Vitamin Shoppe, Inc. VSI Q1 2010 Earnings Call Apr.

21, 2010
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MANAGEMENT DISCUSSION SECTION

Operator: Good afternoon. And welcome to Vitamin Shoppe’s Fiscal First Quarter 2010 Earnings
Conference Call. Today’s call is being recorded. [Operator Instructions]

At this time, I would like to turn the conference call to Mr. Cosmo La Forgia, Vice President of
Finance at Vitamin Shoppe. Please proceed.

Cosmo La Forgia, Vice President of Finance

Thank you. And good morning, everyone. As I always do, before we begin, I’ll review the required
forward-looking statement disclaimers. Part of our discussion today may include forward-looking
statements. These statements are not guarantees of future performance and are inherently subject
to risk and uncertainties.

Actual results might differ materially from those projected herein. The words believe, expect, plan,
intend, estimate or anticipate and similar expressions, as well as future verbs such as should,
would and could identify forward-looking statements. You should not place undue reliance on these
forward-looking statements.

We refer all of you to our filings with the Security and Exchange Commission, including our annual
report on Form 10-K and quarterly report on Form 10-Q for a more detailed discussion of the risks
and uncertainties that may have a direct bearing on our operating results, our performance and our
financial condition.

I will now turn over the call to our Chairman and Chief Executive Officer, Rick Markee.
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Richard L. Markee, Chief Executive Officer and Chairman

Thank you, Cosmo, and good morning, everyone. Welcome to the Vitamin Shoppe’s fiscal first
quarter 2010 earnings call. As usual, I am here with Cosmo; Mike Archbold, our Chief Operating
Officer and Chief Financial Officer; Tony Truesdale, our President and Chief Merchandizing Officer.

Over the past three months, we recorded our 18th consecutive quarter of positive same-store sales
growth. I would like to thank our health enthusiasts throughout the company for their continued
excellence in delivering those results.

We at the Vitamin Shoppe try to ensure our customers receive the best service in the vitamin,
mineral, and supplement industry both in our stores and online. By focusing on our core values of
superior product selection, consistent availability, combined with the knowledge and trust that our
health enthusiasts deliver, I am confident we are providing superior service to our customers
everyday.

Moving to our results this quarter, Vitamin Shoppe’s comp store sales increased 6.2%. Comp store
sales are defined as sales from the store that has been in operation for over 410 days and does not
include any sales from our direct-to-consumer business. Given that over 40% of our store base is
immature, or what we would define as being opened in the last four years, our comp store sales are
benefiting from the ongoing maturation of our younger stores. These newer stores are performing
well and growing across the country. Additionally, our more mature stores, which are typically five
years or older, as a group are also recording positive comp.

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Net sales for the first quarter increased to 11% over the comparable prior-year period driven by
continued growth in specialty supplements, vitamins and multi-vitamins, sports nutrition and herbs.
We continue to experience great balance in the performance of our overall product offering.

During the first quarter, we opened 16 new stores compared with 17 in the first quarter of 2009. Our
total store count at the end of the first quarter was 453 compared with 418 at the end of the first
quarter last year. As we expand our new store base as well as achieve positive comp growth in our
mature stores, we have managed expenses prudently.

We have made great progress in reducing SG&A as a percentage of sales, while continuing to
deliver on our value message to our customers. As you can see, we have expanded both gross
margin and operating margins, while continuing to grow the top line. Mike will discuss these results
in more detail in a few minutes.

Let me now turn the call over to Tony Truesdale, our President and Chief Merchandising Officer to
discuss our direct business, marketing, and merchandising.

Anthony N. Truesdale, President and Chief Merchandising Officer

Thank you, Rick, and good morning, everyone. We are pleased with the first quarter performance in
both retail and direct and feel there are a number plus points which help contribute to our
performance.

Looking back at the first quarter of 2009, we were dealing with the peanut butter recall and took
nutrition bars, trail mix and other portable nutrition products with peanut off the shelf. We are now
benefiting from sales in the first quarter that we didn’t have last year since on-the-go nutrition in
back in stock in our shelves. In addition to the growth in the on-the-go nutrition, we continue to see
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solid growth in the categories of specialty supplements and sports nutrition.

Looking at our direct business, we were pleased with the momentum from the last quarter in our
sales. Net sales to our direct customers increased 7.8% to 22.6 million for the three months ended
March 27, 2010 compared with 20.9 million last year. The overall increase in our direct sales was
due to an increase in our Internet sales of 2.4 million, which was partially offset by a decrease in
our catalog sales.

A quick overview of the last three quarters also shows positive momentum in the direct business.
Our third quarter of 2009 direct business was down 3.8%. Our fourth quarter 2009 business was up
1.1% and now our first quarter 2010 direct business is up 7.8%. This is a trend heading in the right
direction.

Our strength in the Web business continues to be offset by a decline in our catalog business and
we continue to modify our catalog business as needed and evaluate its impact to our total direct
business.

The Internet remains an important sales channel for us. We find that many of our customers desire
the convenience of shopping for their needs online and we don’t expect that to change. Our Internet
channel remains a complement to our retail stores. We find that many people come to us online to
research products and then come into one of our stores to get the benefit of a live person and
personal knowledge from one of our store associates.

We have seen that our customers find the multichannel experience an effective method of gaining
the knowledge they desire in obtaining the products that they need on an ongoing basis.

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During the first quarter, we rolled out merchandising changes at our retail stores to our Power Wall
and announcing some of the benefits for making it easier for our customers to shop in-store. We
realigned the Power Wall to accommodate our fastest growth categories and to allow stores
associates to cross-sell more effectively with the products that customers want the most.

Our in-stock percentage is up from 95.6 to 96.4, which is an improvement of 80 basis points year-
over-year. At the same time, our inventory grew less than the rate of sales at 6% as we continue to
become more efficient in the way we look at our inventory investments.

Lastly, as many of you know, the first quarter is when we send out certificates for free merchandise
to our Healthy Awards customers in recognition of their prior-year spend. In the first quarter of
2010, both the issuance and redemptions have achieved record levels, further reinforcing the
loyalty of our customers to the Vitamin Shoppe brand.

At this point, I’ll turn the call over to Mike Archbold for a more in depth review of our first quarter
2010 financial performance and our retail operations.

Michael G. Archbold, Executive Vice President, Chief Operating Officer and Chief Financial
Officer

Thanks, Tony, and good morning, everyone. For our first quarter of 2010, net sales increased 19.0
million or 11.0% to 191.6 million for the three months ended March 27, 2010 compared with 172.6
million for the prior-year comparable period. The increase was driven by an increase in our
comparable store sales, new sales from our non-comparable stores, and the 7.8% increase in our
direct sales.

Retail sales increased 17.4 million to 169.1 million for this quarter compared with 151.6 million for
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the prior comparable period. Our overall retail store sales for the first quarter increased due to non-
comparable store sales increases of 8.1 million and an increase in comparable store sales of 9.3
million or 6.2%. Reflecting our diversified sales base, our overall sales increased in all major
categories including on-the-go nutrition, sports nutrition and specialty supplements.

Cost of goods sold, which for us includes product, warehouse and distribution as well as occupancy
costs, increased $11.1 million or 9.6% to 126.6 million this quarter compared with 115.5 million for
the prior year. The increase was primarily due to an increase in product costs and occupancy costs.

Gross profit, however, increased $8 million or 14% to $65 million for the three months ended March
27, 2010 compared with 57 million for the comparable prior-year period. Gross profit as a
percentage of sales or gross margin increased to 33.9% for the quarter ended March 27, 2010
compared with 32.0% last year. The 90 basis point improvement in gross margin reflects a less
promotional environment as well as leverage on our occupancy costs.

SG&A, including operating payroll related benefits, advertising and promotion expense,
depreciation and amortization and other expenses, increased 3.0 million or 6.8% to $46.9 million
this quarter compared with $43.9 million for the comparable period prior year. SG&A as a
percentage of net sales decreased to 24.5% this quarter compared with 25.5% for the prior year
comparable period.

While the strong comparable store sales increase contributed to the SG&A leverage, good expense
control also enabled us to drive leverage on a number of components of SG&A, including store
payroll, advertising, depreciation and amortization as well as our corporate expenses.

Income from operations or EBIT for the first quarter increased $5.4 million or 42.3% to $18.1 million
compared with 12.7 million for the prior-year comparable period. Income from operations as a

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percentage of sales increased to 9.4% for the quarter compared with 7.4% for the same quarter in
2009. We’re particularly pleased that we’ve been able to achieve leverage in our day-to-day
operations and have demonstrated our ability to consistently find ways of controlling our operating
cost even as revenues and our store base continued to expand.

Turning further down to P&L, interest expense decreased $2.1 million or 41.5% to $2.9 million this
quarter compared with 5 million last year. This decrease was due to the reduction in debt from the
IPO proceeds, the reduction in debt from cash flow from operations as well as our ongoing efforts
to refinance our existing debt with lower cost instruments. Interest expense also reflects about
$400,000 of amortization of the swap which was terminated last year.

Net income increased $8.7 million for the three months ended March 27, 2010 compared with 4.6
million for the three months ended March 27, 2009. Net income for this quarter also includes a pre-
tax loss on extinguishment of debt of 0.6 million or approximately a penny per share related to the
redemption of $20 million of our senior notes that we repurchased back in January.

Earnings per share for the quarter were $0.33 per basic share compared with $0.14 per share in
the prior year. And on a diluted share basis, it was $0.31 per diluted share as compared with $0.12
per share in the prior year.

Recapping our performance – consistent with the previous discussions that we’ve had, Vitamin
Shoppe’s growth continues to be led by the success of our comp store sales, the maturation of our
inventory store base, our new store expansion initiatives as well as leverage on corporate
expenses and depreciation and amortization. We are also seeing the results of our sustained
efforts to manage our costs as we continue to grow our business. This strength has enabled us to
renegotiate our asset-based revolving credit facility, increasing the facility, as we announced today
in our press release, to $70 million from $50 million and at the same time to also redeem an
additional $25 million of our outstanding floating rate notes.
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Based upon the difference in the spreads between the two vehicles, we expect interest savings in
excess of $1 million annually from this.

I’ll now turn the call back over to Rick for some final remarks.

Richard L. Markee, Chief Executive Officer and Chairman

Thanks, Mike. At the beginning of February, we were awarded the prestigious #1 Rated Vitamin
Store and #1 Rated Vitamin Store Brand from Consumer Labs. Their 2010 supplement user survey
was based on customer satisfaction and we were very pleased to have been voted number one in
both categories. I want to publicly congratulate our health enthusiasts for this well deserved
recognition.

We are pleased to report that the positive trends that we discussed last year have continued into
2010. To recap what we mentioned in our last call, we are upbeat about our performance in 2010.
We continue to expect that in 2010 we will spend approximately 22 million in total CapEx while
opening approximately 42 new stores, continued comparable store sales growth in line with
industry growth in the mid-single digits, have an effective tax rate of approximately 40%, diluted
weighted average shares outstanding of 27.8 million.

We intend to grow our inventory at a rate less than the total sales growth. We continued to reduce
debt and fund store growth with an excess cash flow; improved operating margin, largely reflecting
leverage on selling, G&A expenses, including corporate and depreciation and amortization
expense.

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Our consistent focus on providing our customers with the most complete and authoritative
assortment in the vitamin, mineral and supplement retail industry along with the knowledgeable
health enthusiasts continue to provide a differentiated experience for our customers and a
differentiated result for our shareholders. We look forward to updating you with continued positive
results as we progress through the year.

Operator, I’d like to now turn the call over for questions.
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QUESTION AND ANSWER SECTION

Operator: [Operator Instructions]. And your first question comes from the line of Alan Rifkin with
Bank of America. Please proceed.

<Q – Alan Rifkin>: Yes, thank you very much, and congratulations on a nice quarter, gentlemen.

<A – Richard Markee>: Thank you, Alan.

<Q – Alan Rifkin>: Mike, I believe you said that one of the drivers to gross margin were increased
product costs. I was wondering if you are seeing anything with respect to inflation. And if so, are
you effectively able to pass on some of those higher prices?

<A – Michael Archbold>: Okay. Let’s talk about a couple of things here, Alan. When we talk about
the growth in the absolute cost of goods sold, yes, there is more product cost, but that’s because of
more sales. When you look at it on a rate basis, we actually achieved leverage in our gross profit,
so gross margin improved. And that really reflects two things – the lower promotional level of
activity that we have out there, we continue to see very, very little in terms of inflation in the
business model and don’t expect it going forward. The other place where we achieved leverage on
a percentage basis is on our occupancy. So as we’ve gotten the good comp store sales with the flat
occupancy dollars, we’re getting good leverage on occupancy as well.

<Q – Alan Rifkin>: Okay. So it’s more dollars as opposed to rate?

<A – Michael Archbold>: Correct.

<Q – Alan Rifkin>: Any sort of quantification in terms of growth in the Healthy Awards
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memberships and in particular your super premium people, the folks who are spending north of
$1,000 in the store per year?

<A – Anthony Truesdale>: Alan, this is Tony Truesdale. In the top two segments, we are seeing
consistency year-over-year in the growth and the size of that pool we’ve got.

<A – Richard Markee>: Yeah, the overall growth was about 475,000 people year-over-year,
quarter-to-quarter, Alan. This is Rick.

<Q – Alan Rifkin>: Okay, great. And then one last question, with respect to 2010 guidance, you
said it’s predicated on mid-single digit comps, which is in line with the industry average. Given your
performance and looking at industry trends, is that just really prudence on your part? It certainly
looks like you are gaining incremental share over and above the industry growth rates, so could you
just maybe elaborate on that a little bit?

<A – Richard Markee>: Yeah, go ahead, Mike.

<A – Michael Archbold>: Sure. So the answer is, we have had a good quarter. We continue to
expect and our guidance is to say that we’ll be doing mid-single digits in line with industry growth,
keeping in mind that there is a couple of things that happened in there. One is, we do have an
immature store base and we have been taking market share, as you know. But as we open up
stores, we do also expect that we will have some cannibalization on our store base and the
guidance that we gave reflects about 1% impact of cannibalization. So net of that cannibalization,
we still expect to grow in line with industry growth rates on a go forward basis.

<Q – Alan Rifkin>: Okay. Thank you very much.

<A – Michael Archbold>: Thanks, Alan.

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<A – Richard Markee>: Thanks, Alan.

Operator: Your next question comes from the line of Charles Grom of JPMorgan. Please proceed.

<Q – Radina Russell>: Good morning. It’s Radina for Chuck today. A quick question on the comp,
could you break out traffic versus ticket for us?

<A – Richard Markee>: Yeah, Radina, this is Rick. Our overall traffic counts were in excess of 5%.
We had – like Mike had just mentioned to Alan, we have very little inflation with respect to average
price and our average sale was up around 1%.

<Q – Radina Russell>: Okay, great. And then on the direct side of the business, which was frankly
much stronger than we were modeling, I’d like to drive into what’s really pushing this along. Is it
higher purchases, I guess, from your maybe Healthy Rewards customers or are you attracting new
customers to that segment?

<A – Anthony Truesdale>: Hi, this is Tony. There is two things going on. I think we’re getting
increased traffic and then we’re doing a better job of converting those one-time purchasers to two
and three times and getting them to be consistent customers on the Web.

<Q – Radina Russell>: Okay, great. And do you expect to see any benefit to that business given
what’s happened with vita costs over the past couple of days?

<A – Richard Markee>: Well, we wouldn’t want to opine on anyone else. We just feel strongly that
we are doing a lot of right things online and we’re going to continue to keep our heads down and
focus on what we need to do.
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<Q – Radina Russell>: Okay, great. And then just one more question, with your GPM performance
being affected I guess by the lower promotional activity year-over-year, can you give a little bit of
color with regards to what that actually – what’s gone away and how sustainable that is?

<A – Richard Markee>: We need a little more clarity on that question, Radina, would you?

<Q – Radina Russell>: Well, just in terms of what has changed in terms of the promotional activity
and how sustainable that might be going forward?

<A – Richard Markee>: I think we had said even last fall that we felt that we have been a little bit
more promotional than we’d like to be. We come back to the basic tenets of what we think we’re
really all about, which is superior selection, excellent service in our stores, the best product
category assortment, and we really believe that the strength of those out-lie anything else. We
continue to have our promotional cadence similar to last year. We’ve just dialed back some of the
emphasis and we will continue to do that as long as the business continues to grow like it has been.

<A – Anthony Truesdale>: I think one of the things we continue to do is get a little bit smarter
about where we spend our promotional dollars and how we are spending those. So as we get more
analytically driven around the types of promotions and the long-term benefit, the longitudinal look at
the benefit of that incremental promotion that we do, we are getting smarter about how we spend
those dollars.

<A – Richard Markee>: Yeah, another thing that Tony had mentioned before in his remarks, our
in-stocks are at an all-time high. We really believe we’re doing a great job. Our supply chain is
doing an outstanding job of having the products in-store and online better than we’ve ever had
before.

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<Q – Radina Russell>: Okay, great. Great. Thanks, guys. Great quarter.

<A – Richard Markee>: Thank you.

Operator: And your next question comes from the line of Meredith Adler with Barclays Capital.
Please proceed.

<Q – Meredith Adler>: Hey, thanks and congratulations. Great quarter.

<A – Richard Markee>: Thanks, Meredith.

<Q – Meredith Adler>: Rick, couple of questions. Maybe just following on a little bit to the last
question, could you talk a little bit about what progress you’re making in terms of the kind of
targeted marketing? I think you were going to be using data more intensively. Are we still in an
early stage and what have you done so far?

<A – Richard Markee>: I think we missed a little bit of that, Meredith, can you repeat that question
please?

<Q – Meredith Adler>: Yeah, sure. Just targeting of your marketing efforts, how much, where do
you stand with that and how much more is there to go?

<A – Anthony Truesdale>: Yes, Meredith, this is Tony. We are getting much better at how we’re
segmenting our communications to our customers. I still think there is quite a bit of opportunity
there and we continue to refine that and think about that as we get to know our customers and
understand our segmentation of our customers better. So I would say that there is lots – there is
lots of room there but we are doing a better job than we were a year ago.
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<A – Richard Markee>: If we really think about – this is Rick, Meredith, if we think about our
advertising in total it’s really basically 98% targeted outside of grand opening events. We really
don’t do any mass advertising, it’s really database driven. So, as Tony said, I think we are just
getting better at the refinements consistently.

<Q – Meredith Adler>: Right. That’s wonderful. And then I have a question about – you say you
are going to open 42 stores this year, could you just talk a little bit about the real estate
environment? And then how are you seeing the opening of those the new stores you have opened
in the last year, are they as productive or more productive than you expected?

<A – Richard Markee>: Well let me talk about the first part of that question – answer the first part
of that question. We are extremely confident that, we will open 42 stores around there this year. We
are well into the pipeline and have leases signed for 2011 as we’ve articulated in the past we’re still
committed to a 10% unit growth. So somewhere in the high 40s next year, that’s our goal. We feel
confident about that.

Now the environment continues to be tougher out there with respect to – there is really virtually not
a lot of new centers being developed around the country, that being the case though, we are not
always dependent on that as we look for a lot of competition against small banks, QSRs, the like.
We continue to find plenty of available real estate and we feel pretty confident with our ability to
meet our growth rates.

<A – Michael Archbold>: And just building on the last piece of that, Meredith, the new store pool
continues to perform very much inline with our expectations.

<A – Richard Markee>: Yeah. Thanks Mike.

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<Q – Meredith Adler>: And my final question would just be, I mean, I’ve looked at industry data,
the industry is growing very strongly and I’m just kind of wondering, any sense of what the drivers
of that might be?

<A – Richard Markee>: As we said last fall and I think that you’ve read in many of the industry
articles, clearly you have tremendous demographic plays here with – respecting to the ageing of
America and that group of individuals wanting to improve their wellness significantly and being very
interested in it and I think that that’s a big part of it, probably one of the growing – probably the most
growing, significant part of it.

<Q – Meredith Adler>: Do you think that all this stuff about healthcare reform has gotten people to
look a little bit more?

<A – Richard Markee>: I’m glad that you brought that up, Meredith, I missed that, I think that’s
another very important thing, is that, the avoidance, I mean, we all know that healthcare costs have
gone up precipitously for the last 10 to 20 years and the forecast is that that is going to continue no
matter what kind of healthcare reform there is, to that end I think that if you are a healthy individual
your healthcare costs cost less over time. And I think the avoidance or the hopeful avoidance of
traditional healthcare clearly has helped to fuel this industry.

<Q – Meredith Adler>: Great. Thank you very much.

<A – Richard Markee>: Thank you, Meredith.

Operator: Your next question comes from the line of David Schick with Stifel Nicolaus. Please
proceed.

<Q – David Schick>: Hi, good morning.

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<A – Anthony Truesdale>: Hi, David.

<Q – David Schick>: Just a couple of questions, first just to clarify since everybody’s got a
different story, was there any calendar shift that we should think about for the first quarter?

<A – Richard Markee>: No. Remember we are not an Easter business whatsoever, so when you
look at some of the retailers that have been out there, especially apparel retailers, I would only
suggest that you guys know better than I do that their comps are exaggerated in the March period.
If you look at our comp last year, we were up 5.1% in the first quarter, definitely at the top of – in
the top quartile of performance and again, we added 6.2% on top of that this year, so we have no
impact whatsoever, the Easter business whatsoever. In fact, April is a very normative month and a
really strong month for us.

<Q – David Schick>: Okay. So, no lost days, no day shifts or anything like that?

<A – Richard Markee>: No, nothing.

<Q – David Schick>: Okay, good. Just to keep track of it all. Second, just kind of stepping back to
much longer-term stuff, with the operating margin momentum building or just substantial and really
across the board drivers of that, is there any change to the long-term goals on what you think the
margin should run at in this business that you guys articulated around the IPO?

<A – Richard Markee>: I think it’s premature for us to go there at this time. We’re going to do the
best job we can and pulling every one of the levers we can to improve our overall performance. We
continue to have the type of comps that we believe were that we can achieve along with, as Mike
said, some very prudent cost containment, I think we can get some very, very strong leverage. But I

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think it’s premature for us to change our overall model. So let’s hit those initial goals and we will
keep moving from there.

<Q – David Schick>: Got you. Thanks very much.

<A – Richard Markee>: Thanks David.

Operator: Your next question comes from the line of Mitch Kaiser with Piper Jaffray. Please
proceed.

<Q – Mitchell Kaiser>: Thanks guys. Good morning. Congratulations.

<A – Anthony Truesdale>: Thanks, Mitch.

<Q – Mitchell Kaiser>: I was hoping you could talk, certainly the direct side was very impressive
and you’ve seen a nice turn there. Could you just talk a little bit about how you see the mix evolving
between the catalog versus the Internet and kind of what your expectations might be there?

<A – Richard Markee>: Yeah, Tony, you want to grab that?

<A – Anthony Truesdale>: Sure. Couple of things going – there is couple of things going on in the
direct business. When you look at that business, you got a couple of different shifts going on, so
you got declining catalog business, which tends to have higher gross than the Internet business.
And then within the Internet business, you’ve got a couple of dynamics going on. We’re seeing real
strength in sports nutrition and we are seeing some real strength in a couple of lower margin
sources. So when you look at the different sources, whether you got Amazon, affiliate shopping
engines, e-mails, so we’re seeing some dynamic shift. But overall, the competitive activity in the
marketplace seems to be pretty stable at this point in time.
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<Q – Mitchell Kaiser>: Okay. So I think you are getting at the operating margin there, it was down
a little bit, but it’s principally due to the mix shift. The catalog business has higher gross margins,
right?

<A – Anthony Truesdale>: Yes.

<Q – Mitchell Kaiser>: Okay, sounds good. And then, could you help us just think about the
impact of the peanut-butter recall and how you anniversary that for next year or for this year rather?

<A – Anthony Truesdale>: Yeah, it was really a first quarter phenomenon and if you look at it, it
was minor on the comp, so it’s probably about 20 basis points on the comps.

<Q – Mitchell Kaiser>: Okay, got it. And then, Mike just...

<A – Michael Archbold>: Even with the downturn, David, last year we still did a 5.1 comp, so...

<A – Richard Markee>: Right.

<A – Michael Archbold>: So, it wasn’t significant last year, so the bounce back is not very
significant this year either.

<Q – Mitchell Kaiser>: Okay, okay, sounds good. And then, just thinking about the debt, Mike, in
terms of pay down, I understand the refinancing and certainly that’s a nice benefit to get, but just in
terms of when that might hit for this year?

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<A – Michael Archbold>: At this point that’s as much as we are talking about for this year, we
have already really accomplished two tranches this year, so that will take down another 25 million.
We do – we are, as you will see in the balance sheet, we have drawn a little bit on our ABL and so
what will happen is over the course of the year as we continue to generate cash, we’ll just pay
down the ABL.

<Q – Mitchell Kaiser>: Okay. It sounds good. Fair enough.

<A – Michael Archbold>: Considering what we said in the past is we expect to generate at least
$20 million worth of excess cash flow to be used first and foremost to pay down debt.

<Q – Mitchell Kaiser>: Okay, sounds good. And then just last, the number of customers that you
have in the reward program, I think you’re up 475,000 year-over-year, but where do you stand on
that right now, certainly it’s providing some good benefits on the direct marketing side?

<A – Richard Markee>: It’s around 3.8 million.

<Q – Mitchell Kaiser>: Okay. Thanks guys. Good luck.

<A – Richard Markee>: Thanks.

Operator: [Operator Instructions]. Your next question comes from the line of Peter Benedict with
Robert Baird. Please proceed.

<Q – Peter Benedict>: Hey guys. Mike, just following up on Mitch’s question there, just to be clear
on the debt pay-down that 25 million, is that going to happen here in the second quarter?

<A – Michael Archbold>: Yes, we’re actually initiating the call effective today and it will close on
corrected transcript

May 21.

<Q – Peter Benedict>: Okay. So you did 20 million in first quarter, you will be 25 in the second and
then that’s basically it for the year?

<A – Michael Archbold>: That’s as much as we’re committing to at this point because we will be
drawn on the revolver and then we will pay down the revolver.

<Q – Peter Benedict>: Got it. Okay, that makes sense. And then, on to the gross margin, I mean,
the lift in 90 basis points, how much of that was the product margin improvement, I mean, was it a
small part or half, can you give us a sense?

<A – Michael Archbold>: I can tell you that the product margin improvement was the majority of it,
but we also got about 20 basis points worth of leverage on occupancy as well.

<Q – Peter Benedict>: Excellent. Okay. And then, just lastly how do you guys think of this
healthcare legislation in terms of the impact it could have on the expense side? You guys are doing
a nice job managing the expenses. Is it too early or do you have any kind of a sense of what this all
might mean from the business perspective?

<A – Richard Markee>: Yeah, it’s a little too early. We have done the appropriate work, Peter, and
work with our consultants to look at it. We don’t feel there is any impact right now, it’s too early to
predict for the future. But we will manage it appropriately.

<Q – Peter Benedict>: Okay. Thanks Rick and good luck.

<A – Richard Markee>: Thanks guys.

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Operator: There is a follow-up question from Meredith Adler with Barclays Capital. Please proceed.

<Q – Meredith Adler>: Thanks. I just wanted to make sure I understand the $25 million calling of
the bond. You’re going to finance all of that call from borrowings under the revolver and then over
the course of the year pay down a revolver, am I getting that right?

<A – Michael Archbold>: Okay. So what – two – couple of things are going to happen, so let me
just sequence through. We’ll have increased our revolver from 50 million to 70 million in total. We
currently have $13 million in cash sitting on the balance sheet as of the end of the quarter. We will
use a significant portion of that cash. And then, the remainder will come from the revolving credit
facility. So, right now the expectation would be that we would call 25 million and the revolver would
go up by about call it 17 million at this point.

<Q – Meredith Adler>: Okay. And, is it your expectation that you will have paid down the revolver
completely by the end of the year?

<A – Michael Archbold>: No. What we are talking about is about $20 million per year. So, we are
about 20 million drawn as of the end of the quarter, once we do this refinance we would be 37
million drawn on the 70 facility, and again we expect to pay down about 20 per year.

<Q – Meredith Adler>: Okay, got it.

<A – Michael Archbold>: All right.

<Q – Meredith Adler>: Thank you very much.

<A – Richard Markee>: Thanks Meredith.

corrected transcript

Operator: Your following question comes from the line of Bob Summers with Susquehanna. Please
proceed.

<Q – Bob Summers>: Good morning. Just two quick questions. On the gross margin side the 70
basis points that comes from the product, is that a mix issue or is that from buying better?

<A – Michael Archbold>: It’s really a function of a lower promotional environment.

<Q – Bob Summers>: Okay.

<A – Michael Archbold>: We’ve talked about some of that before, so it’s not necessarily the
buying, but more about the level of promotional cadence that goes on in our stores. So while we
are always focused on making sure we have the right price perception in the store there is lots of
things that we can do to make sure that we can maintain price perception without necessarily over
promoting and giving away discounts unnecessarily.

<Q – Bob Summers>: Okay. And then second, with respect to the comp in the five percentage
point impact from traffic or sort of the 80-20 mix, is that what it’s been historically?

<A – Richard Markee>: Yeah, we said that, in the last couple of years that our customer count has
been number one driver.

<Q – Bob Summers>: Okay, thank you.

<A – Michael Archbold>: Thank you, Bob.

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Operator: Ladies and gentleman that is all the time we have for questions. I would like to turn the
call back over Rick Markee for closing remarks.

Richard L. Markee, Chief Executive Officer and Chairman

Thanks guys we really appreciate it. Once again, thank you for joining us this morning. We look
forward to continuing to update you on our progress. Have a great day.

Operator: Ladies and gentleman that concludes today’s conference. Thank you for your
participation. You may now disconnect and have a wonderful day.
corrected transcript

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