Question-and-Answer Session
Operator
(Operator Instructions) One moment please while we poll for questions. Our first question is coming from Scott Krasik of C. L. King.
Scott Krasik – C. L. King & Associates, Inc.
Can you talk a little bit about gross margins? I mean obviously you’ve had the mix shift with catalog having lower gross margin but they’ve been declining pretty precipitously. It seems like in the first quarter the promotion now is still very, very high. You have a large direct sourcing component. When can you start to see gross margins moving back up?
Eric M. Specter
Scott, let me try to address that with our fourth quarter release since we have highlighted these one-time charges on separate lines of the income statement. Let me comment on our gross margin which of course is net of buying and occupancy and try to give you a direct answer on that and then I’ll fast forward this to what we see in the first quarter. What happened here in the fourth quarter, put the sales side – I think it’s understood that the promotional and lower demand for apparel based product from the moderate customer – where we took compressed the margins and the margins as we stated here for the fourth quarter were in aggregate down 670 basis points which is significant. And, the majority of that drop is the pure merchandise margin and largely contributed by the three retail brands Fashion Bug, Lane Bryant and Catherines. What happen in the fourth quarter and as much as we tried to get out ahead, as we talked in our calls as early as the second quarter conference call about reducing inventories, it certainly in hindsight was not enough. We moved expeditiously in the second half of the year and I am pleased to report that we are now in line as Gayle reported her in the prepared remarks that our inventories have finally now gotten caught up with the reduced demand for sales and are now down 19% on a comp basis. That was a plan that we were looking to execute as early as last June and July.
That all said, even though we pulled back fourth quarter the promotional climate and our objectives of ensuring that we would not carry over fall prior season merchandise into the spring season forced us to take more aggressive markdowns, more promotional markdowns throughout the entire Christmas selling season. And, for all intensive purposes from Black Friday on, or the week before Black Friday we were in a very heavy promotional posture and structure in order to move and sell through the units to get through our end of inventory target at the end of January. That put very significant pressure on the margin at particularly the retail brands which were the largest contributor of this 670 basis point drop.
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