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Bon-Ton Operating Metrics Improve

Weighed down by soaring interest costs and takeover debt as it builds a department store empire, The Bon-Ton Stores Inc. recorded a widening third-quarter loss of $10.9 million, compared with a year-ago deficit of $6.3 million.

Acting as a drag on the bottom line was interest expense of $27.9 million, up almost ten-fold from $2.8 million last year, as the retailer took on debt to build a growing franchise of regional department store nameplates, most recently with its March buyout of the Carson Pirie Scott marquee from Saks. Long-term debt grew by more than $1.2 billion over the past nine months, to $1.3 billion from just $42.5 million at the end of January.

Persistent weakness in soft home was another drag on third-quarter results, the retailer said in a conference call with analysts and investors. Soft home and accessories were among the quarter's worst performers, hurt in part by fewer advertising impressions. Soft home sales during November, while still declining, showed some improvement.

Layering on sales from the Carson's stores it acquired from Saks Inc., The Bon-Ton sales almost tripled, rising by 181.5% to $804.1 million from $285.7 million during the same period a year ago. But same-store sales declined by 3.3% as weakness at core Bon-Ton units offset considerable strength at the newly acquired Carson's business. Same-store sales in The Bon-Ton doors fell by 4.8%, compared with a strong 7.8% increase at Carson's.

Looking past its mounting debt and interest costs, the retailer improved key operating metrics, leveraging higher margins and lower costs into an operating profit of $20.7 million, recovering from a small year-before loss of $1.3 million.

Average gross margin improved substantially during the period, swelling by 280 basis points, or 2.8 percentage points, to 36.6%, helped by fewer markdowns at Bon-Ton and Elder-Beerman units. At the same time, operating costs improved modestly, dipping by 20 basis points, or two-tenths of a percentage point, to 34.0% of sales from 34.2% a year ago.

In a lift to the top line, along with strong comps at Carson's, the retailer reported increased sales of regular priced goods and higher average prices.

THE BON-TON STORES

Qtr. 10/28 (x000) 2006 2005 % change
(loss)
a. Third-quarter results include miscellaneous income of $22.9 million, compared with $2.1 million during the same period a year ago; and an income tax benefit of $3.1 million vs. $3.2 million last year.
b.Nine-month results include miscellaneous income of $57.6 million, compared with $6.1 million last year; and an income tax benefit of $23.0 million vs. $7.0 million the preceding year.
Sales $804,100 $285,676 181.5
Oper. income (EBIT) 20,690 (1,312)
Net income (10,901)a (6,300)a
Per share(diluted) (0.66) (0.39)
Average gross margin 36.6% 33.8%
SG&A expenses 34.0% 34.2%
Nine months
Sales 2,112,646 822,555 156.8
Oper. income (EBIT) 33,582 6,015 458.3
Net income (41,511)b (12,157)b
Per share(diluted) (2.53) (0.75)
Average gross margin 36.2% 35.5%
SG&A expenses 34.6% 34.8%


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