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Bon-Ton Stores 10-K 2009 Documents found in this filing:
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d)
2801 East Market Street
York, Pennsylvania 17402
(717) 757-7660
www.bonton.com
Securities registered pursuant to Section 12(b) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately
$58.7 million as of the last business day of the
registrant’s most recently completed second fiscal quarter.
For purposes of this calculation only, the registrant has
excluded all shares held in the treasury or that may be deemed
to be beneficially owned by executive officers and directors of
the registrant. By doing so, the registrant does not concede
that such persons are affiliates for purposes of the federal
securities laws.
As of March 27, 2009, there were 15,282,373 shares of
Common Stock, $.01 par value, and 2,951,490 shares of
Class A Common Stock, $.01 par value, outstanding.
Portions of the definitive proxy statement for the 2009 Annual
Meeting of Shareholders (the “Proxy Statement”) are
incorporated by reference in Part III to the extent
described in Part III.
The Bon-Ton Stores, Inc. operates on a fiscal year, which is
the 52 or 53 week period ending on the Saturday nearer
January 31 of the following calendar year. References to
“2008,” “2007” and “2006”
represent the 2008 fiscal year ended January 31, 2009, the
2007 fiscal year ended February 2, 2008 and the 2006 fiscal
year ended February 3, 2007, respectively. References to
“2009” represent the 2009 fiscal year ending
January 30, 2010.
References to “the Company,” “we,”
“us,” and “our” refer to The Bon-Ton Stores,
Inc. and its subsidiaries. References to
“Carson’s” are to the Northern Department Store
Group acquired by the Company from Saks Incorporated
(“Saks”) effective March 5, 2006. References to
“Elder-Beerman” denote The Elder-Beerman Stores Corp.
and its subsidiaries, which were acquired by the Company in
October 2003. References to “Bon-Ton” refer to the
Company’s stores operating under the Bon-Ton and
Elder-Beerman nameplates. References to “Parisian”
refer to the stores acquired from Belk, Inc. (“Belk”)
effective October 29, 2006.
PART I
The Company was founded in 1898 and is one of the largest
regional department store operators in the United States,
offering a broad assortment of brand-name fashion apparel and
accessories for women, men and children as well as cosmetics,
home furnishings and other goods. We currently operate 280
stores in mid-size and metropolitan markets in 23 Northeastern,
Midwestern and upper Great Plains states under the Bon-Ton,
Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman,
Herberger’s and Younkers nameplates and, under the Parisian
nameplate, stores in the Detroit, Michigan area, encompassing a
total of approximately 26 million square feet.
We compete in the department store segment of the
U.S. retail industry. Department stores have historically
dominated apparel and accessories retailing, occupying a
cornerstone in the U.S. retail landscape for more than
100 years. Over time, department stores have evolved from
single unit, family owned, urban locations to regional and
national chains serving communities of all sizes. Today, we
operate in a highly competitive, highly fragmented and rapidly
changing environment as the department store industry continues
to evolve in response to consolidation among merchandise vendors
as well as the evolution of competitive retail
formats — mass merchandisers, national chain
retailers, specialty retailers and online retailers.
Our operating results and performance, and that of our
competitors, depend significantly on economic conditions and
their impact on consumer spending. During 2008, a combination of
economic factors created an extremely adverse environment for
the retail industry, including the department store sector. We
believe that these factors included volatility in the capital
markets, with limited or no access to credit for many companies
and consumers. These credit market conditions, the general
downturn in the U.S. economy, and weakening consumer
sentiment contributed to a significant reduction in consumer
spending as compared with 2007 and other recent years.
Our stores offer a broad assortment of quality fashion apparel
and accessories for women, men and children, as well as
cosmetics, home furnishings and other goods at moderate and
better price points. Our comprehensive merchandise assortment
includes nationally distributed brands at competitive prices and
unique product at compelling values through our private brands.
We further
differentiate our merchandise assortment with exclusive product
from nationally distributed brands. The following table
illustrates our net sales by product category for the last three
years:
Our nationally distributed brand assortment includes many of the
most well-known and popular labels in the apparel, accessories,
footwear, cosmetics and home furnishings industries such as
Calvin Klein, Chanel, Coach, Easy Spirit, Bandolino, Børn,
Clarks, Estée Lauder, Jones New York, Liz Claiborne, Anne
Klein II, Nautica, Columbia, Nine West, OshKosh and Ralph
Lauren. We believe these brands enable us to position our stores
as headquarters for fashion, offering both newness and wardrobe
staples at competitive prices. We believe that we maintain
excellent relationships with our merchandise vendors, working
collaboratively to select the most compelling assortments for
our customers.
Our exclusive private brands complement our offerings of
nationally distributed brands and are a key component of our
overall merchandising strategy. Our private brand portfolio
includes popular brands such as Victor by Victor Alfaro, Studio
Works, Living Quarters, Relativity, Laura Ashley, Consensus,
Cuddle Bear, Ruff Hewn, Statements, Breckenridge, Kenneth
Roberts and Karen Neuberger Home. By providing exclusive
fashion products at price points that are more attractive than
nationally distributed brand alternatives, our private brand
program creates value for our customers and increases our brand
exclusiveness, competitive differentiation and customer loyalty.
Our private brand program also presents the opportunity to
increase our overall gross margin by virtue of the more
efficient cost structure inherent in the design and sourcing of
in-house brands.
Our highly experienced team of buyers has developed
long-standing and strong relationships with many of the leading
vendors in the marketplace. Our scale, geographic footprint and
market leadership make us an important distribution channel for
leading merchandise vendors to reach their target consumers. We
believe that our status as a key account to many of our vendors
serves to strengthen our ability to negotiate for merchandise
exclusive to our stores as well as better pricing terms. We
monitor and evaluate the sales and profitability performance of
each vendor and adjust our purchasing decisions based upon the
results of this analysis.
Consistent with industry practice, we receive allowances from
certain of our vendors in support of the merchandise sold to us
that was marked down or that did not allow us to achieve certain
margins upon sale to our customers. Additionally, we receive
advertising allowances and reimbursement of certain payroll
expenses from some of our vendors, which primarily represent
reimbursements of specific, incremental and identifiable costs
incurred to promote and sell the vendors’ merchandise.
We are committed to providing our customers with a satisfying
shopping experience by offering trend-right fashions,
differentiated product, value and convenience. Critical elements
of our customer service approach are:
Our strategic marketing initiatives develop and enhance our
brand equity and support our position as a leading shopping
destination among our target customers. We conduct a
multi-faceted marketing program, including newspaper
advertisements and inserts, broadcast advertisements, direct
mail and in-store events. We use a combination of
(i) advertising and sales promotion activities to reach and
build brand image and traffic and (ii) customer-specific
communications and purchase incentives to drive customer
spending and loyalty. Both types of marketing efforts focus
primarily on our target customer of women between the ages of 35
and 60 with annual household incomes of $55,000 to $125,000,
with the intention of increasing visit frequency and purchases
per visit. Additionally, our marketing activities attract a
broader audience, including juniors, seniors and men. We seek to
attract new customers and to maintain customer loyalty by
actively communicating with our customers through the execution
of targeted marketing facilitated by sophisticated customer
relationship management capabilities.
Effective communication includes showcasing our “hometown
store” tradition. We are focused on important,
cause-related efforts and events to enhance our connection with
the communities in which we operate and with the customers we
serve. These strategic initiatives garner favorable publicity,
drive traffic and generate incremental sales. Additionally,
these efforts serve to differentiate us from our competitors.
We maintain an active calendar of in-store events to promote our
sales efforts. These events include appearances by well-known
designers and personalities, trunk shows, fashion shows and
cosmetic makeovers from leading makeup artists.
Evidencing our customer satisfaction and loyalty is the high
penetration rate of our proprietary credit card program that is
administered by HSBC Bank Nevada, N.A. (“HSBC”). We
have over 4.6 million active proprietary credit card
holders.
Our proprietary credit card loyalty program is designed to
cultivate long-term relationships with our customers. The
loyalty program offers rewards and privileges to all members
meeting annual earned points requirements. Our targeted loyalty
program focuses on our most active customers and includes
marketing features such as advanced sales notices and extra
savings events. Included in our five-year strategic plan is the
objective to increase proprietary credit card penetration as a
driver of total sales growth. To achieve this goal, we
implemented a new proprietary credit card loyalty program called
“Your Rewards” in August 2008. Your Rewards expands
the customer savings element of our previous programs and
provides greater shopping flexibility and customer rewards.
We maintain a sales force of knowledgeable and well-trained
sales associates who deliver excellent service to our customers.
Sales associates are trained in the areas of customer service,
selling skills and product knowledge. We employ a two-tiered
strategy to achieve effective customer service. In selected
areas, we offer
one-on-one
selling with dedicated associates to assist customers with
merchandise selections. Our customers also appreciate the
convenience of self-service formats in many departments and
efficient service centers to expedite their purchases. Our new
associates receive computer-based training for effective,
efficient and uniform training. We actively monitor and analyze,
through our scheduling program, the service levels in our stores
in order to maximize sales associate productivity and store
profitability.
The retail industry is highly competitive and fragmented. We
face competition for customers from traditional department store
operators such as Belk, Inc., Dillard’s, Inc. and
Macy’s, Inc.; national chain retailers such as J. C. Penney
Company, Inc., Kohl’s Corporation and Sears Holdings
Corporation; mass merchandisers such as Target Corporation and
Wal-Mart Stores, Inc.; specialty stores; and catalogue and
online retailers. In addition, we face competition for suitable
store locations from other department stores, national chain
retailers, mass merchandisers and other large-format retailers.
In a number of our markets, we compete for customers with
national department store chains which offer a similar mix of
branded merchandise as we do. In other markets, we face
potential competition from national chains that, to date, have
not entered such markets and from national chains that have
stores in our markets but currently do not carry similar branded
goods. In all markets, we generally compete for customers with
stores offering moderately priced goods. Many of our competitors
have substantially greater financial and other resources than we
do, and many of those competitors have significantly less debt
than we do and may thus have greater flexibility to respond to
changes in our industry.
We believe that we compare favorably with our competitors with
respect to quality, depth and breadth of merchandise, prices for
comparable quality merchandise, customer service and store
environment. We also believe our knowledge of and focus on small
to mid-size markets, developed over our many years of operation,
give us an advantage in these markets that cannot be readily
duplicated. In markets in which we face traditional department
store competition, we believe that we compete effectively.
We own or license various trademarks and trade names, including
our store nameplates and private brands. We believe our
trademarks and trade names are important and that the loss of
certain of our trademarks or trade names, particularly the store
nameplates, could have a material adverse effect on us. We are
not aware of any claims of infringement or other challenges to
our right to use our trademarks in the United States that would
have a material adverse effect on our consolidated financial
position, results of operations or liquidity.
During 2008, we continued our investment in technology
infrastructure equipment and software. We focused on updating
systems and improving business processes with emphasis on
customer service, associate productivity and the reduction of
operating costs. A multi-year program to implement
Bon-Ton’s advanced point-of-sale system in the
Carson’s stores was begun in 2007; currently, 50
Carson’s stores have been completed with an additional 17
scheduled for implementation in 2009. Our eCommerce store, which
was established in 2007, continued its growth in sales and
available assortment. A new third-party fulfillment capability
offering merchandise not carried in store locations was added to
our eCommerce store, significantly expanding our merchandise
offerings. Advanced web technologies at our eCommerce store
offer customers efficient and easy-to-use features such as
optimized product search capabilities and provide us with an
effective delivery vehicle for tailored marketing programs. In
2008, we completed upgrades to our security systems,
communications networks and policies to improve data security.
We achieved certified compliance to Payment Card Industry (PCI)
Data Security Standards, providing increased protection for
customer information. We also implemented the first half of our
consolidated telecommunications network to streamline both
voice and data communications, increase capacity and speed, and
significantly reduce communications costs. It is anticipated
that this project will be completed in 2009.
Our merchandising function is centralized, with a staff of
buyers and a planning and allocation team who have
responsibility for determining the merchandise assortment,
quantities to be purchased and allocation of merchandise to each
store.
We primarily operate on a pre-distribution model through which
we allocate merchandise on our initial purchase orders to each
store. This merchandise is shipped from our vendors to our
distribution facilities for delivery to designated stores. We
then have the ability to direct replenishment merchandise to the
stores that demonstrate the highest customer demand. This
reactive distribution technique helps minimize excess inventory
and affords us timely and accurate replenishment.
Our distribution facilities are electronically monitored by our
merchandising staff to facilitate the distribution of goods to
our stores. We utilize electronic data interchange (EDI)
technology with most vendors, which is designed to move
merchandise onto the selling floor quickly and cost-effectively
by allowing vendors to deliver merchandise pre-labeled for
individual store locations. In addition, we utilize high-speed
automated conveyor systems to scan bar coded labels on incoming
cartons of merchandise and direct cartons to the proper
processing areas. Most of our merchandise is unloaded in the
receiving area and immediately “cross-docked” to the
shipping dock for delivery to the stores. Certain processing
areas are staffed with personnel equipped with hand-held radio
frequency terminals that can scan a vendor’s bar code and
transmit the necessary information to a computer to record
merchandise on hand. We utilize third-party carriers to
distribute our merchandise to our stores.
The majority of our merchandise is held in our stores. We
closely monitor the inventory levels and assortments in our
stores to facilitate reorder and replenishment decisions,
satisfy customer demand and maximize sales. Our business follows
a seasonal pattern; working capital fluctuates with seasonal
variations, reaching its highest level in October or November to
fund the purchase of merchandise inventories prior to the
holiday season.
We have a customer return policy allowing customers to return
merchandise with proper documentation. A reserve is provided in
our consolidated statements of operations for estimated
merchandise returns, based on historical returns experience, and
is reflected as an adjustment to sales and costs of merchandise
sold.
Our business, like that of most retailers, is subject to
seasonal fluctuations, with the major portion of sales and
income realized during the second half of each year, which
includes the holiday season. Due to the fixed nature of certain
costs, our selling, general and administrative
(“SG&A”) expenses are typically higher as a
percentage of net sales during the first half of each year.
Because of the seasonality of our business, results for any
quarter are not necessarily indicative of the results that may
be achieved for a full year. In addition, quarterly results of
operations depend upon the timing and amount of revenues and
costs associated with the opening, closing and remodeling of
existing stores.
We make capital investments to support our long-term business
goals and objectives. We invest capital in new and existing
stores, distribution and support facilities, and information
technology.
In 2009, we expect capital expenditures to total approximately
$40 million, net of approximately $7 million of
landlord contributions, reflecting a reduction from the prior
year’s expenditures of approximately $85 million. As
part of our focus on continually improving our store base,
capital will be employed for remodels and expansions of certain
stores, and on-going store upgrades. We are
focused on maintaining the quality of our stores and our brand
equity while prudently limiting expenditures in response to
current economic conditions.
In 2009, we do not plan to open any new stores. We will be
relocating one store to a larger space in the same shopping mall
and closing the existing store.
We believe capital investments for information technology are
necessary to support our business strategies. We are continually
upgrading our information systems to improve efficiency and
productivity. Included in the 2009 capital budget are
expenditures for numerous information technology projects, most
notably on-going efforts to implement Bon-Ton’s advanced
point-of-sale system in the Carson’s stores.
As of March 27, 2009, we had approximately
29,100 full-time and part-time associates. We employ
additional part-time associates during peak selling periods. We
believe that our relationship with our associates is good.
Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports are available without charge on
our website, www.bonton.com, as soon as reasonably practicable
after they are filed electronically with the Securities and
Exchange Commission (“SEC”).
We also make available on our website, free of charge, the
following documents:
Executive
Officers
The following table sets forth certain information regarding our
executive officers as of March 27, 2009:
Mr. Grumbacher has been Executive Chairman of the
Board of Directors since February 2005. He served as Chairman of
the Board of Directors from August 1991 to February 2005. He was
Chief
Executive Officer from 1985 to 1995 and from June 2000 to August
2004. From 1977 to 1989 he was President.
Mr. Bergren has been President and Chief Executive
Officer since August 2004. Mr. Bergren, who joined the
Company in November 2003 as Vice Chairman and served as
President and Chief Executive Officer of Elder-Beerman from
February 2002 through August 2004, served in senior executive
positions at Belk from 1985 to 2002.
Mr. Buccina was appointed Vice Chairman,
President — Merchandising in June 2006. He had been
President and Chief Merchandising Officer of Carson’s from
April 2006 to June 2006. Prior to that time, he had served as
President — Head Merchant of the Northern Department
Store Group of Saks (“NDSG”) for more than five years.
Mr. Byers was appointed to his current position in
February 2008. He served as Vice Chairman — Stores,
Operations, Private Brand, Planning & Allocation from
October 2006 to February 2008, and as Executive Vice President
— Stores and Visual Merchandising from April 2006 to
October 2006. Prior to that time, he had served as Executive
Vice President of Stores and Visual Merchandising of NDSG since
August 2004. He held the post of Senior Vice
President / Territory Director of Stores for
Kohl’s Corporation between 2000 and August 2004.
Mr. Clouser has been Executive Vice
President — Human Resources since April 2006, and
assumed additional responsibilities for Corporate Procurement,
Corporate Operations and Information Services in February 2008.
He served as Senior Vice President — Human Resources
from February 2005 to April 2006 and Vice President —
Employment and Training from April 2004 to February 2005. For
more than four years prior to that time, he was Senior Vice
President — Human Resources at Elder-Beerman.
Mr. Plowman has been Executive Vice
President — Finance since April 2006, Chief Financial
Officer since May 2005 and Principal Accounting Officer since
June 2003. He served as Senior Vice President —
Finance from September 2001 to April 2006.
Ms. Schrantz has been Executive Vice
President — Sales Promotion and Marketing since March
2009. Prior to that, she served as Executive Vice
President — Stores and Visual since March 2008. She
served as Senior Vice President — Merchandise Planning
and Internet Marketing from September 2006 to February 2008, and
as Senior Vice President — Product Development and
Private Brand from September 2005 to August 2006. Before joining
the Company, Ms. Schrantz held various merchandising posts
of increasing responsibility at the Proffitts/McRae’s
division of Saks for more than five years.
We have made, in this Annual Report on
Form 10-K,
forward-looking statements relating to developments, results,
conditions or other events we expect or anticipate will occur.
These statements may relate to revenues, earnings, store
openings, business strategy, general economic conditions, market
conditions and the competitive environment. The words
“believe,” “may,” “might,”
“will,” “estimate,” “intend,”
“expect,” “anticipate,” “plan” and
similar expressions as they relate to the Company, or future or
conditional verbs, such as “will,” “should,”
“would,” “may” and “could,” are
intended to identify forward-looking statements. Forward-looking
statements are based on management’s then-current views and
assumptions and we undertake no obligation to update them.
Forward-looking statements are subject to risks and
uncertainties, and actual results may differ materially from
those projected.
An investment in our securities carries certain risks. Investors
should carefully consider the risks described below and other
risks which may be disclosed in our filings with the SEC before
investing in our securities.
Historically, we have generated cash flow from operating
activities and used supplemental borrowings under our credit
facility to provide the liquidity we need to operate our
business. The downturn in the global economy and the recent
distress in the financial markets have resulted in extreme
volatility in the capital markets and diminished liquidity and
credit availability. The tightening of credit markets could make
it more difficult for us to access funds, to refinance our
existing indebtedness, to enter into agreements for new
indebtedness or to obtain funding through the issuance of
securities and could potentially increase our borrowing costs.
If such conditions were to persist, we would seek alternative
sources of liquidity, but there can be no assurance that we
would be successful in obtaining such additional liquidity. As a
result, we may not be able to meet our obligations as they
become due.
Consumer spending habits, including spending for the merchandise
that we sell, are affected by, among other things, prevailing
economic conditions, levels of employment, salaries and wage
rates, prevailing interest rates and credit terms, housing
costs, energy costs, income tax rates and policies, inflation,
consumer confidence and consumer perception of economic
conditions. In addition, consumer purchasing patterns may be
influenced by consumers’ disposable income, credit
availability and debt levels. A continued or incremental
slowdown in the United States’ economy or an uncertain
economic outlook could adversely affect consumer spending
habits, resulting in lower net sales and profits, including the
potential write-down of the current valuation of long-lived
assets, intangible assets and deferred tax assets.
Our vendors, landlords, lenders and other business partners
could also be adversely affected by difficult economic
conditions. This, in turn, could impact us through increasing
the risk of bankruptcy of our vendors, landlords, lenders and
business partners, increasing the cost of goods, creating a void
in product, reducing access to liquid funds or credit,
increasing the cost of credit or other impacts which we are
unable to fully anticipate.
We compete with other department stores and many other
retailers, including store-based, mail-order and internet
retailers. Many of our competitors have financial and marketing
resources that greatly exceed ours. The principal competitive
factors in our business are price, quality and selection of
merchandise, reputation, store location, advertising and
customer service. We cannot ensure that we will be able to
compete successfully against existing or future competitors, or
that prolonged periods of deep discount pricing by our
competitors during periods of weak consumer confidence or
economic instability will not have a material adverse effect on
our business. Our expansion into new markets served by our
competitors and the entry of new competitors into, or expansion
of existing competitors in, our markets could have a material
adverse effect on our business, financial condition and results
of operations.
Our business is dependent to a significant degree upon close
relationships with our vendors and their factors and our ability
to purchase brand name merchandise at competitive prices and
terms. The loss of key vendor and factor support could have a
material adverse effect on our business. There can be no
assurance that we will be able to acquire brand name merchandise
at competitive prices or on competitive terms in the future. For
example, certain merchandise that is
high profile and in high demand may be allocated by vendors
based upon the vendors’ internal criteria, which are beyond
our control.
In addition, given the weak global markets, vendors and factors
may seek assurances to protect against non-payment of amounts
due them. If we continue to experience declining operating
performance, and if we experience severe liquidity challenges,
vendors and factors may demand that we accelerate our payment
for their products. These demands could have a significant
adverse impact on our operating cash flow and result in a severe
diminishment of our liquidity. Under such circumstances,
borrowings under our existing credit facility could reach
maximum levels, in which case we would take actions to obtain
additional liquidity. However, there can be no assurance that we
would be successful obtaining such additional liquidity. As a
result, we may not be able to meet our obligations as they
become due. In addition, if our vendors are unable to access
liquidity or become insolvent, they could be unable to supply us
with product or continue with their support of our advertising
and promotional programs. Any such disruptions could negatively
impact our ability to acquire merchandise or obtain vendor
allowances in support of our advertising and promotional
programs, which in turn could have a material adverse impact on
our business, operating results, financial condition or cash
flow.
Failure to fully
realize the benefits expected from our cost savings initiatives
in 2009 could have a material adverse effect on our business and
results of operations. Additionally, declines in sales below
what is anticipated could have a material adverse effect on our
business and results of operations.
There can be no assurance that we will be successful in fully
realizing the anticipated benefits from our cost savings
initiatives in 2009. Our ability to benefit from these
initiatives is subject to both the risks affecting our business
generally and the inherent difficulties associated with
implementation. In addition, should our sales decline more than
anticipated, we may not have the ability to further reduce costs
commensurate with the decrease in sales given our high fixed
cost structure. Failure to realize the benefits expected to
result from these cost savings initiatives, or facing sales
declines of a greater magnitude than anticipated, which could be
increasingly difficult to mitigate due to our high fixed cost
structure, could have a material adverse effect on our business
and results of operations.
As of January 31, 2009, we had total debt of approximately
$1.2 billion, which is subject to restrictions and
financial covenants. This could have important consequences to
our investors. For example, it could:
Our ability to service our debt depends upon, among other
things, our ability to replenish inventory at competitive prices
and terms, generate sales and maintain our stores. If we do not
generate sufficient cash from our operations to service our debt
obligations, we will need to take one or more actions, including
refinancing our debt, obtaining additional financing, selling
assets, obtaining additional equity capital, or reducing or
delaying capital expenditures. We cannot be certain that our
cash flow will be sufficient to allow us to pay the principal
and interest on our debt and meet our other obligations. Debt
under our senior secured credit facility bears interest at a
floating rate, a portion of which is offset by fixed-rate swap
derivatives. Accordingly, changes in prevailing interest rates
may affect our ability to meet our debt service obligations. A
higher interest rate on our debt would adversely affect our
operating results. If we are unable to meet our debt service
obligations or if we default under our credit facilities, our
lenders could elect to declare all borrowings outstanding,
together with accumulated and unpaid interest and other fees,
immediately due and payable, which would have a material adverse
effect on our business, financial condition and results of
operations.
Our discretion in
some matters is limited by the restrictions contained in our
senior secured credit facility and mortgage loan facility
agreements and in the indenture that governs our senior
unsecured notes, and any default on our senior secured credit
facility, mortgage loan facility or the indenture that governs
the senior unsecured notes could harm our business,
profitability and growth prospects.
The agreements that govern our senior secured credit facility
and mortgage loan facility, and the indenture that governs our
senior unsecured notes, contain a number of covenants that limit
the discretion of our management with respect to certain
business matters and may impair our ability to respond to
changing business and economic conditions. The senior secured
credit facility, the mortgage loan facility and the indenture,
among other things, restrict our ability to:
The borrowing base calculation under our senior secured credit
facility contains an inventory advance rate subject to periodic
review at the lender’s discretion. Based upon the most
recent inventory appraisal in February 2009, we realized a
decrease in our advance rate, the effect of which would have
reduced borrowing availability by $31.4 million had the new
advance rate been applied to our calculation at January 31,
2009.
Our senior secured credit facility contains a financial covenant
that requires us to comply with a minimum excess availability
requirement of $75 million. Our ability to borrow funds for
any purpose depends on our satisfying this requirement.
If we fail to comply with the financial covenant or the other
restrictions contained in our senior secured credit facility,
mortgage loan facility or the indenture that governs our senior
unsecured notes, an event of default would occur. An event of
default could result in the acceleration of our debt due to the
cross-default provisions within our debt agreements. If the debt
is accelerated, we would not have, and may not be able to
obtain, sufficient funds to repay our debt, which could have a
material adverse effect on our business, financial condition and
results of operations.
Our proprietary credit card program is operated, under
agreement, by HSBC. HSBC issues our proprietary credit cards to
our customers and we receive a percentage of the net credit
sales thereunder. The inability or unwillingness of HSBC to
provide support for our proprietary credit card program under
similar terms or conditions as exist today may result in a
decrease in credit card sales to our customers and a loss of
revenues attributable to payments from HSBC. In addition, if our
agreement with HSBC is terminated under circumstances in which
we are unable to quickly and adequately contract with a
comparable replacement vendor, our customers who have accounts
under our proprietary credit card program will be unable to use
their cards. This would likely result in a decrease in sales to
such customers, a loss of the revenues attributable to the
payments from HSBC and an adverse effect on customer goodwill,
any or all of which could have a material adverse effect on our
business and results of operations.
Significant changes in interest rates, decreases in the fair
value of plan assets and investment losses on plan assets have
affected and could further affect the funded status of our plans
and could increase future funding requirements of the pension
plans. A significant increase in future funding requirements
could have a negative impact on our cash flows, financial
condition and results of operations.
While we are not required to make any mandatory contributions to
the defined benefit pension plan in 2009, the funded status of
this plan and the related cost reflected in our financial
statements are affected by various factors that are subject to
an inherent degree of uncertainty, particularly in the current
economic environment. Under the Pension Protection Act of 2006,
continued losses of asset values may necessitate increased
funding of the defined benefit pension plan in the future to
meet minimum federal government requirements. The continued
downward pressure on the asset values of the defined benefit
pension plan may require us to fund obligations earlier than we
forecasted, which would have a negative impact on cash flows
from operations.
It is difficult to predict what and how much merchandise
consumers will want. A substantial part of our business is
dependent on our ability to make correct trend decisions.
Failure to accurately predict constantly changing consumer
tastes, spending patterns and other lifestyle decisions,
particularly given the long lead times for ordering much of our
merchandise, could adversely affect our long-term relationships
with our customers. Our managers focus on inventory levels and
balance these levels with inventory plans and reviews of trends;
however, if our inventories become too large, we may have to
“mark down” or decrease our sales prices, and we may
be required to sell a significant amount of unsold inventory at
discounted prices or even below cost.
The products we sell are sourced from a wide variety of domestic
and international vendors. Our ability to find qualified vendors
and source products in a timely and cost-effective manner,
including obtaining vendor allowances in support of our
advertising and promotional programs, represents a significant
challenge. The availability of products and the ultimate costs
of buying and selling these products, including advertising and
promotional costs, are not completely within our control and
could increase our merchandise and operating costs.
Additionally, costs and other factors specific to imported
merchandise, such as trade restrictions, tariffs, currency
exchange rates and transport capacity and costs, are beyond our
control and could restrict the availability of imported
merchandise or significantly increase the costs of our
merchandise and adversely affect our business, financial
condition and results of operations.
A majority of our merchandise is manufactured outside of the
United States. Political instability or other events resulting
in the disruption of trade from the countries where our
merchandise is manufactured or the imposition of additional
regulations relating to, or duties upon, the merchandise we
import could cause significant delays or interruptions in the
supply of our merchandise or increase our costs. If we are
forced to source merchandise from other countries, those goods
may be more expensive or of inferior quality from the
merchandise we now sell. If we are unable to adequately replace
the merchandise we currently source with merchandise produced
elsewhere, our business, financial condition and results of
operations could be adversely affected.
Our business is subject to seasonal influences, with a major
portion of sales and income historically realized during the
second half of the fiscal year, which includes the holiday
season. This seasonality causes our operating results to vary
considerably from quarter to quarter and could have a material
adverse impact on the market price of our common stock. We must
carry a significant amount of inventory, especially before the
peak selling periods. If we are not successful in selling our
inventory, especially during our peak selling periods, we may be
forced to rely on markdowns, vendor support or promotional sales
to dispose of the inventory or we may not be able to sell the
inventory at all, which could have a material adverse effect on
our business, financial condition and results of operations.
Because a significant portion of our business is apparel sales
and subject to weather conditions in our markets, our operating
results may be unexpectedly and adversely affected by inclement
weather. Frequent or unusually heavy snow, ice or rain storms
might make it difficult for our customers to travel to our
stores and thereby reduce our sales and profitability. Extended
periods of unseasonable temperatures in our markets, potentially
during our peak seasons, could render a portion of our inventory
incompatible with those unseasonable conditions, reduce sales
and adversely affect our business.
Our success depends to a significant degree upon the continued
contributions of our executive officers and other key personnel,
both individually and as a group. Our future performance will be
substantially dependent on our ability to retain or replace our
executive officers and key
personnel and the inability to retain or replace our executive
officers and key personnel could prevent us from executing our
business strategy.
We currently own or lease 280 stores, which subjects us to the
risks associated with owning and leasing real estate. In
particular, because of changes in the investment climate for
real estate, the value of a property could decrease, and its
operating costs could increase. Store leases generally require
us to pay a fixed minimum rent and a variable amount based on a
percentage of sales at that location. These leases generally do
not allow for termination prior to the end of the lease term
without economic consequences. If a store is not profitable and
we make the decision to close it, we may remain committed to
perform certain obligations under the lease, including the
payment of rent, for the balance of the lease term. In addition,
as each of the leases expires, we may be unable to negotiate
renewals, either on commercially acceptable terms or at all,
which could cause us to close stores in desirable locations. If
an existing owned store is not profitable and we make the
decision to close it, we may be required to record an impairment
charge
and/or exit
costs associated with the closing of that store. In addition,
lease or other obligations may restrict our right to cease
operations of an unprofitable owned or leased store, which may
cause us to continue to operate the location at a loss.
The success of any store depends substantially upon its
location. There can be no assurance that current locations will
continue to be desirable as demographic patterns change.
Neighborhood or economic conditions where stores are located
could decline in the future, resulting in potentially reduced
sales in those locations. In addition, if we cannot obtain
desirable new locations our sales will suffer or if we cannot
obtain these locations at reasonable prices our cost structure
will increase.
We offer our customers quality products at competitive prices
marketed under our private brands. We expect to continue to grow
our private label offerings and have invested in our development
and procurement resources and marketing efforts related to these
exclusive brand offerings. The expansion of our private brand
offerings subjects us to certain additional risks. These
include, among others, risks related to: our failure to comply
with government and industry safety standards; mandatory or
voluntary product recalls related to our private brand
offerings; our ability to successfully protect our proprietary
rights in our exclusive offerings and risks associated with
overseas sourcing and manufacturing. In addition, damage to the
reputation of our private brand trade names may generate
negative customer sentiment. Our failure to adequately address
some or all of these risks could have a material adverse effect
on our business, results of operations and financial condition.
While we believe our relationship with our associates is good,
we cannot be assured that we will not become the subject of
unionization campaigns similar to those faced by our
competitors. The potential for unionization could increase if
the U.S. Congress passes proposed legislation called the
Employee Free Choice Act in which unions can organize based on
card check authorization rather than by secret ballot election.
This proposed legislation also provides for third-party
arbitration of collective bargaining agreements. If some or all
of our workforce were to become unionized and collective
bargaining agreement terms were significantly different from our
current compensation arrangements or work practices, it could
have a material adverse effect on our business, financial
condition and results of operations.
To keep pace with changing technology, we must continuously
provide for the design and implementation of new information
technology systems as well as enhancements of our existing
systems. Any failure to adequately maintain and update the
information technology systems supporting our sales operations
or inventory control could prevent us from processing and
delivering merchandise, which could adversely affect our
business, financial condition and results of operations.
The protection of customer, employee, and Company data is
critical to us. The regulatory environment surrounding
information security and privacy is increasingly demanding, with
the frequent imposition of new and constantly changing
requirements. In addition, customers have an expectation that we
will adequately protect their personal information. Although we
have appropriate security measures in place, our facilities and
systems, and those of our third-party service providers, could
be vulnerable to security breaches, acts of vandalism, computer
viruses, misplaced or lost data, programming
and/or human
errors or other similar events. A significant breach of
customer, employee or Company data could damage our reputation
and result in lost sales, fines or lawsuits.
Collectively, Tim Grumbacher, trusts for the benefit of
Mr. Grumbacher’s grandchildren and The Grumbacher
Family Foundation beneficially own shares of our outstanding
common stock (which is entitled to one vote per share) and
shares of our Class A common stock (which is entitled to
ten votes per share) representing, in the aggregate, more than
50% of the votes eligible to be cast by shareholders in the
election of directors and generally. Accordingly,
Mr. Grumbacher has the power to control all matters
requiring the approval of our shareholders, including the
election of directors and the approval of mergers and other
significant corporate transactions. The interests of
Mr. Grumbacher and certain other stockholders may conflict
with the interests of our other shareholders and holders of our
debt securities.
In addition to
Mr. Grumbacher’s voting control, certain provisions of
our charter documents and Pennsylvania law could discourage
potential acquisition proposals and could deter, delay or
prevent a change in control of the Company that our other
shareholders consider favorable and could depress the market
value of our common stock.
Certain provisions of our articles of incorporation and by-laws,
as well as provisions of the Pennsylvania Business Corporation
Law, could have the effect of deterring takeovers or delaying or
preventing changes in control or management of the Company that
our shareholders consider favorable and could depress the market
value of our common stock.
Subchapter F of Chapter 25 of the Pennsylvania Business
Corporation Law of 1988, which is applicable to us, may have an
anti-takeover effect and may delay, defer or prevent a tender
offer or takeover attempt that a shareholder might consider in
his or her best interest. In general, Subchapter F could delay
for five years and impose conditions upon “business
combinations” between an “interested shareholder”
and us, unless prior approval by our Board of Directors is
given. The term “business combination” is defined
broadly to include various merger, consolidation, division,
exchange or sale transactions, including transactions using our
assets for refinancing purposes. An “interested
shareholder,” in general, would be a beneficial owner of
shares entitling that person to cast at least 20% of the votes
that all shareholders would be entitled to cast in an election
of directors.
The market price of our common stock has been and may continue
to be volatile and may be significantly affected by:
None.
We currently operate 280 stores in 23 states, encompassing
approximately 26 million square feet. We own 33 stores,
have ground leases on eight stores, and lease 239 stores.
We operate under eight nameplates, as follows:
Our corporate headquarters is located in York, Pennsylvania
where the majority of our administrative and sales support
functions reside. Our merchandising and marketing functions are
located in Milwaukee, Wisconsin. We own two distribution centers
located in Rockford, Illinois and Green Bay, Wisconsin, and we
lease two distribution centers located in Allentown,
Pennsylvania and Fairborn, Ohio. We have a furniture warehouse
attached to our Naperville, Illinois store.
On December 8, 2005, Adamson Apparel, Inc. filed a
purported class action lawsuit against Saks in the United States
District Court for the Northern District of Alabama. In its
complaint the plaintiff asserted breach of contract claims and
alleged that Saks improperly assessed chargebacks, timely
payment discounts and deductions for merchandise returns against
members of the plaintiff class. The lawsuit sought compensatory
and incidental damages and restitution. Under the terms of the
purchase agreement relating to the acquisition of NDSG from Saks
in March 2006, the Company had an obligation to indemnify Saks
for any damages incurred by Saks under this lawsuit by
Adamson Apparel, Inc. solely to the extent that such damages
related to the business the Company acquired from Saks.
A settlement of this action was reached in the second quarter of
2008. The outcome of this matter had no material effect on our
financial condition, results of operations or liquidity.
We are party to legal proceedings and claims that arise during
the ordinary course of business. In the opinion of management,
the ultimate outcome of any such litigation and claims will not
have a material adverse effect on the Company’s financial
condition, results of operations or liquidity.
None.
Our common stock is traded on The Nasdaq Global Select Stock
Market (symbol: BONT). There is no established public trading
market for our Class A common stock. The Class A
common stock is convertible on a share-for-share basis into
common stock at the option of the holder. The following table
sets forth the high and low sales price of our common stock for
the periods indicated as furnished by Nasdaq:
On March 27, 2009, we had approximately
238 shareholders of record of common stock and four
shareholders of record of Class A common stock.
We have paid quarterly cash dividends on Class A common
stock and common stock since July 15, 2003. Pursuant to our
senior secured credit facility agreement, as amended
November 20, 2007, any dividends paid may not exceed
$5.0 million in any year or $20.0 million during the
term of the agreement, which expires March 2011
($8.6 million of which has been paid through March 27,
2009). In addition, pursuant to the indenture that governs our
senior unsecured notes, any dividends paid may not exceed $0.24
per share in any year. We paid $0.05 per share on Class A
common stock and common stock in each quarter of 2007 and the
first three quarters of 2008. The dividend of $0.05 per share on
Class A common stock and common stock declared in the
fourth quarter of 2008 was paid in the first quarter of 2009.
While a dividend was not declared at its last meeting on
March 17, 2009, our Board of Directors may consider
dividends in subsequent periods as it deems appropriate.
STOCK PERFORMANCE
GRAPH
The following graph compares the yearly percentage change in the
cumulative total shareholder return on the Company’s common
stock from January 31, 2004 through January 31, 2009,
and the cumulative total return on the Center for Research in
Security Prices Total Return Index for The Nasdaq Stock Market
(U.S. Companies) and the Nasdaq Retail Trade Stocks Index
during such period. The comparison assumes $100 was invested on
January 31, 2004 in the Company’s common stock and in
each of the foregoing indices and assumes the reinvestment of
any dividends.
Overview
We compete in the department store segment of the
U.S. retail industry. Founded in 1898, the Company is one
of the largest regional department store operators, offering a
broad assortment of brand-name fashion apparel and accessories
for women, men and children as well as cosmetics, home
furnishings and other goods. We currently operate 280 stores in
23 states in the Northeast, Midwest and upper Great Plains
under the Bon-Ton, Bergner’s, Boston Store, Carson Pirie
Scott, Elder-Beerman, Herberger’s and Younkers nameplates
and, under the Parisian nameplate, stores in the Detroit,
Michigan area, encompassing a total of approximately
26 million square feet. The Company had net sales of
$3.1 billion in 2008.
Effective March 5, 2006, we purchased all of the
outstanding securities of two subsidiaries of Saks that were
solely related to the business of owning and operating 142
retail department stores. The stores are located in
12 states in the Midwest and upper Great Plains regions and
operate under the names Carson Pirie Scott, Younkers,
Herberger’s, Boston Store and Bergner’s. Under the
terms of the purchase agreement, we paid approximately
$1.0 billion in cash for Carson’s.
To finance the acquisition and the payoff of our previous
revolving credit facility, we entered into a new revolving
credit facility which provides for up to $1.0 billion in
borrowings, issued $510.0 million in senior unsecured
notes, and entered into a new mortgage loan facility in the
aggregate principal amount of $260.0 million.
On October 25, 2006, we entered into an asset purchase
agreement with Belk, pursuant to which we agreed to purchase
assets in connection with four department stores, all operated
under the Parisian nameplate, and the rights to construct a new
Parisian store, which opened in October 2007. The purchase price
was $25.7 million in cash. In addition, we agreed to assume
specific liabilities and obligations of Belk and its affiliates
with respect to the acquired Parisian stores. The acquisition of
these Parisian stores was effective as of October 29, 2006.
Our performance in 2008 reflects the declining U.S. economy
and record low consumer confidence that have greatly impacted
the retail industry, including the department store sector. A
wide range of factors contributed to the difficult economic
environment: a poor housing market, high energy costs, mortgage
and credit market concerns, rising unemployment and a loss of
wealth due to the decline in the stock market. We believe that,
for these reasons, consumers were less willing to spend their
discretionary income.
While we prudently managed variables within our
control — inventory investment, operating expenses and
capital expenditures — in response to the
deteriorating economic situation, we were unable to counteract
the severe external pressures. As a result, we reported a
decline in sales and gross margin, as well as considerable asset
impairments and an income tax valuation allowance adjustment,
resulting in a significant loss for the year. Given the outlook
of continued recessionary factors, we anticipate another
difficult year in 2009. Assumptions in our 2009 projections
include:
In response to the deepening economic crisis, we have
implemented a cost savings plan in 2009 which builds upon the
expense control efforts initiated in 2008; actions taken include
the reduction of corporate and store personnel, the elimination
of bonus payments for senior executives and merit-based wage
increases for all associates, the suspension of employer
contributions to our 401(k) plan, and the reduction of capital
spending and inventory levels. The impact of these actions is
estimated to be an annualized increase in income from operations
of $70.0 million. Our cash flow in 2009 will benefit from
these savings as well as the lower capital spending.
In 2008, we recognized material non-cash charges which we
believe are primarily a result of the downturn in our business
and the expectation that current economic challenges will impede
near-term recovery in the retail sector. Our assessment of the
recoverability of these assets considered Company-specific
projections, assumptions about market rates and transactions
and, in the case of goodwill, our market capitalization at the
time of testing. As a result of the reviews, the following
charges were recorded:
The charges noted above compare unfavorably with a per share
impact for asset impairment charges of $(0.16) in 2007.
The following table summarizes changes in our selected operating
indicators, illustrating the relationship of various income and
expense items to net sales for each year presented (components
may not add or subtract to totals because of rounding):
Net sales: Net sales in 2008 decreased 7.0% to
$3,130.0 million from $3,365.9 million in 2007.
Comparable store sales decreased 7.4% from the prior year. We
believe the comparable store sales decline reflects a confluence
of factors that created an adverse economic environment
throughout the year, particularly the last quarter of 2008,
which weakened consumer sentiment and pressured spending.
The best performing merchandise category in the period was
Children’s Apparel. Sales increases in this category
primarily reflect expanded and improved product selection in
branded playwear and outerwear. The poorest performing
categories in the period were Furniture (included in Home) and
Moderate Sportswear and Dresses (both included in Women’s
Apparel). Furniture sales were impacted by the difficult housing
market in new construction and existing home sales, and
continued deterioration in consumer spending for more expensive
items. Moderate Sportswear and Dresses have been impacted by the
challenging economic environment, which has resulted in reduced
consumer spending on discretionary items. Sales in Moderate
Sportswear were also affected by the decision made in 2007 by
certain of our key vendors to exit the moderate sportswear
business. It was not until the fall of 2008 that we began
receiving merchandise from new, replacement vendors.
Other income: Other income, which includes
income from revenues received under our credit card program
agreement with HSBC, leased departments and other customer
revenues, was $95.5 million, or 3.0% of net sales, in 2008
as compared with $102.7 million, or 3.0% of net sales, in
2007. The decrease primarily reflects reduced sales volume in
the current year.
Costs and expenses: Gross margin dollars in
2008 were $1,095.0 million as compared with
$1,215.8 million in 2007, a decrease of
$120.8 million. The decrease in gross margin dollars
reflects the reduced sales volume and a decrease in the gross
margin rate. Gross margin as a percentage of sales decreased
1.1 percentage points to 35.0% in the current year from
36.1% in the prior year. The decrease in the gross margin rate
primarily reflects an increased net markdown rate in response to
the challenging economic environment.
SG&A expense in 2008 was $1,033.5 million as compared
with $1,066.7 million in 2007, a decrease of
$33.1 million. The decrease primarily resulted from expense
reductions in payroll, benefits and advertising in response to
our sales trend. Other expense reductions were due to increased
efficiencies in operations and prior year store closing
expenses. Despite the expense savings, the expense rate in 2008
increased 1.3 percentage points to 33.0% of net sales,
compared with 31.7% in 2007, due to the reduced sales volume.
In 2008, depreciation and amortization expense and amortization
of lease-related interests increased $0.2 million, to
$122.2 million, from $122.0 million in 2007.
We recorded a non-cash goodwill impairment charge of
$17.8 million in the second quarter of 2008 in accordance
with Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other
Intangible Assets” (“SFAS No. 142”).
Based upon our review, the fair value of our single reporting
unit, estimated using a combination of our common stock trading
value as of the end of the second quarter of 2008, a discounted
cash flow analysis and other generally accepted valuation
methodologies, was less than the carrying amount. There was no
such charge in 2007. See Notes 1 and 3 in the Notes to
Consolidated Financial Statements.
In the fourth quarter of 2008, in accordance with the provisions
of SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets”
(“SFAS No. 144”), we recorded
$17.9 million of non-cash asset impairment charges which
resulted in a reduction in the carrying amount of certain store
properties. We recorded charges of $2.7 million for asset
impairments in 2007. See Notes 1 and 2 in the Notes to
Consolidated Financial Statements.
In the fourth quarter of 2008, a review was completed of the
carrying value of certain intangible assets in accordance with
SFAS No. 142. As a result of our assessment, we
recorded non-cash asset impairment charges of $8.1 million
related to the reduction in the value of four indefinite-lived
trade names and two indefinite-lived private label brand names.
In 2007, we recorded impairment charges of $1.3 million
related to the reduction in the value of two indefinite-lived
private label brand names. See Notes 1 and 3 in the Notes
to Consolidated Financial Statements.
(Loss) income from operations: The loss from
operations in 2008 was $(9.0) million, or (0.3)% of net
sales, as compared with income from operations of
$125.7 million, or 3.7% of net sales, in 2007.
Interest expense, net: Net interest expense in
2008 was $97.8 million, or 3.1% of net sales, as compared
with $108.2 million, or 3.2% of net sales, in 2007. The
$10.3 million decrease primarily reflects decreased
borrowing levels and reduced interest rates in the current year
and $1.0 million of prior year expense incurred for the
early extinguishment of debt.
Income tax provision: The income tax provision
reflects an effective tax rate of (59.1)% in 2008, compared with
34.0% in 2007. The 2008 income tax provision includes an
unfavorable $108.5 million tax expense adjustment in the
fourth quarter of 2008 pursuant to establishment of an
additional valuation allowance against our deferred tax assets
and a favorable $7.0 million tax benefit adjustment in the
third quarter of 2008 related to expiration of certain exposures
pursuant to the provisions of Financial Accounting Standards
Board (“FASB”) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”
(“FIN No. 48”).
Net (loss) income: Net loss in 2008 was
$(169.9) million, or (5.4)% of net sales, as compared with
net income of $11.6 million, or 0.3% of net sales, in 2007.
2007 consisted of 52 weeks, while 2006 consisted of
53 weeks. Comparability between the periods is also
affected by the inclusion of five additional weeks of
Carson’s operations in the first quarter of 2007; the prior
year period includes Carson’s operations following the
March 5, 2006 acquisition.
Net sales: Net sales in 2007 increased 0.1% to
$3,365.9 million from $3,362.3 million in 2006. The
total sales increase reflects the inclusion of the five
additional weeks of sales from Carson’s in the first
quarter of 2007 as well as sales at the acquired Parisian
stores, partially offset by a reduction for closed stores and
the inclusion of an additional week of sales in the prior year,
reflective of the fifty-three week fiscal period. The balance of
sales in 2007 reflects a Bon-Ton comparable store net sales
decrease of 6.5% and, for informational purposes only, a
full-year Carson’s comparable store net sales decrease of
1.6%, which, in total, approximates $112 million.
We believe that the comparable store net sales decline was the
result of several factors including, among others:
The best performing merchandise categories in the period were
Children’s Apparel, Footwear and Better Sportswear
(included in Women’s Apparel). Children’s Apparel
benefited from increased inventory investment and the
introduction of new vendors and licensed product. Sales
increases in Footwear were primarily the result of increased
inventory investment and the expansion of certain vendors into
additional stores. Better Sportswear sales increased as
customers responded favorably to our new and expanded offerings
of private brand merchandise and key branded vendors.
The poorest performing categories in the period were Home (which
includes Furniture), Moderate Sportswear and Coats (both
included in Women’s Apparel). The sales decrease in Home
was primarily due to the elimination of the prior year
liquidation event, the impact of which was particularly
significant in the second quarter of 2007, and the concerns in
the housing market. Sales in Coats and Moderate Sportswear were
adversely impacted by the unseasonable weather. Moderate
Sportswear was also affected by the decision made by certain of
our key vendors to exit the moderate sportswear business; the
Company was unable to develop sufficient new merchandise
resources to mitigate the sales volume erosion in 2007.
Other income: Other income, which includes
income from revenues received under our credit card program
agreement with HSBC, leased departments and other customer
revenues, was $102.7 million, or 3.0% of net sales, in 2007
as compared with $93.5 million, or 2.8% of net sales, in
2006. The increase in dollars was primarily due to the inclusion
of thirteen weeks of Carson’s operations in the first
quarter of 2007 as compared with eight weeks of Carson’s
post-acquisition operations in the first quarter of 2006 and
increased revenues received under the credit card program
agreement, partially offset by the inclusion of an additional
week of operations in the prior year.
Costs and expenses: Gross margin dollars in
2007 were $1,215.8 million as compared with
$1,243.5 million in 2006, a decrease of $27.7 million.
The decrease in gross margin dollars primarily reflects the
reduced sales volume attributable to the comparable store sales
decrease and a
decrease in the gross margin rate. Gross margin as a percentage
of sales decreased 0.9 percentage point to 36.1% in the
current year from 37.0% in the prior year. The decrease in the
gross margin rate reflects the inclusion of Carson’s sales
and markdowns for the first five weeks of the current year; this
historically clearance-driven period with reduced margins was
not included in the prior year period. Additionally, the gross
margin rate was impacted by increased net markdowns in the third
and fourth quarters of 2007, the result of increased promotional
activity in response to unseasonable weather conditions and the
challenging economic environment.
SG&A expense in 2007 was $1,066.7 million as compared
with $1,056.5 million in 2006, an increase of
$10.2 million. The principal factors in the increase in
SG&A expense were the inclusion of five incremental weeks
of Carson’s operations in the first quarter of 2007 as
compared with the first quarter of 2006 and increases in those
costs affected by normal inflationary adjustments. These
increases were partially offset by a reduction in integration
expenses, increased efficiencies in operations in 2007 and the
inclusion of an additional week of operations in the prior year.
The 2007 expense rate increased 0.2 percentage point to
31.7%.
Depreciation and amortization expense and amortization of
lease-related interests increased $18.0 million, to
$122.0 million, in 2007 from $104.0 million in 2006,
primarily the result of including thirteen weeks of
Carson’s operations in the first quarter of 2007 as
compared with eight weeks of Carson’s operations in the
first quarter of 2006 as well as the increased expense
associated with asset additions.
In 2007 we recorded $2.7 million of asset impairment
charges which resulted in a reduction in the carrying amount of
certain store properties, as compared with $2.9 million of
charges in 2006 for an impaired store property and a reduction
in the value of duplicate information systems software.
Additionally, in 2007 we recorded an impairment charge of
$1.3 million related to a reduction in the value of two
indefinite-lived private label brand names. There was no such
charge in 2006.
Income from operations: Income from operations
in 2007 was $125.7 million, or 3.7% of net sales, as
compared with $173.7 million, or 5.2% of net sales, in 2006.
Interest expense, net: Net interest expense in
2007 was $108.2 million, or 3.2% of net sales, as compared
with $107.1 million, or 3.2% of net sales, in 2006. The
$1.0 million increase is principally due to the net
additional weeks of interest expense on debt incurred in
connection with the acquisition of Carson’s compared with
such interest expense in the prior year, partially offset by a
prior year charge of $6.8 million for the write-off of fees
associated with a bridge facility and the early extinguishment
of previous debt.
Income tax provision: The income tax provision
reflects an effective tax rate of 34.0% in 2007 as compared with
29.5% in 2006. Included in the prior year provision is an income
tax benefit adjustment of $4.1 million principally
associated with a net reduction in income tax valuation
allowances.
Net income: Net income in 2007 was
$11.6 million, or 0.3% of net sales, as compared with
$46.9 million, or 1.4% of net sales, in 2006.
Liquidity and
Capital Resources
At January 31, 2009, we had $19.7 million in cash and
cash equivalents and $268.7 million available under our
asset-based revolving credit facility (before taking into
account the minimum borrowing availability of
$75.0 million). The borrowing base calculation under our
revolving credit facility contains an inventory advance rate
subject to periodic review at the lender’s discretion.
Based upon the most recent inventory appraisal in February 2009,
we realized a decrease in our advance rate, the effect of which
would have reduced borrowing availability by $31.4 million
had the new advance rate been applied to our calculation at
January 31, 2009.
While much of the reported loss in 2008 resulted from material
non-cash charges for asset impairments and deferred tax
valuation allowances, our operating performance decreased as
well. In anticipation of continued recessionary pressures in
2009, we have heightened our focus on maximizing operating cash
flow and have significantly curtailed our planned capital
expenditures. Additionally, we will continue to control
inventory levels in order to benefit our working capital needs.
We anticipate that these actions, together with projected cash
benefits from our cost savings initiatives, will positively
impact our 2009 cash flow.
Our business is dependent to a significant degree upon close
relationships with our vendors and their factors. The loss of
key vendor or factor support could have a material adverse
effect on our business. Given the weak global markets, vendors
and factors may seek assurances to protect against non-payment
of amounts due them. If we continue to experience declining
operating performance, and if we experience severe liquidity
challenges, vendors and factors may demand that we accelerate
our payment for their products. These demands could have a
significant adverse impact on our operating cash flow and result
in a severe diminishment of our liquidity. Under such
circumstances, borrowings under our existing credit facility
could reach maximum levels, in which case we would take actions
to obtain additional liquidity. However, there can be no
assurance that we would be successful obtaining such additional
liquidity. As a result, we may not be able to meet our
obligations as they become due. In addition, if our vendors are
unable to access liquidity or become insolvent, they could be
unable to supply us with product or continue with their support
of our advertising and promotional programs. Any such
disruptions could negatively impact our ability to acquire
merchandise or obtain vendor allowances in support of our
advertising and promotional programs, which in turn could have
an adverse impact on our business, operating results, financial
condition or cash flow.
Historically, we have generated cash flow from operating
activities and used supplemental borrowings under our credit
facility to provide the liquidity we need to operate our
business. The downturn in the global economy and the recent
distress in the financial markets have resulted in extreme
volatility in the capital markets and diminished liquidity and
credit availability. The tightening of credit markets could make
it more difficult for us to access funds, to refinance our
existing indebtedness, to enter into agreements for new
indebtedness or to obtain funding through the issuance of
securities and could potentially increase our borrowing costs.
If such conditions were to persist, we would seek alternative
sources of liquidity, but there can be no assurance that we
would be successful obtaining such additional liquidity. As a
result, we may be unable to meet our obligations as they become
due.
Typically, cash flows from operations are impacted by consumer
confidence, weather in the geographic markets served by the
Company, and economic and competitive conditions existing in the
retail industry; a downturn in any single factor or a
combination of factors could have a material adverse impact upon
our ability to generate sufficient cash flows to operate our
business. Currently, our business model is adversely impacted by
additional economic drivers reflective of the global recession.
While the current and anticipated future difficult economic
conditions affect our assessment of short-term liquidity, we
consider our resources (cash flows from operations supplemented
by borrowings under the credit facility) adequate to satisfy our
2009 cash needs. While there can be no assurances, management
believes there should be sufficient liquidity to cover our
short-term funding needs.
The following table summarizes material measures of our
liquidity and capital resources:
Our primary sources of working capital are cash flows from
operations and borrowings under our revolving credit facility.
Our business follows a seasonal pattern; working capital
fluctuates with seasonal variations, reaching its highest level
in October or November to fund the purchase of merchandise
inventories prior to the holiday season.
Working capital levels decreased minimally between 2008 and
2007. The increase in the current ratio in 2008, as compared
with 2007, primarily reflects proportionately larger decreases
in current liabilities as compared with current assets,
principally due to reduced accrued liabilities relating to
benefits. The increase in debt to total capitalization is
largely due to the significant decrease in shareholders’
equity in 2008, the result of the net loss for the period as
well as a decline in the funded status of the Company’s
defined benefit pension plans. The decrease in unused
availability under lines of credit as compared with the prior
year reflects decreased availability primarily due to reduced
inventory levels as well as increased documentary letters of
credit to support the purchasing of inventory.
Increases in working capital and the current ratio in 2007, as
compared with 2006, largely reflect reductions in accrued
liabilities and income taxes payable. The decrease in debt to
total capitalization reflects cash flow generated in 2007
utilized to reduce debt levels. The increase in unused
availability under lines of credit as compared with the prior
year primarily reflects decreases in direct borrowings and
standby letters of credit to support the importing of
merchandise and as collateral for obligations related to general
liability and workers’ compensation insurance.
Cash provided by (used in) our operating, investing and
financing activities is summarized as follows:
The decrease in net cash provided by operating activities in
2008 as compared with 2007 largely reflects a decrease in
business performance, resulting in the current year loss
(compared with prior year income), partially offset by increased
non-cash charges such as depreciation and amortization;
impairment charges for long-lived assets, intangible assets and
goodwill; and the increase in the valuation allowance against
deferred tax assets. We sought to reduce our working capital
needs and, accordingly, reduced inventory levels in 2008 and we
plan to continue to control inventory levels in 2009. The change
in cash flows from operating activities in 2007 primarily
reflects decreases in
merchandise inventories due to inventory management efforts in
response to sales trends, partially offset by a reduction in net
income.
We invested $84.8 million, $109.7 million and
$95.2 million in capital expenditures (not reduced by
landlord contributions) in 2008, 2007 and 2006, respectively.
These investments were for the opening, expanding and remodeling
of stores as well as investments in information technology.
Additional capital investment of $1,073.3 million in 2006
was expended for the acquisition of Carson’s and Parisian.
We have significantly reduced our capital expenditures in
response to current economic conditions and expect capital
expenditures to total approximately $40 million (net of
approximately $7 million of landlord contributions) in
2009, as we are limiting store expansion and remodel activities
in the near term. Included in future capital expenditures is
continued investment in information technology for on-going
efforts to implement Bon-Ton’s advanced
point-of-sale
system in the Carson’s stores.
The decrease in net cash used in financing activities in 2008 as
compared with 2007 primarily reflects net payments made to
reduce long-term debt in 2007, the result of increased operating
cash flows in that year. Proceeds from the issuance of long-term
debt totaled $2,048.4 million in 2006, reflecting increased
borrowings to fund the acquisitions of Carson’s and
Parisian.
On March 6, 2006, The Bon-Ton Department Stores, Inc., a
wholly owned subsidiary of The Bon-Ton Stores, Inc., and certain
of its subsidiaries, Bank of America, N.A. (“Bank of
America”) and certain other lenders entered into a Loan and
Security Agreement (“Senior Secured Credit Facility”)
which provides for up to $1.0 billion of revolver
borrowings. The Senior Secured Credit Facility includes a
last-in,
first-out revolving credit facility of up to $900.0 million
and a
first-in,
last-out revolving credit facility of up to $100.0 million,
and has a
sub-limit of
$150.0 million for the issuance of standby and documentary
letters of credit. All borrowings under the Senior Secured
Credit Facility are limited by amounts available pursuant to a
borrowing base calculation, which is based on percentages of
eligible inventory, real estate and fixed assets, with a
reduction for applicable reserves. The Senior Secured Credit
Facility is guaranteed by The Bon-Ton Stores, Inc. and certain
of its subsidiaries. The Senior Secured Credit Facility is
secured by substantially all the assets of the Company, except
for leasehold interests and certain mortgaged real property. As
part of the Senior Secured Credit Facility, Bank of America and
the other lenders will make available certain swing line loans
in an aggregate amount not to exceed $75.0 million
outstanding at any one time. Borrowings under the Senior Secured
Credit Facility bear interest at either (i) the prime rate
established by Bank of America, from time to time, plus the
applicable margin (the “Prime Rate”) or (ii) the
LIBOR rate from time to time plus the applicable margin. The
applicable margin is determined based upon the excess
availability under the Senior Secured Credit Facility. The swing
line loans bear interest at the same rate applicable to
last-in,
first-out Prime Rate loans. We are required to pay a commitment
fee to the lenders for unused commitments at a rate of 0.25% to
0.30% per annum, based upon the unused portion of the total
commitment under the Senior Secured Credit Facility. The Senior
Secured Credit Facility expires March 6, 2011. The
financial covenant contained in the Senior Secured Credit
Facility requires that the minimum excess availability be
greater than $75.0 million at all times. In addition, there
are certain restrictions against the incurrence of additional
indebtedness, pledge or sale of assets, payment of dividends and
distributions, and other similar restrictions. Per the
November 20, 2007 amendment of the Senior Secured Credit
Facility, dividends paid may not exceed $20.0 million over
the life of the agreement ($8.6 million of which has been
paid out through March 27, 2009), or $5.0 million in
any single year, and capital expenditures are limited to
$150.0 million per year, with a one-year carryover of any
prior year unused amount. The Senior Secured Credit Facility
also provides that it is a condition precedent to borrowing that
no event has occurred that could reasonably be expected to have
a material adverse effect, as defined in the agreement, on the
Company. If we fail to comply with the financial covenant or the
other restrictions contained in our Senior Secured Credit
Facility, mortgage loan facility or the indenture that governs
our senior unsecured notes, an event of default would occur. An
event of default could result in the acceleration of our debt
due to the cross-default provisions within our debt agreements.
As of
January 31, 2009, the Company had borrowings of
$320.1 million, with $268.7 million of borrowing
availability (before taking into account the minimum borrowing
availability covenant of $75.0 million) and
letter-of-credit
commitments of $33.2 million. The borrowing base
calculation under the Senior Secured Credit Facility contains an
inventory advance rate subject to periodic review at the
lender’s discretion. Based upon the most recent inventory
appraisal in February 2009, we realized a decrease in our
advance rate, the effect of which would have reduced borrowing
availability by $31.4 million had the new advance rate been
applied to our calculation at January 31, 2009.
On April 8, 2009, we elected to reduce our commitment under
our Senior Secured Credit Facility to $800.0 million from
the previous $1.0 billion, which will reduce interest
expense associated with the unused commitment fee.
On March 6, 2006, The Bon-Ton Department Stores, Inc.
entered into an Indenture (the “Indenture”) with The
Bank of New York, as trustee, under which The Bon-Ton Department
Stores, Inc. issued $510.0 million aggregate principal
amount of its
101/4% Senior
Notes due 2014 (the “Notes”). The Notes are guaranteed
on a senior unsecured basis by The Bon-Ton Stores, Inc. and
certain of its subsidiaries. The Notes mature on March 15,
2014. The Notes may not be redeemed prior to March 15,
2010. The interest rate of the Notes is fixed at
101/4%
per year. Interest on the Notes is payable on March 15 and
September 15 of each year, beginning on September 15, 2006.
The Indenture includes covenants that limit the ability of the
Company and its restricted subsidiaries to, among other things,
incur additional debt, pay dividends and make distributions,
make certain investments, enter into certain types of
transactions with affiliates, use assets as security in other
transactions, and sell certain assets or merge with or into
other companies.
On March 6, 2006, certain bankruptcy-remote special purpose
entities (each an “SPE” and, collectively, the
“SPEs”) that are indirect wholly owned subsidiaries of
The Bon-Ton Stores, Inc. entered into loan agreements with Bank
of America, pursuant to which Bank of America provided a new
mortgage loan facility in the aggregate principal amount of
$260.0 million (the “Mortgage Loan Facility”).
The Mortgage Loan Facility has a term of ten years and is
secured by mortgages on twenty-three retail stores and one
distribution center owned by the SPEs. Each SPE entered into a
lease with each of The Bon-Ton Stores, Inc. subsidiaries
operating on such SPE’s properties. A portion of the rental
income received under these leases will be used to pay the debt
service under the Mortgage Loan Facility. The Mortgage Loan
Facility requires level monthly payments of principal and
interest based on an amortization period of twenty-five years
and the balance outstanding at the end of ten years will then
become due and payable. The interest rate for the Mortgage Loan
Facility is fixed at 6.2125%. Financial covenants contained in
the Mortgage Loan Facility require that the SPEs maintain
certain financial thresholds, as defined in the agreements. In
addition, the SPEs are required to establish lease shortfall
reserve accounts pursuant to the terms of the Mortgage Loan
Facility. If the SPEs’ EBITDA (earnings before interest,
taxes, depreciation and amortization) falls below prescribed
levels, excess cash, as defined in the agreement, shall be
deposited in the lease shortfall reserve account and access to
these funds is restricted.
We used the net proceeds of the Notes offering and Mortgage Loan
Facility, along with borrowings under the Senior Secured Credit
Facility, to finance the acquisition of Carson’s, refinance
our previous revolving credit agreement, and pay related fees
and expenses in connection with the acquisition and related
financing transactions.
Aside from planned capital expenditures, our primary cash
requirements will be to service debt and finance working capital
increases during peak selling seasons. Additionally, in the
first quarter of 2009, we paid $5.7 million pursuant to the
termination of one of our unfunded supplemental pension plans.
We paid a quarterly cash dividend of $0.05 per share on shares
of Class A common stock and common stock on May 1,
2008, August 1, 2008, November 3, 2008 and
February 2, 2009 to shareholders of record as of
April 15, 2008, July 15, 2008, October 15, 2008,
and January 15, 2009,
respectively. Our Board of Directors may consider dividends in
subsequent periods as it deems appropriate.
The following tables reflect our contractual obligations and
commitments as of January 31, 2009:
In addition, we expect to make cash contributions to our
supplementary pension plans and the postretirement medical and
life insurance benefit plan in the amount of $7.2 million,
$1.5 million, $1.5 million, $1.4 million and
$1.4 million in 2009, 2010, 2011, 2012 and 2013,
respectively, and $5.1 million in the aggregate for the
five years thereafter.
We do not anticipate making a contribution to the Carson defined
benefit pension plan in 2009. Funding requirements will depend
on changes in the discount rate, the actual performance of plan
assets, and the impact of The Pension Protection Act of 2006.
Note 9 in the Notes to Consolidated Financial Statements
provides a more complete description of our benefit plans.
Documentary letters of credit are primarily issued to support
the purchasing of merchandise, which includes our private brand
goods. Standby letters of credit are primarily issued to support
the purchasing of merchandise and as collateral for obligations
related to general liability and workers’
compensation insurance. Surety bonds are primarily for
previously incurred and expensed obligations related to
workers’ compensation.
In the ordinary course of business, we enter into arrangements
with vendors to purchase merchandise up to twelve months in
advance of expected delivery. These purchase orders do not
contain any significant termination payments or other penalties
if cancelled.
Our discussion and analysis of financial condition and results
of operations are based upon the Consolidated Financial
Statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. Preparation
of these financial statements required us to make estimates and
judgments that affected reported amounts of assets and
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of our financial
statements. On an ongoing basis, we evaluate our estimates,
including those related to merchandise returns, bad debts,
inventories, goodwill, intangible assets, income taxes,
financings, contingencies, insurance reserves, and litigation.
We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and could
potentially lead to materially different results under different
assumptions and conditions. We believe our critical accounting
policies are as described below. For a discussion of the
application of these and other accounting policies, see the
Notes to Consolidated Financial Statements.
Inventories are stated at the lower of cost or market with cost
determined by the retail inventory method. Under the retail
inventory method, the valuation of inventories at cost and the
resulting gross margin is derived by applying a calculated
cost-to-retail
ratio to the retail value of inventories. The retail inventory
method is an averaging method that has been widely used in the
retail industry. Use of the retail inventory method will result
in valuing inventories at the lower of cost or market if
markdowns are taken timely as a reduction of the retail value of
inventories.
Inherent in the retail inventory method calculation are certain
significant management judgments and estimates including, among
others, merchandise markups, markdowns and shrinkage, which
significantly impact both the ending inventory valuation at cost
and the resulting gross margin. These significant estimates,
coupled with the fact that the retail inventory method is an
averaging process, can, under certain circumstances, result in
individual inventory components with cost above related net
realizable value. Factors that can lead to this result include
applying the retail inventory method to a group of products that
is not fairly uniform in terms of its cost, selling price
relationship and turnover; or applying the retail inventory
method to transactions that include different rates of gross
profit, such as those relating to seasonal merchandise. In
addition, failure to take timely markdowns can result in an
overstatement of inventory under the lower of cost or market
principle. We believe that the retail inventory method we use
provides an inventory valuation that approximates cost and
results in carrying inventory in the aggregate at the lower of
cost or market.
We regularly review inventory quantities on-hand and record an
adjustment for excess or old inventory based primarily on an
estimated forecast of merchandise demand for the selling season.
Demand for merchandise can fluctuate greatly. A significant
increase in the demand for merchandise could result in a
short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in
the amount of excess inventory quantities on-hand. Additionally,
estimates of future merchandise demand may prove to be
inaccurate, in which case we may have understated or overstated
the adjustment required for excess or old inventory. If our
inventory is
determined to be overvalued in the future, we would be required
to recognize such costs in costs of goods sold and reduce
operating income at the time of such determination. Likewise, if
inventory is later determined to be undervalued, we may have
overstated the costs of goods sold in previous periods and would
recognize additional operating income when such inventory is
sold. Therefore, although every effort is made to ensure the
accuracy of forecasts of future merchandise demand, any
significant unanticipated changes in demand or in economic
conditions within our markets could have a significant impact on
the value of our inventory and reported operating results.
Prior to the Carson’s acquisition, we utilized the
last-in,
first-out (“LIFO”) cost basis for all of our
inventories. In connection with the Carson’s acquisition,
we evaluated the inventory costing for the acquired inventories
and elected the
first-in,
first-out (“FIFO”) cost basis for the majority of the
acquired Carson’s locations. As of January 31, 2009
and February 2, 2008, approximately 32% of our inventories
were valued using a FIFO cost basis and approximately 68% of our
inventories were valued using a LIFO cost basis. As is currently
the case with many companies in the retail industry, our LIFO
calculations yielded inventory increases due to deflation
reflected in price indices used. The LIFO method values
merchandise sold at the cost of more recent inventory purchases
(which the deflationary indices indicated to be lower),
resulting in the general inventory on-hand being carried at the
older, higher costs. Given these higher values and the
promotional retail environment, we have reduced the carrying
value of our LIFO inventories to an estimated realizable value.
These reductions totaled $41.6 million and
$37.0 million as of January 31, 2009 and
February 2, 2008, respectively. Inherent in the valuation
of inventories are significant management judgments and
estimates regarding future merchandise selling costs and
pricing. Should these estimates prove to be inaccurate, we may
have overstated or understated our inventory carrying value. In
such cases, operating results would ultimately be impacted.
As is standard industry practice, allowances from merchandise
vendors are received as reimbursement for charges incurred on
marked-down merchandise. Vendor allowances are generally
credited to costs of goods sold, provided the allowance is:
(1) collectable, (2) for merchandise either
permanently marked down or sold, (3) not predicated on a
future purchase, (4) not predicated on a future increase in
the purchase price from the vendor, and (5) authorized by
internal management. If the aforementioned criteria are not met,
the allowances are reflected as an adjustment to the cost of
merchandise capitalized in inventory.
Additionally, allowances are received from vendors in connection
with cooperative advertising programs and for reimbursement of
certain payroll expenses. These allowances received from each
vendor are reviewed to ensure reimbursements are for specific,
incremental and identifiable advertising or payroll costs
incurred to sell the vendor’s products. If a vendor
reimbursement exceeds the costs incurred, the excess
reimbursement is recorded as a reduction of cost purchases from
the vendor and reflected as a reduction of costs of merchandise
sold when the related merchandise is sold. All other amounts are
recognized as a reduction of the related advertising or payroll
costs that have been incurred and reflected in SG&A expense.
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities,
and the valuation allowance recorded against net deferred tax
assets. Pursuant to SFAS No. 109, “Accounting for
Income Taxes” (“SFAS No. 109”), the
process involves summarizing temporary differences resulting
from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included within the consolidated balance
sheet. In addition, SFAS No. 109 requires that
companies assess whether valuation allowances should be
established against their deferred tax assets based on
consideration of all available evidence using a “more
likely than not” standard. To the extent a valuation
allowance is established in a period, an expense must be
recorded within the income tax provision in the statement of
operations.
Our net deferred tax assets were $2.7 million and
$104.9 million at January 31, 2009 and
February 2, 2008, respectively. In assessing the
realizability of our deferred tax assets, we considered whether
it was more likely than not that our deferred tax assets will be
realized based upon all available evidence, including scheduled
reversal of deferred tax liabilities, historical operating
results, projected future operating results, tax carry-back
availability, and limitations pursuant to Section 382 of
the Internal Revenue Code, among others. Pursuant to
SFAS No. 109, significant weight is to be given to
evidence that can be objectively verified. As a result, a
company’s current or previous losses are given more weight
than any projected future taxable income. In addition, a recent
three-year historical cumulative loss is considered a
significant element of negative evidence that is difficult to
overcome.
We evaluated our deferred tax assets each reporting period,
including assessment of the Company’s cumulative income
over the prior three-year period, to determine if valuation
allowances were required. A significant element of negative
evidence was the Company’s three-year historical cumulative
loss as of the fourth quarter of 2008. This, combined with
uncertain near-term economic conditions, reduced our ability to
rely on our projections of future taxable income in establishing
the deferred tax assets valuation allowance at January 31,
2009. Accordingly, a full valuation allowance was established
during the fourth quarter of 2008 on nearly all the
Company’s net deferred tax assets, resulting in a tax
expense adjustment of $108.5 million.
We recorded a valuation allowance of $145.5 million and
$14.3 million at January 31, 2009 and February 2,
2008, respectively. If actual results differ from these
estimates or these estimates are adjusted in future periods, the
valuation allowance may need to be adjusted, which could
materially impact our financial position and results of
operations. If sufficient positive evidence arises in the future
indicating that all or a portion of the deferred tax assets meet
the more likely than not standard under SFAS No. 109,
the valuation allowance would be reversed accordingly in the
period that such a conclusion is reached.
Effective February 4, 2007, we adopted the provisions of
FIN No. 48, which prescribes a recognition and
derecognition threshold and measurement element for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
Accordingly, we establish reserves for certain tax positions
that we believe are supportable, but are potentially subject to
successful challenge by applicable taxing authorities. However,
interpretations and guidance surrounding income tax laws and
regulations change over time. Changes in our assumptions and
judgments could materially impact our financial position and
results of operations.
Property, fixtures and equipment are recorded at cost and are
depreciated on a straight-line basis over the estimated useful
lives of such assets. Changes in our business model or capital
strategy can result in the actual useful lives differing from
estimates. In cases where we determined that the useful life of
property, fixtures and equipment should be shortened, we
depreciated the net book value in excess of the salvage value
over the revised remaining useful life, thereby increasing
depreciation expense. Factors such as changes in the planned use
of fixtures or leasehold improvements could also result in
shortened useful lives. Our net property, fixtures and equipment
amounted to $832.8 million and $885.5 million at
January 31, 2009 and February 2, 2008, respectively.
SFAS No. 144 requires the Company to test a long-lived
asset for recoverability whenever events or changes in
circumstances indicate that its carrying value may not be
recoverable. Factors that could trigger an impairment review
include the following:
If the undiscounted cash flows associated with the asset are
insufficient to support the recorded asset, an impairment loss
is recognized for the amount (if any) by which the carrying
amount of the asset exceeds the fair value of the asset. Cash
flow estimates are based on historical results, adjusted to
reflect our best estimate of future market and operating
conditions. Estimates of fair value are calculated based on a
discounted cash flow analysis. Should cash flow estimates differ
significantly from actual results, an impairment could arise and
materially impact our financial position and results of
operations. Given the seasonality of operations, impairment is
not conclusive, in many cases, until after the holiday period in
the fourth quarter is concluded.
Newly opened stores may take time to generate positive operating
and cash flow results. Factors such as store type, store
location, current marketplace awareness of private label brands,
local customer demographic data and current fashion trends are
all considered in determining the time-frame required for a
store to achieve positive financial results. If conditions prove
to be substantially different from expectations, the carrying
value of new stores’ long-lived assets may ultimately
become impaired.
We evaluated the recoverability of our long-lived assets in
accordance with SFAS No. 144. As a result, in 2008 we
recognized a $17.9 million asset impairment charge which
resulted in a reduction in the carrying amount of certain store
properties. These 2008 analyses anticipate continued difficult
economic conditions. Should economic conditions result that are
worse than anticipated, additional impairment charges could
result. In 2007 we recorded $2.7 million of asset
impairment charges which resulted in a reduction in the carrying
amount of certain store properties. Impairment losses of
$2.9 million, which resulted in a reduction in the carrying
amount of a store property and a reduction in the value of
duplicate information systems software resulting from the
acquisition of Carson’s, were recorded in 2006.
Net intangible assets totaled $148.2 million and
$165.9 million at January 31, 2009 and
February 2, 2008, respectively. Our intangible assets at
January 31, 2009 are principally comprised of
$77.3 million of lease interests that relate to
below-market-rate leases and $70.8 million associated with
trade names, private label brand names and customer lists. The
lease-related interests are being amortized using a
straight-line method. The customer lists are being amortized
using a declining-balance method. At January 31, 2009,
lease-related interests and customer lists had average remaining
lives of fourteen years and ten years, respectively, for
amortization purposes. At January 31, 2009, trade names and
private label brand names of $54.1 million have been deemed
as having indefinite lives.
In accordance with SFAS No. 142, goodwill and other
intangible assets that have indefinite lives are reviewed for
impairment at least annually or when events or changes in
circumstances indicate the carrying value of these assets might
exceed their current fair values. Fair value is determined using
quoted market prices
and/or a
discounted cash flow analysis, which requires certain
assumptions and estimates regarding industry economic factors.
Our policy is to conduct impairment testing based on our most
current business plans, which reflect anticipated changes in the
economy and the industry.
We recorded a goodwill impairment charge of $17.8 million
in the second quarter of 2008 in accordance with
SFAS No. 142. Based upon our review, the fair value of
our single reporting unit, estimated using a combination of our
common stock trading value as of the end of the second quarter
of 2008, a discounted cash flow analysis and other generally
accepted valuation methodologies, was less than the carrying
amount. The charge reduced the balance of goodwill to zero at
January 31, 2009 from the $17.8 million balance at
February 2, 2008. No such charge was recorded in 2007 or
2006.
Other indefinite-lived intangible assets were reviewed in the
second quarter of 2008 as well, with the determination that no
impairment adjustments were required on these assets at that
time. Because of the significant economic downturn experienced
during the fourth quarter of 2008, we reviewed the intangible
assets for impairment and recognized asset impairment charges of
$8.0 million and $0.1 million on indefinite-lived
trade names and private label brand names, respectively. As a
result of our review of the carrying value of intangible assets
for 2007, we recorded an asset impairment charge of
$1.3 million related to the reduction in the value of two
indefinite-lived private label brand names. No such charge was
recorded in 2006.
While the value of intangible assets has been substantially
reduced, should future results or economic events cause a change
in our projected cash flows, future determination of fair value
may not support the carrying amount of these assets. If actual
results prove inconsistent with our assumptions and judgments,
we could be exposed to a material impairment charge.
We use a combination of insurance and self-insurance for a
number of risks, including workers’ compensation, general
liability and employee-related health care benefits, a portion
of which is paid by our associates. We determine the estimates
for the liabilities associated with these risks by considering
historical claims experience, demographic factors, severity
factors and other actuarial assumptions. A change in claims
frequency and severity of claims from historical experience as
well as changes in state statutes and the mix of states in which
we operate could result in a change to the required reserve
levels.
Pension and
Supplementary Retirement Plans
We provide an unfunded supplementary pension plan to certain key
executives. Through acquisitions, we acquired a defined benefit
pension plan and assumed the liabilities of three supplementary
pension plans and a postretirement benefit plan. Major
assumptions used in accounting for these plans include the
discount rate and the expected long-term rate of return on the
defined benefit plan’s assets.
The discount rate assumption is evaluated annually. We utilize
the Citibank Pension Discount Curve (“CPDC”) to
develop the discount rate assumption. The CPDC is developed from
a U.S. Treasury par curve that reflects the Treasury Coupon
and Strips market. Option-adjusted spreads drawn from the
double-A corporate bond sector are layered in to develop a
double-A corporate par curve, from which the CPDC spot rates are
developed. The CPDC spot rates are applied to expected benefit
payments, from which a single constant discount rate can then be
developed based on the expected timing of these benefit payments.
We base our asset return assumption on current and expected
allocations of assets, as well as a long-term view of expected
returns on the plan asset categories. We assess the
appropriateness of the expected rate of return on an annual
basis and, when necessary, revise the assumption. Our target
pension plan asset allocation of equity securities, fixed income
and real estate at January 31, 2009 and February 2,
2008 was 65%, 30% and 5%, respectively.
Changes in the assumptions regarding the discount rate and
expected return on plan assets may result in materially
different expense and liability amounts. Actuarial estimations
may differ materially from actual results, reflecting many
factors including changing market and economic conditions,
changes in investment strategies, higher or lower withdrawal
rates and longer or shorter life-spans of participants. In
addition, while we are not required to make any mandatory
contributions to the defined benefit pension plan in 2009, the
funded status of this plan and the related cost reflected in our
financial statements are affected by various factors that are
subject to an inherent degree of uncertainty, particularly in
the current economic environment. Under the Pension Protection
Act of 2006, continued losses of asset values may necessitate
increased funding of the defined benefit pension plan in the
future to meet minimum federal government requirements. The
continued downward pressure on the asset values of the defined
benefit pension plan may require us to fund obligations earlier
than we forecasted, which would have a negative impact on cash
flows from operations.
In the first quarter of 2009, we paid $5.7 million pursuant
to the termination of one of our unfunded supplemental pension
plans.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements; however, it does not
require any new fair value measurements. SFAS No. 157
was effective for years beginning after November 15, 2007
for financial assets and liabilities that are measured at fair
value on a recurring basis. Accordingly, effective
February 3, 2008, we adopted the provisions of
SFAS No. 157 for financial assets and liabilities that
are measured at fair value on a recurring basis; the adoption of
SFAS No. 157 did not have a material impact on our
consolidated financial statements. See Note 4 in the Notes
to Consolidated Financial Statements regarding the
implementation of SFAS No. 157.
Pursuant to the option for a one-year deferral of
SFAS No. 157’s fair-value measurement
requirements for non-financial assets and liabilities that are
not required or permitted to be measured at fair value on a
recurring basis, we elected to defer application of
SFAS No. 157 to, among others, goodwill, fixed asset
and intangible asset impairment testing, and liabilities for
exit or disposal activities initially measured at fair value. We
expect the full adoption of this statement in 2009 will not have
a material impact on the consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities — an Amendment of FASB Statement
No. 133” (“SFAS No. 161”).
SFAS No. 161 requires companies to provide qualitative
disclosures about the objectives and strategies for using
derivatives, quantitative data about the fair value of and gains
and losses on derivative contracts, and details of
credit-risk-related contingent features in their hedged
positions. The statement also requires companies to disclose
more information about the location and amounts of derivative
instruments in financial statements; how derivatives and related
hedges are accounted for under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities”; and how the hedges affect the entity’s
financial position, financial performance and cash flows.
SFAS No. 161 is effective for years beginning after
November 15, 2008. We expect the adoption of this statement
will not have a material impact on the consolidated financial
statements.
In December 2008, the FASB issued Staff Position
No. 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets” (“FSP
No. 132(R)-1”). FSP No. 132(R)-1 requires
entities to provide enhanced disclosures about investment
allocation decisions, the major categories of plan assets, the
inputs and valuation techniques used to measure fair value of
plan assets, the effect of fair value measurements using
significant unobservable inputs on changes in plan assets for
the period and significant concentrations of risk within plan
assets. The enhanced disclosures about plan assets required by
FSP No. 132(R)-1 must be provided in our Annual Report on
Form 10-K
for the year ending January 30, 2010. We are currently
assessing the potential impacts, if any, on the consolidated
financial statements.
Market Risk
and Financial Instruments
We are exposed to market risk associated with changes in
interest rates. To provide some protection against potential
rate increases associated with our variable-rate facilities, we
enter into derivative financial transactions in the form of
interest rate swaps. The interest rate swaps are used to hedge a
portion of the underlying variable-rate facilities. The swaps
are qualifying hedges and the interest rate differential is
reflected as an adjustment to interest expense over the life of
the swaps.
At January 31, 2009, we held two
“variable-to-fixed”
rate swaps with a notional amount of $50.0 million each.
The notional amount does not represent amounts exchanged by the
parties; rather, it is used as the basis to calculate amounts
due and to be received under the rate swap. During 2008 and
2007, we did not enter into or hold derivative financial
instruments for trading purposes.
The following table provides information about our derivative
financial instruments and other financial instruments that are
sensitive to changes in interest rates, including debt
obligations and the interest rate swaps. For debt obligations,
the table presents principal cash flows and related weighted
average interest rates by expected maturity dates at
January 31, 2009. For the interest rate swaps, the table
presents the notional amount and weighted average pay and
receive interest rates by expected maturity date. For additional
discussion of our interest rate swaps, see Note 11 in the
Notes to Consolidated Financial Statements.
Our business, like that of most retailers, is subject to
seasonal fluctuations, with the major portion of sales and
income realized during the second half of each fiscal year,
which includes the holiday season. See Note 19 in the Notes
to Consolidated Financial Statements for the Company’s
quarterly results for 2008 and 2007. Due to the fixed nature of
certain costs, SG&A expense is typically higher as a
percentage of net sales during the first half of each year.
Working capital requirements fluctuate during the year as well
and generally reach their highest levels during the third and
fourth quarters.
Because of the seasonality of our business, results for any
quarter are not necessarily indicative of results that may be
achieved for a full year. In addition, quarterly operating
results are impacted by the timing and amount of revenues and
costs associated with the opening of new stores and the closing
and remodeling of existing stores.
Although we cannot determine the precise effects of inflation on
our business, we do not believe inflation has had a material
impact on operating results during the past three years.
However, there can be no assurance that our business will not be
affected by material inflationary adjustments in the future.
Information called for by this item is set forth in the
Consolidated Financial Statements and Financial Statement
Schedule contained in this report and is incorporated herein by
this reference. See index at
page F-1.
None.
Attached as exhibits to this
Form 10-K
are certifications of the Company’s Chief Executive Officer
and Chief Financial Officer, which are required by
Rule 13a-14
of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). This “Controls and
Procedures” section includes information concerning the
controls and controls evaluation referred to in the
certifications. This section should be read in conjunction with
the certifications for a more complete understanding of the
topics presented.
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in reports
filed pursuant to the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is
accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. Our
management, including our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act) as of the end of the period covered by this
report and, based on this evaluation, concluded that our
disclosure controls and procedures are effective.
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting to provide reasonable assurance regarding the
reliability of its financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of the Company’s assets; (ii) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that the
Company’s receipts and expenditures are being made only in
accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of its assets that could have a
material effect on the financial statements.
Management assessed the Company’s internal control over
financial reporting as of January 31, 2009, the end of the
2008 fiscal year. Management based its assessment on criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management’s
assessment included evaluation of such elements as the design
and operating effectiveness of key financial reporting controls,
process documentation, accounting policies and the
Company’s overall control environment.
Based on its assessment, management has concluded that the
Company’s internal control over financial reporting was
effective as of the end of the fiscal year to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external reporting
purposes in accordance with generally accepted accounting
principles. The results of management’s assessment were
reviewed with the Audit Committee of the Company’s Board of
Directors.
KPMG LLP independently assessed the effectiveness of the
Company’s internal control over financial reporting. KPMG
LLP has issued an attestation report, which is included below.
The Board of Directors and Shareholders
The Bon-Ton Stores, Inc.:
We have audited The Bon-Ton Stores, Inc. internal control over
financial reporting as of January 31, 2009, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Bon-Ton Stores, Inc.’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Management Report on Internal
Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, The Bon-Ton Stores, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of January 31, 2009, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of The Bon-Ton Stores, Inc. and
subsidiaries as of January 31, 2009 and February 2,
2008, and the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the fiscal
years in the three-year period ended January 31, 2009, and
the related financial statement schedule, and our report dated
April 15, 2009 expressed an unqualified opinion on those
consolidated financial statements and the related financial
statement schedule.
/s/ KPMG
LLP
Philadelphia, Pennsylvania
April 15, 2009
Our management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls
or internal control over financial reporting will prevent or
detect all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives
will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further,
because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that
misstatements because of error or fraud will not occur or that
all control issues and instances of fraud, if any, within our
Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of a simple error or
mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based, in part, on certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks.
Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with
policies or procedures.
Except as discussed below, there were no changes to the
Company’s internal control over financial reporting that
occurred during the thirteen weeks ended January 31, 2009
that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
The Company made certain changes to its internal control over
financial reporting in connection with implementation of new
general ledger and account payable computer systems, which were
implemented pursuant to the Company’s ongoing technology
improvements. Management believes the new controls are effective.
None.
As part of our system of corporate governance, our Board of
Directors has adopted a Code of Ethical Standards and Business
Practices applicable to all directors, officers and associates.
This Code is available on our website at www.bonton.com.
The information regarding executive officers is included in
Part I under the heading “Executive Officers.”
The remainder of the information called for by this Item is
incorporated by reference to the sections entitled
“Election of Directors,” “Section 16(a)
Beneficial Ownership Reporting Compliance” and
“Corporate Governance and Board of Directors
Information” of the Proxy Statement.
The information called for by this Item is incorporated by
reference to the section entitled “Executive
Compensation” of the Proxy Statement.
The information called for by this Item is incorporated by
reference to the sections entitled “Security Ownership of
Directors and Executive Officers” and “Equity
Compensation Plan Information” of the Proxy Statement.
The information called for by this Item is incorporated by
reference to the sections entitled “Related Party
Transactions” and “Director Independence” of the
Proxy Statement.
The information called for by this Item is incorporated by
reference to the section entitled “Fees Paid to KPMG”
of the Proxy Statement.
(a) The following documents are filed as part of this
report:
1. Consolidated Financial Statements — See the
Index to Consolidated Financial Statements and Financial
Statement Schedule on
page F-1.
2. Financial Statement Schedule — See the Index
to Consolidated Financial Statements and Financial Statement
Schedule on
page F-1.
(b) The following are exhibits to this
Form 10-K
and, if incorporated by reference, we have indicated the
document previously filed with the SEC in which the exhibit was
included.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE BON-TON STORES, INC.
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer
Dated: April 15, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
The Board of Directors and Shareholders
The Bon-Ton Stores, Inc.:
We have audited the accompanying consolidated balance sheets of
The Bon-Ton Stores, Inc. and subsidiaries as of January 31,
2009 and February 2, 2008, and the related consolidated
statements of operations, shareholders’ equity, and cash
flows for each of the fiscal years in the three-year period
ended January 31, 2009. In connection with our audits of
the consolidated financial statements, we also have audited the
financial statement schedule, Valuation and Qualifying Accounts.
These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of The Bon-Ton Stores, Inc. and subsidiaries as of
January 31, 2009 and February 2, 2008, and the results
of their operations and their cash flows for each of the fiscal
years in the three-year period ended January 31, 2009, in
conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in notes 1, 9 and 18 to the consolidated
financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans,” effective February 3,
2007 and Financial Accounting Standards Board Interpretation
No. 48, “Accounting for Uncertainty in Income
Taxes,” effective February 4, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), The
Bon-Ton Stores, Inc.’s internal control over financial
reporting as of January 31, 2009, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated April 15,
2009 expressed an unqualified opinion on the effectiveness of
the Company’s internal control over financial reporting.
/s/ KPMG
LLP
Philadelphia, Pennsylvania
April 15, 2009
THE BON-TON
STORES, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these
consolidated financial statements.
THE BON-TON
STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these
consolidated financial statements.
THE BON-TON
STORES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
The accompanying notes are an integral part of these
consolidated financial statements.
THE BON-TON
STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these
consolidated financial statements.
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
The Bon-Ton Stores, Inc. is a Pennsylvania corporation
incorporated on January 31, 1996 as the successor of a
company incorporated on January 31, 1929. As of
January 31, 2009, The Bon-Ton Stores, Inc. operated,
through its subsidiaries, 281 stores, which includes twelve
furniture galleries, in 23 states in the Northeast, Midwest
and upper Great Plains under the Bon-Ton, Bergner’s, Boston
Store, Carson Pirie Scott, Elder-Beerman, Herberger’s and
Younkers nameplates and, under the Parisian nameplate, stores in
the Detroit, Michigan area.
References to “the Company” refer to The Bon-Ton
Stores, Inc. and its subsidiaries. References to
“Carson’s” are to the Northern Department Store
Group acquired by the Company from Saks Incorporated
(“Saks”) effective March 5, 2006. References to
“Elder-Beerman” denote The Elder-Beerman Stores Corp.
and its subsidiaries, which were acquired by the Company in
October 2003. References to “Bon-Ton” refer to the
Company’s stores operating under the Bon-Ton and
Elder-Beerman nameplates. References to “Parisian”
refer to the stores acquired from Belk, Inc. effective
October 29, 2006.
The Company’s fiscal year ends on the Saturday nearer
January 31, and consisted of fifty-two weeks for 2008 and
2007 and fifty-three weeks for 2006. References to
“2008,” “2007” and “2006”
represent the Company’s fiscal 2008 year ended
January 31, 2009, fiscal 2007 year ended
February 2, 2008 and fiscal 2006 year ended
February 3, 2007, respectively. References to
“2009” represent the Company’s fiscal
2009 year ending January 30, 2010.
The consolidated financial statements include the accounts of
The Bon-Ton Stores, Inc. and its wholly owned subsidiaries. All
intercompany transactions have been eliminated in consolidation.
Results of operations for 2008 and 2007 include Carson’s
and Parisian for the entire fifty-two weeks. Results of
operations for 2006 include Carson’s from the March 5,
2006 acquisition date through February 3, 2007 (see
Note 13) and Parisian from the October 29, 2006
acquisition date through February 3, 2007. The Company
conducts its operations through one business segment.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires that management make estimates and assumptions about
future events. These estimates and assumptions affect the
amounts of assets and liabilities reported, disclosures about
contingent assets and liabilities and the reported amounts of
revenue and expenses. Such estimates include the valuation of
inventories, long-lived assets, intangible assets, insurance
reserves, legal contingencies and assumptions used in the
calculation of income taxes and retirement and other
post-employment benefits, among others. These estimates and
assumptions are based on management’s best estimates and
judgments. Management evaluates its estimates and assumptions on
an ongoing basis using historical experience and other factors,
including the current economic environment, which management
believes to be reasonable under the circumstances. Management
adjusts such estimates and assumptions when facts and
circumstances dictate. As future events and their effects cannot
be determined with precision, actual results could differ
significantly from these estimates. Changes in those estimates
resulting from continuing changes in the economic environment
will be reflected in the financial statements in future periods.
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
Certain prior year balances presented in the consolidated
financial statements and notes thereto have been reclassified to
conform to the current year presentation. These
reclassifications did not impact the Company’s net (loss)
income for 2008, 2007 or 2006.
The Company considers all highly liquid short-term investments
with maturities of three months or less at the time of purchase
to be cash equivalents. Cash equivalents are generally overnight
money market investments.
For financial reporting and tax purposes, merchandise
inventories are determined by the retail method. Prior to the
Carson’s acquisition, the
last-in,
first-out (“LIFO”) cost basis was utilized for all
inventories. In connection with the Carson’s acquisition,
the Company adopted the
first-in,
first-out (“FIFO”) cost basis for the majority of the
acquired Carson’s locations. As of January 31, 2009
and February 2, 2008, approximately 32% of the
Company’s merchandise inventories were valued using a FIFO
cost basis and approximately 68% of merchandise inventories were
valued using a LIFO cost basis. There were no adjustments to
costs of merchandise sold for LIFO valuations in 2008, 2007 and
2006. If the FIFO method of inventory valuation had been used
for all inventories, the Company’s merchandise inventories
would have been lower by $6,837 at January 31, 2009 and
February 2, 2008.
Costs for merchandise purchases, product development and
distribution are included in costs of merchandise sold.
Depreciation and amortization of property, fixtures and
equipment is computed using the straight-line method based upon
the shorter of the remaining accounting lease term, if
applicable, or the economic life reflected in the following
ranges:
No depreciation is recorded until property, fixtures and
equipment are placed into service. The Company capitalizes
interest incurred during the construction of new facilities or
major improvements to existing facilities and development
projects that exceed one month. The amount of interest costs
capitalized is limited to the costs incurred during the
construction period. Interest of $410, $257 and $71 was
capitalized in 2008, 2007 and 2006, respectively.
Repair and maintenance costs are charged to operations as
incurred. Property retired or sold is removed from asset and
accumulated depreciation accounts and the resulting gain or loss
is reflected in selling, general and administrative
(“SG&A”) expense.
Costs of major remodeling and improvements on leased stores are
capitalized as leasehold improvements. Leasehold improvements
are amortized over the shorter of the accounting lease term or
the useful life of the asset. Capital leases are recorded at the
lower of fair market value or the present value of future
minimum lease payments. Capital leases are amortized in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 13, “Accounting for
Leases.”
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”
(“SFAS No. 144”), requires the Company to
test a long-lived asset for recoverability whenever events or
changes in circumstances indicate that its carrying value may
not be recoverable. If the undiscounted cash flows associated
with the asset are insufficient to support the recorded asset,
an impairment loss is recognized for the amount (if any) by
which the carrying amount of the asset exceeds the fair value of
the asset. Cash flow estimates are based on historical results,
adjusted to reflect the Company’s best estimate of future
market and operating conditions. Estimates of fair value are
calculated based on a discounted cash flow analysis. As a result
of this evaluation, asset impairment charges, which resulted in
a reduction in the carrying amount of certain store properties
of $17,853 and $2,747, were recorded in 2008 and 2007,
respectively (see Note 2). Impairment losses of $2,923 were
recorded in 2006, resulting in a reduction in the carrying
amount of a store property and a reduction in the value of
duplicate information systems software resulting from the
acquisition of Carson’s.
In accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets”
(“SFAS No. 142”), goodwill and other
intangible assets that have indefinite lives are reviewed for
impairment at the reporting unit level at least annually or when
events or changes in circumstances indicate it is more likely
than not that the carrying value of these assets exceeds their
implied fair values. Intangible assets subject to amortization
are reviewed for impairment in accordance with
SFAS No. 144. Based on its reporting structure,
management has determined the Company has one reporting unit for
purposes of applying SFAS No. 142. Fair value is
determined using quoted market prices
and/or a
discounted cash flow analysis and other generally accepted
valuation methodologies, which requires certain assumptions and
estimates regarding industry economic factors and future
profitability of acquired businesses. The Company’s policy
is to conduct impairment testing based on its most current
business plans, which reflect anticipated changes in the economy
and the industry.
The Company recorded a goodwill impairment charge of $17,767 in
the second quarter of 2008 in accordance with
SFAS No. 142. Based upon the Company’s review,
the fair value of its single reporting unit, estimated using a
combination of the Company’s common stock trading value as
of the end of the second quarter of 2008, a discounted cash flow
analysis and other generally accepted valuation methodologies,
was less than the carrying amount (see Note 3). No such
charge was recorded in 2007 or 2006. As a result of its review
of the carrying value of intangible assets for 2008, the Company
recorded an asset impairment charge of $8,052 primarily related
to the reduction in value of four indefinite-lived trade names
(see Note 3). In 2007, the Company recorded an asset
impairment charge of $1,323 related to the reduction in the
value of two indefinite-lived private label brand names. No such
charge was recorded in 2006.
Amounts paid by the Company to secure financing agreements are
reflected in other long-term assets and are amortized over the
term of the related facility. Amortization of credit facility
costs are classified as interest expense. Unamortized amounts at
January 31, 2009 and February 2, 2008 were $17,812 and
$21,728, respectively. Deferred financing fees amortized to
expense for 2008, 2007 and 2006 were $4,184, $4,143 and $5,984,
respectively.
The Company accounts for income taxes according to
SFAS No. 109, “Accounting for Income Taxes”
(“SFAS No. 109”). Under
SFAS No. 109, deferred tax assets and liabilities are
recognized for
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
the expected future tax consequences of the difference between
the financial statement and income tax basis of assets and
liabilities and from net operating losses and credit
carryforwards. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized within income in the
period that includes the enactment date.
SFAS No. 109 requires an assessment of whether
valuation allowances should be established against deferred tax
assets based on consideration of all available evidence using a
“more likely than not” standard. The Company recorded
valuation allowances of $145,468 and $14,260 at January 31,
2009 and February 2, 2008, respectively (see Note 18).
The Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes”
(“FIN No. 48”) effective February 4,
2007. FIN No. 48 prescribes a recognition and
derecognition threshold and measurement attribute for the
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN No. 48 requires the
Company to recognize, in the financial statements, the impact of
a tax position if that position is more likely than not of being
sustained under audit, based on the technical merits of the
position.
The Company recognizes revenue, which excludes sales tax, at
either the
point-of-sale
or at the time merchandise is delivered to the customer and all
significant obligations have been satisfied. The Company has a
customer return policy allowing customers to return merchandise
with proper documentation. A reserve is provided for estimated
merchandise returns, based on historical returns experience, and
is reflected as an adjustment to sales and costs of merchandise
sold.
The Company licenses space to third parties in its stores and
receives compensation based on a percentage of sales made in
these departments and receives revenues from customers for
delivery of certain items and services (primarily associated
with its furniture operations). The Company also receives
revenues under a credit card program agreement with HSBC Bank
Nevada, N.A., in which the Company is paid a percentage of net
credit sales for its proprietary credit card sales. The
aforementioned revenues are recorded within other income. In
addition, the Company recovers a portion of its cost from the
disposal of damaged or otherwise distressed merchandise; this
recovery is recorded within other income.
Advertising production costs are expensed the first time the
advertisement is run. Media placement costs are expensed in the
period the advertising appears. Total advertising expenses, net
of vendor allowances, included in SG&A expense for 2008,
2007 and 2006 were $140,301, $144,260 and $139,842,
respectively. Prepaid expenses and other current assets include
prepaid advertising costs of $7,599 and $7,291 at
January 31, 2009 and February 2, 2008, respectively.
As is standard industry practice, the Company receives
allowances from merchandise vendors as reimbursement for charges
incurred on marked-down merchandise. Vendor allowances are
credited to costs of merchandise sold, provided the allowance
is: (1) collectable, (2) for merchandise either
permanently marked down or sold, (3) not predicated on a
future purchase, (4) not predicated on a future increase in
the purchase price from the vendor, and (5) authorized by
internal
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
management. If the aforementioned criteria are not met, the
Company reflects the allowance dollars as an adjustment to the
cost of merchandise capitalized in inventory.
Additionally, the Company receives allowances from vendors in
connection with cooperative advertising programs and for
reimbursement of certain payroll expenses. These amounts are
recognized by the Company as a reduction of the related
advertising or payroll costs that have been incurred and
reflected in SG&A expense. The Company reviews these
allowances received from each vendor to ensure reimbursements
are for specific, incremental and identifiable advertising or
payroll costs incurred by the Company to sell the vendor’s
products. If a vendor reimbursement exceeds the costs incurred
by the Company, the excess reimbursement is recorded as a
reduction of cost purchases from the vendor and reflected as a
reduction of costs of merchandise sold when the related
merchandise is sold.
The Company, consistent with industry practice, mandates that
vendor merchandise shipments conform to certain standards. These
standards are usually defined in the purchase order and include
items such as proper ticketing, security tagging, quantity,
packaging, on-time delivery, etc. Failure by vendors to conform
to these standards increases the Company’s merchandise
handling costs. Accordingly, various purchase order violation
charges are billed to vendors; these charges are reflected by
the Company as a reduction of costs of merchandise sold in the
period in which the respective violations occur. The Company
establishes reserves for purchase order violations that may
become uncollectable.
The Company is self-insured for certain losses related to
workers’ compensation and health insurance, although it
maintains stop-loss coverage with third party insurers to limit
exposures. The estimate of its self-insurance liability contains
uncertainty since the Company must use judgment to estimate the
ultimate cost that will be incurred to settle reported claims
and claims for incidents incurred but not reported as of the
balance sheet date. When estimating its self-insurance
liability, the Company considers a number of factors which
include, but are not limited to, historical claims experience,
demographic factors, severity factors and information provided
by independent third-party advisors.
The carrying values of the Company’s cash and cash
equivalents, accounts payable and obligations under capital
leases approximate fair value. The Company discloses the fair
value of its long-term debt and derivative financial instruments
in Notes 10 and 11, respectively. Fair value estimates of
the Company’s long-term debt and derivative financial
instruments are based on market prices or derived from
discounted cash flow analyses, respectively.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents. The Company manages the credit risk associated
with cash and cash equivalents by maintaining cash accounts and
investing with high-quality institutions. The Company maintains
cash accounts, primarily on an overnight basis, which may exceed
federally insured limits. The Company has not experienced any
losses from maintaining cash
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
accounts in excess of such limits. The Company believes that it
is not exposed to any significant risks related to its cash
accounts.
The Company leases a majority of its retail stores under
operating leases. Many of the lease agreements contain rent
holidays, rent escalation clauses and contingent rent
provisions — or some combination of these items. The
Company recognizes rent expense on a straight-line basis over
the accounting lease term, which includes cancelable option
periods where failure to exercise such options would result in
an economic penalty. In calculating straight-line rent expense,
the Company utilizes an accounting lease term that equals or
exceeds the time period used for depreciation. Additionally, the
commencement date of the accounting lease term reflects the
earlier of the date the Company becomes legally obligated for
the rent payments or the date the Company takes possession of
the building for initial construction and setup. The excess of
rent expense over the actual cash paid is recorded as deferred
rent.
Effective January 29, 2006, the Company adopted
SFAS No. 123(R), “Share-Based Payment”
(“SFAS No. 123R”). This statement replaced
SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”), and
superseded Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB
No. 25”). SFAS No. 123R requires that all
share-based compensation be recognized as an expense in the
financial statements and that such cost be measured at the fair
value of the award. SFAS No. 123R was adopted using
the modified prospective method of application, which requires
the Company to recognize compensation cost on a prospective
basis. Under this method, the Company recorded share-based
compensation expense for awards granted prior to, but not yet
vested as of, January 28, 2006 using the fair value amounts
determined for pro forma disclosures under
SFAS No. 123. For share-based awards granted after
January 28, 2006, the Company recognizes compensation
expense based on estimated grant date fair value using the
Black-Scholes option-pricing model.
The Company elected to adopt the shortcut method provided in
Staff Position No. FAS 123(R)-3, “Transition
Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards,” for determining the initial
pool of excess tax benefits available to absorb tax deficiencies
related to share-based compensation subsequent to the adoption
of SFAS No. 123R. The shortcut method includes
simplified procedures for establishing the beginning balance of
the pool of excess tax benefits (the “APIC Tax Pool”)
and for determining the subsequent effect on the APIC Tax Pool
and the Company’s Consolidated Statements of Cash Flows of
the tax effects of share-based compensation awards.
Basic earnings per share (“EPS”) is based upon the
weighted average number of shares outstanding during each
period. Diluted EPS reflects the impact of assumed exercise of
dilutive stock options and vesting of dilutive restricted stock.
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
The following table presents a reconciliation of the weighted
average shares outstanding used in basic and diluted EPS
calculations for each of 2008, 2007 and 2006:
Due to the Company’s net loss in 2008, restricted shares
and restricted stock units with a dilutive effect of
155,236 shares and stock options with a dilutive effect of
2,656 shares were excluded from diluted weighted average
shares outstanding.
The following average shares were excluded from the computation
of diluted weighted average shares outstanding because their
effect would have been antidilutive:
The Company is a regional department store operator offering a
broad assortment of brand-name fashion apparel and accessories
for women, men and children as well as cosmetics, home
furnishings and other goods. As of January 31, 2009, the
Company operated 281 stores in 23 states in the
Northeastern, Midwestern and upper Great Plains areas of the
United States. The diversity of the Company’s products,
customers and geographic operations reduces the risk that a
severe impact will occur in the near term as a result of changes
in its customer base, competition or markets.
In response to the current global economic conditions and the
resultant decline in consumer spending, the Company has
considered the impact of continued recessionary factors on its
liquidity and has performed an analysis of the key assumptions
in its forecast such as sales, gross margin and SG&A
expenses; an evaluation of its relationships with vendors and
their factors, including availability of vendor credit; and an
analysis of cash requirements, including the Company’s
inventory and other working capital requirements, capital
expenditures and borrowing availability under its credit
facility. Based upon these analyses and evaluations, the Company
expects its anticipated sources of liquidity will be sufficient
to meet its obligations without significant revisions to its
planned operations through 2009.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands
disclosures about fair value measurements; however, it does not
require any new fair value measurements. SFAS No. 157
was effective for years beginning after November 15, 2007
for financial assets and liabilities that are measured at fair
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
value on a recurring basis. Accordingly, effective
February 3, 2008, the Company adopted the provisions of
SFAS No. 157 for financial assets and liabilities that
are measured at fair value on a recurring basis; the adoption of
SFAS No. 157 did not have a material impact on the
consolidated financial statements. See Note 4 regarding the
implementation of SFAS No. 157.
Pursuant to the option for a one-year deferral of
SFAS No. 157’s fair-value measurement
requirements for non-financial assets and liabilities that are
not required or permitted to be measured at fair value on a
recurring basis, the Company elected to defer application of
SFAS No. 157 to, among others, goodwill, fixed asset
and intangible asset impairment testing, and liabilities for
exit or disposal activities initially measured at fair value.
The Company expects the full adoption of this statement in 2009
will not have a material impact on its consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities — an Amendment of FASB Statement
No. 133” (“SFAS No. 161”).
SFAS No. 161 requires companies to provide qualitative
disclosures about the objectives and strategies for using
derivatives, quantitative data about the fair value of and gains
and losses on derivative contracts, and details of
credit-risk-related contingent features in their hedged
positions. The statement also requires companies to disclose
more information about the location and amounts of derivative
instruments in financial statements; how derivatives and related
hedges are accounted for under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”); and how
the hedges affect the entity’s financial position,
financial performance and cash flows. SFAS No. 161 is
effective for years beginning after November 15, 2008. The
Company expects the adoption of this statement will not have a
material impact on its consolidated financial statements.
In December 2008, the FASB issued Staff Position
No. 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets” (“FSP
No. 132(R)-1”). FSP No. 132(R)-1 requires
entities to provide enhanced disclosures about investment
allocation decisions, the major categories of plan assets, the
inputs and valuation techniques used to measure fair value of
plan assets, the effect of fair value measurements using
significant unobservable inputs on changes in plan assets for
the period and significant concentrations of risk within plan
assets. The enhanced disclosures about plan assets required by
FSP No. 132(R)-1 must be provided in the Company’s
Annual Report on
Form 10-K
for the year ending January 30, 2010. The Company is
currently assessing the potential impacts, if any, on its
consolidated financial statements.
Property, fixtures and equipment and related accumulated
depreciation and amortization consisted of:
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
Accumulated depreciation and amortization includes $11,471 and
$7,799 at January 31, 2009 and February 2, 2008,
respectively, related to buildings and equipment under capital
leases. Amortization of buildings and equipment under capital
leases is included within depreciation and amortization expense.
Depreciation expense related to property, fixtures and equipment
of $114,622, $114,098 and $99,281 was included in depreciation
and amortization expense for 2008, 2007 and 2006, respectively.
Asset impairment charges of $17,853 and $2,747, which resulted
in a reduction in the carrying amount of certain store
properties, were recorded in 2008 and 2007, respectively.
Impairment losses of $2,923 were recorded in 2006, resulting in
a reduction in the carrying amount of a store property and a
reduction in the value of duplicate information systems software
resulting from the acquisition of Carson’s. The expenses
are included in other impairment charges.
Goodwill and intangible assets consist of the following:
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
In accordance with SFAS No. 142, the Company is
required to review goodwill and other intangible assets that
have indefinite lives for impairment at the reporting unit level
at least annually or when events or changes in circumstances
indicate it is more likely than not that the carrying value of
these assets exceeds their implied fair value. Based on its
reporting structure, management has determined the Company has
one reporting unit for purposes of applying
SFAS No. 142.
The economic environment as of the second quarter of 2008
depressed stock values for many companies, including that of the
Company. This factor, coupled with the expectation that the
economic challenges would impede near-term recovery in the
retail sector, led the Company to determine that its goodwill
should be reviewed for impairment during the second quarter of
2008.
In evaluating goodwill for impairment, the estimated fair value
of the Company’s single reporting unit is compared to its
carrying amount. If the estimated fair value is less than its
carrying amount, an impairment loss is recorded in accordance
with the provisions of SFAS No. 142 to the extent that
the implied fair value of the goodwill is less than its carrying
amount. The fair value of the Company’s single reporting
unit was estimated using a combination of its common stock
trading value as of the end of the second quarter of 2008, a
discounted cash flow analysis and other generally accepted
valuation methodologies.
As a result of the goodwill impairment review, the Company
determined that its goodwill was fully impaired and,
accordingly, recorded a goodwill impairment charge of $17,767
during the second quarter of 2008.
Other indefinite-lived intangible assets were reviewed in the
second quarter of 2008 as well, with the determination that no
impairment adjustments were required on these assets at that
time. Because of the significant economic downturn experienced
during the fourth quarter of 2008, the Company again reviewed
its intangible assets for impairment. As a result of the adverse
environment and expectations regarding future operating
performance of these assets, it was determined that the carrying
values exceeded the estimated fair values, which were based on
discounted cash flow analyses. Accordingly, the Company
recognized asset impairment charges of $8,000 and $52 on
indefinite-lived trade names and private label brand names,
respectively, in the fourth quarter of 2008. Private label brand
names not subject to amortization were reduced by $1,323 in 2007
as a result of an impairment charge. No such charge was recorded
in 2006. The expenses are included in other impairment charges.
Lease-related interests reflect below-market-rate leases
purchased in store acquisitions completed in 1992 through 2006
that were adjusted to reflect fair market value. The
lease-related interests, including the unfavorable lease-related
interests included in other long-term liabilities, are being
amortized on a straight-line method and reported as
“amortization of lease-related interests” in the
consolidated statements of operations. At January 31, 2009,
these lease-related interests have weighted-average remaining
lives of fourteen years for amortization purposes.
At January 31, 2009, customer lists and relationships are
being amortized on a declining-balance method over the remaining
lives of ten years. The private label brand names are fully
amortized as of January 31, 2009.
The amortization from the customer lists and relationships and
private label brand names is included within depreciation and
amortization expense.
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
Amortization of $2,760, $2,957 and $985 was recorded on customer
lists and relationships and private label brand names during
2008, 2007 and 2006, respectively. Amortization of $4,866,
$4,978 and $3,720 was recorded for favorable and unfavorable
lease-related interests during 2008, 2007 and 2006,
respectively. The Company anticipates amortization on customer
lists and relationships and private label brand names of
approximately $2,390 in 2009, $2,216 in 2010, $2,042 in 2011,
$1,890 in 2012 and $1,759 in 2013. The Company anticipates
amortization for favorable and unfavorable lease-related
interests of approximately $4,866 in 2009, $4,555 in 2010,
$4,747 in 2011, $4,698 in 2012 and $4,553 in 2013.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements; however, it does not require any new fair value
measurements. Effective February 3, 2008, the Company
adopted the provisions of SFAS No. 157 for financial
assets and liabilities that are measured at fair value on a
recurring basis. The adoption of SFAS No. 157 for
financial assets and liabilities that are measured at fair value
on a recurring basis did not have a material impact on the
Company’s consolidated financial statements.
Pursuant to the option for a one-year deferral of
SFAS No. 157’s fair-value measurement
requirements for non-financial assets and liabilities that are
not required or permitted to be measured at fair value on a
recurring basis, the Company elected to defer application of
SFAS No. 157 to, among others, goodwill, fixed asset
and intangible asset impairment testing, and liabilities for
exit or disposal activities initially measured at fair value.
The Company expects the full adoption of this statement will not
have a material impact on the consolidated financial statements.
SFAS No. 157 establishes fair value hierarchy levels
which prioritize the inputs used in valuations determining fair
value. Level 1 inputs are unadjusted quoted prices in
active markets for identical assets or liabilities. Level 2
inputs are primarily quoted prices for similar assets or
liabilities in active markets or inputs that are observable for
the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs based on the
Company’s own assumptions.
As of January 31, 2009, the Company held two interest rate
swap contracts required to be measured at fair value on a
recurring basis (see Note 11). The fair values of these
interest rate swap contracts are derived from discounted cash
flow analysis utilizing an interest rate yield curve that is
readily available to the public or can be derived from
information available in publicly quoted markets. Therefore, the
Company has categorized these interest rate swap contracts as a
Level 2 fair value measurement.
The following table presents the Company’s financial assets
and liabilities that are carried at fair value and measured on a
recurring basis as of January 31, 2009:
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
In addition, effective February 3, 2008, the Company
adopted the provisions of SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”).
SFAS No. 159 permits companies to measure many
financial instruments and certain other assets and liabilities
at fair value on an
instrument-by-instrument
basis. SFAS No. 159 also establishes presentation and
disclosure requirements to facilitate comparisons between
companies that select different measurement attributes for
similar types of assets and liabilities.
In accordance with SFAS No. 159 implementation
options, the Company chose not to elect the fair value option
for its financial assets and liabilities that had not been
previously measured at fair value. Therefore, material financial
assets and liabilities, such as the Company’s short and
long-term debt obligations, are reported at their carrying
amounts.
Prepaid expenses and other current assets were comprised of the
following:
Accrued expenses were comprised of the following:
Other long-term liabilities were comprised of the following:
THE BON-TON
STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data)
The following supplemental cash flow information is provided for
the periods reported:
In connection with the acquisition of Carson’s, the Company
developed integration plans which included the transfer of
Bon-Ton’s existing merchandising and marketing functions to
Carson’s former headquarters in Milwaukee, Wisconsin. This
plan resulted in involuntary associate termination charges of
$4,760 in 2006, which were reflected in SG&A expense.
Payments in the amount of $4,427 were made during 2006; the
balance of the involuntary termination costs was fully paid as
of November 3, 2007.
In connection with the Elder-Beerman acquisition, the Company
developed integration plans resulting in involuntary
terminations, employee relocations, and lease terminations.
Involuntary termination benefits and relocation expenses were
fully paid as of January 28, 2006. The liability for
terminated leases will be paid over the remaining contract
periods ending in 2030.
Liabilities recognized in connection with the acquisition and
integration activities are as follows:
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