.18 per diluted share in non-cash fixed asset intangible impairment charges, and $0.07 per diluted share gain associated with the insurance settlement.

We achieved adjusted EBITDA of $116 million, including $6.5 million of consulting expense and severance costs related to the Company's cost savings initiative. Excluding the consulting expense and severance costs, adjusted EBITDA was $122.5 million compared to $112.1 million last year, which also excludes $3.9 million of severance costs, and $1.4 million gain associated with the insurance recovery.

Moving to a review of select balance sheet items and other data. We ended the period with inventory, including in-transit, up 1.8% to prior year levels. As Kathy noted, this was higher than planned due to our decision to pull forward spring deliveries, and lower than expected sales in January. Excluding the impact of accelerated spring receipts, inventory would have increased just 0.3% as compared to the same period last year. We have worked through the majority of our cold weather merchandise, and are comfortable with the content of our inventory at this time. We are pleased that overall, our inventory remains clean, and we achieved another quarter of reduced aging.

As we previously mentioned, on November 29, 2016, the Company repaid the outstanding principal amount of $57 million, and retired its 10 5/8% senior lien, senior secured, second lien senior secured notes in advance of the July 2017 maturity date. We reduced debt by $11.3 million during the fiscal year. This debt reduction was more than offset by the reclassification of a direct financing lease associated with our Evergreen Park store. Therefore, total debt was essentially flat to the prior year at $989 million.

Free cash flow, which is defined as net cash provided by operating activities less gross capital expenditures was $4.3 million in FY16, as compared to negative free cash flow of $66.9 million in FY15. At period end, debt consisted of $350 million of senior notes due 2021, $506.7 million of our asset-based line revolver, $127.3 million of cap leases, and the $13.3 million of the financing lease associated with our Evergreen store in Illinois. Debt to EBITDA on a 12 month trailing basis is 8.5 times, compared to 9.08 times the previous year. As of January 28, 2017, the Company had approximately $234 million of borrowing capacity under its revolving credit facility.

Capital expenditures for the year, excluding external contributions, were approximately $55 million, and net of external contributions were approximately $31 million. Our CapEx spending focused primarily on projects that build infrastructure for growth, such as omnichannel operations, customer-facing store upgrades, including fixtures, visuals, and remodels and information systems.

Turning now to our full year FY17 guidance. We are forecasting loss per diluted share to be in the range of $2.08 to $2.59, inclusive of $0.05 expensed for the 53rd week; and adjusted EBITDA to be in the range of $115 million to $125 million. Adjusted EBITDA is not a measure recognized under GAAP. Please refer to our financial table in our press release which reconciles this non-GAAP measure to net loss.

Assumptions reflected in the Company's full-year guidance includes the following: a comparable sales decrease ranging from 2% to 3%, which excludes sales from the 53rd week; a gross margin rate ranging from a 10 to 20 basis-point increase over the previous FY16 rate of 35.5%; SG&A between $864 million and $866 million, including approximately $10 million for the 53rd week; CapEx not to exceed $30 million net of external contributions; and an estimated 20.3 million shares of weighted shares outstanding. We expect to reduce debt in the range of $20 million to $30 million, and we note that we are currently looking to close four to six doors in FY17. As a general note, our Form 10-K for 2016 will be available by April 13, 2017.

With that, we'll open the call up for questions.

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Questions and Answers

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Operator [1]

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Thank you.

(Operator Instructions)

We'll go first to William Reuter with Bank of America.

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Jenny King-Dugan, BofA Merrill Lynch - Analyst [2]

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Good morning, this is Jenny on for Bill today. Thanks for taking our questions. So you mentioned introducing a FAO Schwarz store-in-store concept this fall. Can you quantify how many you expect to open?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [3]

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We're still working on the details of how many doors, but it will be substantial in terms of our footprint. We usually launch new initiatives anywhere between 50 and 100 doors.

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Jenny King-Dugan, BofA Merrill Lynch - Analyst [4]

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Great. And then, you also mentioned you expect to reduce debt by $20 million to $30 million this year. Can you talk about the timing of that?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [5]

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Well, that figure is by year-end.

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Jenny King-Dugan, BofA Merrill Lynch - Analyst [6]

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Okay, great. And then lastly from us, is there any way to try and quantify the impact you mentioned of unseasonably warm weather on the quarter?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [7]

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Yes, on the quarter it was, for the first quarter, our plan was for this year, to pick up through the whole fall season was about, we're going to earn back -- last year we dropped $34 million in cold weather. So our plan was to earn back $17 million of that, and we ended up dropping $50 million-some odd off of that plan.

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Jenny King-Dugan, BofA Merrill Lynch - Analyst [8]

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Okay, great. I'll pass it along to others. Thanks.

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Operator [9]

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And we'll go next to Steven Ruggiero with R.W. Pressprich.

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Steve Ruggiero, R.W. Pressprich - Analyst [10]

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Good morning, and thank you for taking the questions. Just to follow-up on the last question, and your answer, Kathy. In 6/2015, in FY15, you dropped $34 million, and you were expecting to get -- gain back $17 million, but you ended up dropping $50 million. Does that imply that on a two year basis, you dropped $65 million roughly?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [11]

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Yes.

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Steve Ruggiero, R.W. Pressprich - Analyst [12]

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And do you attribute that entirely to weather, or are there other factors going on, in terms of the mix of merchandise that you can identify?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [13]

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No, actually, we do attribute it entirely on weather, unseasonably warm weather, both years stacked, because we really didn't drastically change gloves. We felt very good about the trend merchandise we had, in terms of packable down, and all the new fashion pieces in terms of wool that emerged. But it was absolutely based on the unseasonably warm weather two years stacking. And the biggest drop last year also came, I mean, in 2016 was from -- third quarter was extremely warm, versus an extremely warm third quarter and whole year of 2015 last year. Two years ago.

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Steve Ruggiero, R.W. Pressprich - Analyst [14]

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So as we look at your year-end inventory, would you say that there's a portion in there that is packed away, the generics of winter wear, or is it not part of it?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [15]

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Not an issue at all. We're in good shape. We have at this point, we do have less than last year, and we always have returns and accommodations that quite frankly, are less than last year, because we're very, very reactive in terms of coming out of third quarter, and where the trends were. So we feel that -- we're going to be very clean.

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Steve Ruggiero, R.W. Pressprich - Analyst [16]

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Okay. And Nancy, you gave some great color on the pull-forward for spring with inventory and year-over-year being up 0.3%, versus the recorded number of [1.8%]. That implies roughly $14 million of pull-forward, if my calculations are correct, and correct me, if I'm wrong on that. That said, your objective for the year was to be down 5% year-over-year.

You had been making some great progress, and actually were tracking to more than meet that, as of the end of the third quarter. Once again, even if you pull out of the -- pull the pull-forward spring out of the inventory number, you still ended the year higher than expected. Is that all about sales and falling short of expectations, and versus your plan? Or are there other factors that went on there we should be aware of?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [17]

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No, you caught it right on, the nail, the head on the nail, that in addition to bringing the inventory forward, the rest of it is really due to the January sales falling out. We thought we were in a good position coming out of holiday. And I think everyone experienced the extremely low traffic that hit in January. And at that point, we couldn't do a whole lot to react to it. So again, we think the inventory is very clean.

We will be able to move on in that, and we have reduced, during 2016 receipts by over $200 million, so we are well-positioned for 2017. We have targeted again, a pretty good reduction for 2017 as well, and we're on track for that right now.

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Steve Ruggiero, R.W. Pressprich - Analyst [18]

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Okay. And if I can ask a few more, and you alluded to a good start perhaps if -- almost I'm stretching my thoughts here. You alluded to a good start in February, when you commented on inventory before. Can we take away, that in fact inventories have been pruned a bit in February, and you feel comfortable with the progress you're making with sales in February, or am I reaching?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [19]

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February is such a small piece of the year. It's really the whole March/April combination of [Marple], and for us going into this week, of our Goodwill sale which is our signature event. We hold them twice a year, and then the Easter shift coming into April is to -- obviously way too soon to judge where we're going to end up. That said though, we were pleased with the performance we received on spring product during the month of February, but way too soon to call at this point.

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Steve Ruggiero, R.W. Pressprich - Analyst [20]

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Okay. And once, a couple more questions. One on your cost savings, obviously a fantastic job on the SG&A line, and your gross margin's met expectations, or at least our expectations for the year. Next year, you're looking for more cost savings, and no reason to doubt that you'll achieve them.

Can you --I may have missed this, because I jumped on in the middle of the call. Can you just give us a little granularity on where those SG&A savings are going to come from?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [21]

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Sure. So you'll remember that we enlisted the help of a consultant last year, and we had a fairly significant reduction in workforce. Both of those, the expense associated with those will not be repeated in 2017, so that is a big piece of the cost savings. The stores that we closed in 2016, we'll have a full year of savings related to that. And then, the wrap of the initiatives that we put into place last year, you'll remember that was really only the second half of the year. So we have a fairly significant wrap related to those initiatives.

And then, we're hoping to make some head way on medical, and you'll remember that was a fairly large expense hit for us this year. And then across the board, we've implemented our own profit improvement center, that is going to take a look at all of our current arrangements and agreements. And we have pretty much negotiated with all of our vendor -- not the vendors so much, but the ones who were providing us with non vendor materials. But pretty much across the board, we've just looked to increase efficiencies, productivity, right-size things where it makes sense in relations to the sales so. But it's coming from a number of different places, but we think it's very achievable.

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Steve Ruggiero, R.W. Pressprich - Analyst [22]

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Well, it's definitely good stuff. Good job on that. And last question, if you don't mind. On the store closings, what are the -- four to six is the number I heard for 2016. I'm assuming they'll be in the first quarter. Have you identified, have you released those stores? And what are the parameters that you used to decide, is it just four wall profitability, or just go beyond that, in deciding which doors should be closed?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [23]

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Well, they won't be in the first quarter. As you mentioned, the stores that we closed in 2016, were at the tail end of 2016. That's how we are getting the whole year of savings related to those expenses. Most of the stores will be toward the latter part of the year.

There are some one-off opportunities that we were evaluating, and this is part of us, as we take a look at stores as they're coming up for their leases, we're also taking opportunities to discuss different situations with our landlords, and taking advantage of those as they come about. So we haven't announced any of them yet. It will happen throughout the year -- and I take that back we did announce St. Clairsville. So that one is taking place in March, but the rest have not been announced as of yet.

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Steve Ruggiero, R.W. Pressprich - Analyst [24]

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And the parameters you use, is it just four wall profitability, or does it go beyond that?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [25]

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For our standard closures, the ones that we typically say we're closing three to five stores a year, that is based on the leases coming due. And yes, there's four wall cash flow. There have been other opportunities as we're looking at competitor closings. And as I said, arrangements with the landlords that might make sense for us to do something during the lease term, but we will not be paying to get out of store leases.

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [26]

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We do take into big consideration, obviously the profitability of that single location, but most definitely mall conditions. I mean, the conditions of the malls in locations are changing. So we evaluate what the condition of the mall is, what the occupancy of the mall is, what is the demographics of the community, what's the industry of the community being in an up north location? Many of our towns have changed over the years, so it's not just, what does this individual store location perform at, but what is the opportunity to thrive, and do better?

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Steve Ruggiero, R.W. Pressprich - Analyst [27]

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Got it. Thanks for taking all my questions.

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [28]

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Thanks, Steve.

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [29]

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Thanks, Steve.

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Operator [30]

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We'll go next to Carla Casella with JPMorgan.

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Carla Casella, JPMorgan - Analyst [31]

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Hi, how are you?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [32]

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Good.

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Carla Casella, JPMorgan - Analyst [33]

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On the inventory side, for the year, do you anticipate that you'll generate cash through working capital from the store closures, and bringing inventory back in line, or should that be more of a neutral?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [34]

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We're definitely going to see an improvement in working capital. Part of that is going to be related to inventory, part is going to be other steps that we're taking. So I hope that answers your question. We are looking to reduce debt this year, both in terms of the receipts during the year, and our year-over-year position.

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Carla Casella, JPMorgan - Analyst [35]

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Okay. (multiple speakers). And then, I want to know your thoughts on store closures that we've been hearing of from JC Penney, Macy's and Sears, how you've seen any of the ones that have already closed impact any of your stores, or the market areas where you're near those stores?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [36]

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The stores, there are six locations that we competed against Macy's in 2016, and they had very -- they had strong performance. They were in the high single-digits year-over-year increases. So we view that on a select basis, the same way we evaluate how a store should close, if a store should close. We evaluated the market, the opportunity for upside, the demographics, our store condition, and the mall condition.

And there are about, there are 10 locations that Macy's is closing in 2017. Right now, they 're at the very end of the going out of business sale. There are potentially four or five locations that we feel could be important for us, and we could replicate what we experienced in 2016.

Not every location is appropriate, in terms of market. We also have a good program that we enacted in 2016, we're adding vendors that we did not carry, that Macy's carried in those exit markets. So we're in the process of negotiating those opportunities.

We also, quite frankly, we carry the big three cosmetic lines, and CHANEL in every single one of our locations. So we are very aggressive, in terms of recruiting their key cosmetic sales associates, with their cosmetic book, which has been an opportunity for us.

So just because Macy's exits, it's -- we really evaluate what's the opportunity for our location, adding vendors, adding quality sales associates, the physicality and the condition of the mall, and if we can experience upside. So it's still -- it's too early to tell, but by the time we get out of first or second quarter, we'll have a firm view of what we're going to be doing for the fall season of Macy's.

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Carla Casella, JPMorgan - Analyst [37]

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Okay. And then you mentioned -- (multiple speakers)

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [38]

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JC Penney are --

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Carla Casella, JPMorgan - Analyst [39]

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Oh, go ahead. Sorry.

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [40]

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Yes, we're still waiting to see where those locations are. Years ago, when JC Penney went through its contraction, we picked up nicely in moderate sportswear and in some home businesses. So we feel that with our initiatives in home, with our furniture rollout, with our Laura Ashley launch, going after ready-made draperies, there could be an opportunity, because those are some of JC Penney's strengths.

But it's not the same as the big pick up that you can -- occur with Macy's, gaining that cosmetic market share, and adding Calvin Klein, Michael Kors, Polo if needed, to compete and really capture those customers that were Macy's shoppers, as their first preference.

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Carla Casella, JPMorgan - Analyst [41]

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Okay, great. And then, during the going out of business sales, do you see a negative impact at all? So like, I'm guessing, if there's a quarter, where there's a heavy number of stores that are liquidating?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [42]

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In the beginning, the only category that we really -- well, what was atypical about a Macy's closing this time, was in the past they, in the cosmetic business, they would either return or redistribute the cosmetic inventory to other locations.

This year, because of the magnitude of those locations -- now remember, we only compete against 10, but they did not -- they discounted cosmetics as part of their GOB, which they had never done before. So in the beginning, that splurge with cosmetics hurt our business.

But now that they are getting towards the end, it's only been a couple weeks, we're seeing nice performance like we've done versus the 2016 closings. But we haven't expanded -- we're just getting the natural traffic. We really are gearing towards the fall season, in terms of the big strategy against vendors, against sales associates, and maybe moving some locations to take on -- to capture that customer. So it's still a little bit too early to tell.

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Carla Casella, JPMorgan - Analyst [43]

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Okay, great. And then, your CapEx -- but not CapEx of $30 million, what is your maintenance level? That looks pretty close to a maintenance level?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [44]

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We've been talking about $25 million as the maintenance.

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Carla Casella, JPMorgan - Analyst [45]

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Gross or net?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [46]

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That would be net -- or gross, sorry.

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Carla Casella, JPMorgan - Analyst [47]

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Okay. So that would compare to $55 million for the year then?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [48]

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I'm comparing that to the -- so, I'm sorry. I meant net. I'm comparing that to $30 million.

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Carla Casella, JPMorgan - Analyst [49]

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Okay.

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [50]

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So what we're spending is the $25 million versus the $30 million.

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Carla Casella, JPMorgan - Analyst [51]

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Okay. So you're pretty much finished with a lot of your infrastructure spend for your omnichannel, now that you've got the distribution open, is that what's come back so much?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [52]

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Right. So we had a two year investment over 2014 and 2015 of almost $38 million. So that is up and running, really running very well. And the enhancements that we're making to omni that Kathy mentioned, are more on the IT side, and improving the efficiency and productivity, and adding the bells and whistles that are expected from the customer. So that big investment is already behind us and we're continuing to see very, still very nice landlord contributions, so that the remodels both major and minor that we're doing, we're getting a nice contribution from our landlords.

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Carla Casella, JPMorgan - Analyst [53]

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Okay. And then, just one more, on the -- you mentioned four to six store closures, is that the total number of leases that come due this year? Or how many do you have coming due in 2017 and 2018, or up for renewal? Sorry.

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [54]

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It is not everything that's coming due for this year. So over the course of the next three years, we have 28 doors that we're kind of taking a look at. Only 11 of those are non-cash flow positive, or non-cash flow negative. So we have some of those other doors that I talked about earlier that aren't necessarily up for lease renewals, but are things that we are -- special projects that we're evaluating.

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [55]

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We have 20 stores, where the leases are coming due this year.

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [56]

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For this year, yes.

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Carla Casella, JPMorgan - Analyst [57]

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I'm sorry, 20 where leases are coming due this year? (multiple speakers)

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [58]

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20 this year (multiple speakers)

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [59]

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Yes.

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Carla Casella, JPMorgan - Analyst [60]

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Okay. That's great. Thank you.

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Operator [61]

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We'll go next to Grant Jordan with Wells Fargo.

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Grant Jordan, Wells Fargo Securities - Analyst [62]

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Yes, can you talk a little bit more about the source of cost savings you expect to get this year, and if that's an annualized number, or those are actual expenses you'll save in 2017?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [63]

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So as I mentioned before, we have a number of categories of expense savings that we're looking at, and some of them relate to the savings that we experienced in 2016. So when we look at last year, we had an outside consultant that came in, and really acted as our procurement department. And at the same time, at the beginning of the year, we have had a reduction in workforce.

So one of the major components for us, is not only the wrap associated with last year's cost savings initiatives, because we were only able to generate those for six months out of the year. So we're seeing an additional six months of that, for this year. So the combination of the two, will give us our full year impact.

The consulting fees were, between consulting and severance that was the $6.5 million that we mentioned both in the press release, and our speaking comments. That will not be repeated this year. We also do get a nice lift from any stores that we close, so we had four stores closing last year, that will generate cost savings for us this year. We are expecting to have a little bit of an improvement in our medical expense, that was a big drag on our expenses this year.

And then we have other, new initiatives that are being developed by our new profit improvement center that are really pretty much across the board. So again, we're looking at any place that we can increase our productivity, generate greater efficiencies. The variable items that are associated with our sales, with that being down, we tried to right-size the business. So coming to us on a number of different fronts.

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Grant Jordan, Wells Fargo Securities - Analyst [64]

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Okay. Great. Thank you very much.

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Operator [65]

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And we'll go next to Karru Martinson with Jefferies.

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Holland Davey, Jefferies LLC - Analyst [66]

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Hi, this is Holland Davey on for Karru. Thanks for taking our questions. First, just with FY17 adjusted EBITDA guidance, essentially flat to the guidance provided for 2016, can you guys just talk about what it's going to take for us to start seeing EBITDA to begin to grow, and how you get there?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [67]

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Well, I think obviously we need top line sales growth, and with the current environment that is really putting pressure on generating any additional EBITDA growth. I think, as we continue to talk about, we are controlling the things we can control, so we've made nice improvement on margin.

We had 80 basis point improvement in 2016. We're expecting another 10 to 20 basis points in 2017. We have done a really good job on SG&A over the last couple of years, so that's helping to stabilize us. But it really is about generating, and seeing the industry improve on the top line.

And so, a lot of the initiatives that Kathy talked about, in terms of bringing customers into the store, remerchandising, taking advantage of some of our competitors closing doors, those are all things that during 2017 will help position us for when the consumer really returns in force to the department stores. Do you have anything you want to add?

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [68]

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Yes, I also think that we have strong -- like everybody else, we have very nice momentum with our omnichannel and our online business. We delivered very strong double-digit growth, doubling in our mobile, and we continue, we really see that to continue through 2017 and into the future.

We're just around 10% penetration in our omnichannel business. So if the average is around 20%, we believe that we have tremendous amount of upside to keep growing that business. And the enhancements, remember also, we do not need to re-platform to get growth.

We are in terms of CapEx spend it's more modest amounts, in terms of improving our search results which we have worked on very diligently this year. Also speed to the site, in terms of how fast our sites function, merchandising of the site, our conversion has -- is strong, and our traffic is strong, that we think that that omnichannel and delivering the e-commerce growth, that we have upside to, is a very, very important piece of the business.

And we're not forgetting about our brick. That's why we've doubled the amount of events, that we've added a beauty and style event this spring, that's why we launched our -- our different way of doing a treasure hunt, if you will, is our close to home sourcing initiative. That looks like a lot of legs can come from that, through the season.

Our Laura -- expanding home, adding 10 more furniture locations to 75 locations is a different merchandise category, launching our first 25 stores of Laura Ashley home store home shop, that should really capture that DIY customer, who wants to come in and create their own space. So it's really a two pronged attack, and the opportunity to make our stores, and our individual locations more interesting, with new shops, the vendors that we've been doing well with, and opportunities in the furniture and home expansions that we see.

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Holland Davey, Jefferies LLC - Analyst [69]

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Great. And then, lastly, could you just touch on how you guys feel about your current liquidity situation, and then asset [breadth]?

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Nancy Walsh, Bon-Ton Stores Inc - EVP & CFO [70]

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Well, we ended the year at $234 million of liquidity. We are very comfortable that we have sufficient liquidity to meet all of our business and financial obligations.

We mentioned we repaid the $57 million of our outstanding senior notes, well in advance of its July 2017 maturity date. So we are very comfortable with our liquidity, and feel that that will be more than sufficient to cover us for 2017.

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Holland Davey, Jefferies LLC - Analyst [71]

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Okay, great. Thank you.

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [72]

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Thank you.

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Operator [73]

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That concludes our question-and-answer session. I would like to turn the conference back over to Kathy Bufano for any additional or closing remarks.

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [74]

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Thank you for joining us today, and very much appreciate your interest in Bon-Ton.

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Operator [75]

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That concludes today's conference. We thank you for your participation.

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Kathy Bufano, Bon-Ton Stores Inc - President & CEO [76]

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Thank you.