The Bon-Ton Stores, Inc. Announces Fourth Quarter And Fiscal 2006 Results

YORK, Pa. - The Bon-Ton Stores, Inc. has reported results for the fourth quarter and fiscal year ended February 3, 2007. As previously reported, the Company acquired the Northern Department Store Group from Saks Incorporated.

For the fourth quarter of fiscal 2006, the Company reported net income of $88.4 million, or $5.20 per diluted share, which included a non-recurring state tax benefit of $4.1 million, or $0.24 per diluted share, compared to net income of $38.2 million, or $2.30 per diluted share, for the fourth quarter of fiscal 2005.

For fiscal 2006, the Company reported net income of $46.9 million, or $2.78 per diluted share, compared to net income of $26.0 million, or $1.57 per diluted share, for the prior year. Net income in fiscal 2006 was positively impacted by a non-recurring state tax adjustment of $4.1 million, or $0.24 per diluted share, and negatively impacted by severance costs incurred in connection with the closing of the Carson Pirie Scott State Street store of approximately $2.4 million on a pre-tax basis, or an after-tax impact of $0.09 per diluted share.

Net income in fiscal 2005 was positively impacted by an income tax adjustment of approximately $2.2 million, or $0.13 per diluted share, and negatively impacted by an after-tax impact of $0.08 per diluted share associated with the sale of the Company’s proprietary credit card operations in the second quarter and an after-tax charge of $0.10 per diluted share associated with the closing of four stores.

Bud Bergren, President and Chief Executive Officer, commented, “We are pleased with our fourth quarter and fiscal 2006 results, and I am extremely proud of the team that came together on March 6, 2006 and what they accomplished as we integrated the Bon-Ton and Carson’s operations. Along with achieving our earnings goals for fiscal 2006, we succeeded in meeting key milestones during the fourth quarter and throughout the year. We:

completed Phase I and II of the systems integration and ended the Transition Services Agreement with Saks Incorporated as scheduled;
rolled out the common merchandise assortment across all locations, including the new private brand offerings, which received a favorable response from our customers;
implemented a common marketing/advertising calendar in the second half of the year which resulted in less aggressive discounting in the Company’s promotional activity from the prior year period at the Bon-Ton/Elder-Beerman stores. This strategy negatively impacted sales, but the gross margin rate improved;
established the private brand organization in Milwaukee, which is now an integral part of our merchandise organization;
established and expanded the Planning and Allocation division, affording us opportunities for increased sales and profitability and an improvement in turnover;
completed the purchase and integration of Parisian store locations from Belk Inc.;
closed three unprofitable stores, improved the efficiency of our distribution operations by closing one distribution center, and announced expansions of two stores and the renovation and reconfiguration of two existing stores; and
continued the execution of our integration process, beginning 2007 with a focus on system enhancements and effectiveness of our new marketing initiatives.”
Mr. Bergren added, “Our accomplishments in 2006 position us well to achieve our 2007 goals. This is just the beginning of realizing the potential benefits we can achieve as we begin the second year as a bigger, smarter, stronger company which strives to exceed the expectations of our customers, associates and shareholders.”

Sales

For the fourth quarter of fiscal 2006, total sales increased 169% to $1,249.6 million compared to $464.6 million for the prior year period. Fourth quarter sales include $805.7 million from Carson’s and Parisian stores. Bon-Ton comparable store sales for the thirteen weeks ended January 27, 2007 decreased 5.6% compared to the prior year thirteen-week period.

Fiscal 2006 total sales increased 161% to $3,362.3 million compared to $1,287.2 million for the prior year period. Fiscal 2006 sales include $2,119.1 million from Carson’s stores for the period March 5, 2006 through February 3, 2007 and Parisian stores for the period October 29, 2006 through February 3, 2007. Bon-Ton comparable store sales for the fifty-two week period ended January 27, 2007 decreased 2.7% compared to the prior year fifty-two week period.

Carson’s sales are not included in the Company’s reported comparable store sales; therefore, the following is provided for informational purposes only. Carson’s comparable store sales for the thirteen weeks ended January 27, 2007 increased 4.4% and for the period March 5, 2006 through January 27, 2007 increased 4.3%. For Carson’s and Bon-Ton combined, comparable store sales for the thirteen weeks ended January 27, 2007 increased 0.5%.

Other Income

Other income increased $21.6 million to $35.9 million in the fourth quarter of fiscal 2006, compared to $14.3 million in the prior year period, primarily due to the inclusion of the Carson’s operations in the fourth quarter of fiscal 2006. For the fifty-three weeks ended February 3, 2007, other income increased $73.1 million to $93.5 million, compared to $20.4 million in the prior year fifty-two week period, primarily due to the inclusion of the Carson’s operations for 11 months of fiscal 2006 and credit card revenues having been reflected as an offset to selling, general and administrative expenses through the third quarter in the prior year.

Gross Margin

In the fourth quarter of fiscal 2006, gross margin dollars increased $305.1 million compared to the prior year period. The gross margin rate increased 1.0 percentage point, to 38.3% of net sales, as compared to 37.3% reported in the prior year period. Fiscal 2006 gross margin dollars increased $778.5 million compared to the prior year period. The fiscal 2006 gross margin rate increased 0.9 percentage point to 37.0% of net sales, as compared to 36.1% reported in the prior year period.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses in the fourth quarter of fiscal 2006 increased $203.5 million to $324.8 million as compared to the prior year period. The SG&A expense rate decreased 0.1 percentage point to 26.0% of net sales, compared to 26.1% of net sales in the prior year period. Integration expenses in the fourth quarter of fiscal 2006 were $3.7 million and for the year, $15.6 million. Fiscal 2006 SG&A expenses increased $649.3 million to $1,056.5 million, as compared to the prior year period. The fiscal 2006 SG&A expense rate decreased 0.2 percentage point to 31.4% of net sales, compared to 31.6% in the prior year period.

EBITDA

EBITDA, defined as net income before interest, income taxes, depreciation and amortization, increased $123.2 million in the fourth quarter of fiscal 2006 to $189.3 million compared to $66.2 million in the fourth quarter of fiscal 2005. Fiscal 2006 EBITDA increased $202.3 million to $280.6 million compared to $78.3 million in the prior year period. EBITDA is not a measure recognized under generally accepted accounting principles – see Note 1 below.

Depreciation and Amortization

Depreciation and amortization expense in the fourth quarter of fiscal 2006 increased $23.7 million to $30.2 million compared to $6.6 million in the prior year period. Fiscal 2006 depreciation and amortization expense increased $78.8 million to $106.9 million compared to $28.1 million in the prior year period. Depreciation and amortization in the fourth quarter and fiscal 2006 reflects the impact of purchase accounting for the acquired Carson’s operations. Fiscal 2006 includes a charge of approximately $3 million to reduce the value of duplicate and impaired assets.

Interest Expense, Net

Interest expense, net, in the fourth quarter of fiscal 2006 increased $25.7 million to $28.1 million compared to $2.3 million in the prior year period. Fiscal 2006 interest expense, net, increased $95.1 million to $107.1 million compared to $12.1 million in the prior year period. In the first quarter of fiscal 2006, the Company recorded a charge of $6.8 million reflecting the write-off of fees associated with a bridge facility and the early payoff of the Company’s previous debt.

Comments

Keith Plowman, Executive Vice President and Chief Financial Officer, commented, “We are pleased with our fourth quarter and fiscal 2006 financial results for the combined companies as we completed the first 11 months of integrating our operations. We executed to plan and exceeded our financial goals for fiscal 2006.”

Mr. Plowman added, “We look forward to the second year of the integration process and remain confident that we have positioned our combined company to benefit from more efficient operations in 2007 and beyond. Our guidance for fiscal 2007 earnings per share is a range of $3.40 to $3.50 and EBITDA in a range of $315 to $320 million. Assumptions reflected in our guidance include:

Total sales growth of 3% to 5%;
Comparable stores sales flat to 1.0% increase;
Gross margin rate consistent with fiscal 2006;
Additional $8 million in cost savings;
Reduction of $9.5 million of integration costs;
Capital expenditures of $106 million (net of landlord contributions); and
Estimated weighted average shares outstanding of 17.00 million to 17.35 million.”