Chico's FAS Inc (CHS) 2002 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Paul and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Chico's second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. As a reminder, ladies and gentlemen, this call is being recorded today, August 29th, 2002.

I would now like to introduce your speakers on today's call, Mr. Marvin Gralnick, CEO, Mr. Scott Edmonds, president and COO, Mr. Charlie Kleman, CFO.

Mr. Kleman, you may now begin your conference.

Thank you, everyone, for attending our second quarter conference call. We hope this late call is not an inconvenience as we had a regularly scheduled board meeting this morning. We had already indicated we had comfort with the 19 cents earnings, as you all know. I'll start, though, with the safe harbor statement. [Inaudible], plans, objectives or expectations of the company or future results or events that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. Such forward looking statements involve known or unknown risks, including but not limited to general economic and business conditions and conditions in the specialty retail industry. There can be no assurance that the actual future results, performance or achievements express or implied by such forward look statements will occur. Uses of forward looking statements are used to [inaudible] Form 10(q), the management discussion and analysis in the company's latest annual report to stockholders, the company's filings on form 8(k) and other federal securities law filings for a description of the other important factors that may affect the company's results of operations, business and financial conditions. The company does not undertake to publicly update or revise its forward looking statements even if experience or future changes make it clear that the projected results expressed or implied in such statements will not be realize.

I'm getting pretty good at this. It's time for Marvin.

Good afternoon. Our second quarter revenue of over 125 million and earnings of 19 cents a share represents our highest revenue and most profitable second quarter in our history. This follows our first quarter of over 130 million in revenue and earnings of 23 cents a share, our most profitable quarter ever. As we complete August, the first month of our third quarter, we see our strong trend continuing with comp store sales in the low double digits. Our fall product including denim, outer wear, suede and leather jackets, tailored shirts, pants and novelty items are all selling briskly. Our holiday selection is exciting, new and innovative. It is by far our best ever. Chico's is on the move. We are focused on our strong brand recognition. Our customer will be delighted as we continue to offer the most current fashions interpreted for her. Our new concept, Pozzo [phonetic], is on track to open in the first quarter of next year with 8 stores. It looks great. We can't wait.

Our new distribution center outside of Atlanta is completely outfitted as and is in the testing phase. It will be fully operational in the first half of 2003. Our management team is stronger than ever and ready to take Chico's to a billion and beyond.

Scott?

Thank you, Marvin.

You know, I've said during our first quarter conference call that this management team was fully capable and totally committed to delivering on the earnings per share and deliver we did. Our record second quarter numbers speak for themselves and I know we're all very proud of those results. Our product development team continues to deliver a new creative and exciting product. They know what our customer is looking for and they make sure Chico's delivers it. The style, the fit, the comfort, we've got it all. It's all about her Chico's and she knows it. Our marketing team has produced some excellent mailers and television spots both of which have also positively impacted sales. Store operations continue to provide our trademark most amazing personal service, and the again our customers appreciate that. And it's all about her Chico's. We are continuing as Marvin said, the transformation of our new 232,000 square foot distribution center in winier, Georgia into a state of the art facility. We will soon begin to distribute outlet merchandise from this facility and anticipate distributing front line merchandise in the first quarter of 2003. For real estate snapshot, for fiscal 2002 we are still on track to open 65 net new stores. Year to date we have opened 28. We anticipate opening approximately 23 additional stores in the third quarter, but the balance opening in the fourth quarter. I might also add that one of our third quarter stores will be our first Manhattan location. This store will open October 3rd and is located at 1310 third avenue at the intersection of 75th Street and third avenue. We invite you all to come by. Additionally, of the 40 stores we planned on relocating, remodeling or expanding, 19 have been completed year to date. As you know, on August 16th we officially announced our new concept Pozzo and our plan it open 8 test stores in the first quarter of fiscal '03. We are very excited about the possibilities for Pozzo. However, we want to assure that Chico's customer and our stockholders that the Chico's develop and product development team as well as the field management team will stay remain - excuse me, will remain completely focused on the Chico's brand. Positive speaks to a different customer and will employ entirely separate design and product development and field management teams to focus on the Pozzo customers. Real estate for fiscal '03 our current plans are to open between 65 and 70 net company owned stores, including the Pozzo stores. We are very proud of the company's performance and will continue to focus on building the brand and again delivering on the earnings per share.

Now Charlie will review the numbers with you.

Thanks, Scott.

Second quarter saw same store sales increase that was slightly above our 5 to 9 percent guidance, again and it was at 11.6. It saw also slightly improved growth and operating margins in spite of a rather deteriorating traffic environment in July. This resulted in our 18th consecutive quarter with a 45 percent or more increase in net income of course excluding last year's third quarter terrorist attack. In July we realized the customer needed a reason to come in, thus we added a week of TV in July in tailgate parties in August. She responded with a mid 20s comp and the last week of July and low double digit comps in August. During August we've seen comps in the low double digit range in the first week, single digits second week, low double digits third and very strong this week September. Before we get to the numbers let's review in operational issues for the quarter. As Scott and Marvin indicated DC move is on track Pozzo on track to for first quarter launch. We are also on track with a significant software conversions. We went live with our new HRIF. That's the human resources with new HRIF solution in July. Our new DC software will be live in September. We still plan global sourcing to go live next quarter. Balance of the software is [inaudible] and all the rest I still plan to go live in the second quarter of next year. We're on budget and on plan to finish our Briggs [phonetic] store building from infrastructure perspective. Although we believe these new software packages will bring us to a billion in all areas we were as with the DC move under no pressure to do this in any sort of rush. Thus we will mitigate any risk by assuring we are ready for these changes similar our cash registers' conversion last year which went with very few hitches. If we're not ready to flip the switch as they say we won't do it until we are ready. Now let's move on to some financial analysis of the those great second quarter numbers. The gross margins improved by three tenths of a percent in the second quarter and we are seeing continuing improving trends in the fall merchandise. We do not point traffic patterns in those transitional months or indicative of fall seasonal patterns. This should be expected. And consequently we reiterate a 5 to 9 comp plan through October through the rest of the year with low double digit for August and September. The above accomplishments are even more important when you realize that 95 of our stores are still running at equipment of over thousand dollars chain is now over $825 per net selling square foot. The going forward we expect to see flat to small increases in the quarter over quarter gross margin percent for the rest of the year. We are not expecting any significant degradation to our gross margins due to our DC move. Our SG and A for the last quarter came in essentially in line with our guidance. That is, we've indicated several times previously that we should leverage above a 7 percent same store sales increase and we did jump that for the quarter. The comp reductions that we implemented last year and bediscussed in our last quarter's conference call have successfully reduced our cost base with little intake on operations and we believe no disruptions in our customer service. We are carefully monitoring those comps today and benefits and those that will require further analysis. During the first quarter the 8/10 of percent in improve in SG and A from .2 down to 39.4 was net of a four tenths percent increase in the direct marketing for the first quarter from 2.7 to 3.1 percent. This increase which for the most part was planned was instituted because we believed it is wise evident to get our customer more aware of the Chico's brand in the year and and this will pay dividends all year long. With the six month increase in marketing all taken into account, we will still end the year with our full marketing budget in 3 and laugh percent range of net sales. Now remember this three-and-a-half percent includes all national TV and magazine ads all passport costs and most importantly all catalog costs. Very conservative marketing plan when one considers the number and frequency of our catalog drops. Further guidance in the SG and A area remains the same. That is, about 7 percent same store percent sale increases, generally leverage the cost and which is not anticipated any unusual charges related to the DC or software. All of this results in one of our best second quarter operating margins ever as we [inaudible] upped last year's second quarter 19.8 percent to 20.9 percent this year that is our second straight quarter with - with over 20 percent operating margin. and remember last year full operating margin was only 17.9. Now, in spite our price point decline for the quarter, we still ran an 11 plus comp. the price points and UPT's were down roughly 6 percent for the quarter due to transitional Mark downs in the low traffic environment while UPT's were slightly up. This resulted in an average transaction down roughly 4 percent. Now, most people believed an increasing units is usually an indication of stronger merchandise acceptance and improved selling effectiveness and we believe our price points will increase year over year by the fourth quarter of this year. Now, the biggest driver to the same store sales is still increased traffic in our stores and increased transactions and we still believe that the bulk of women aims 35 to 355 are still not shopping our store yet thus we continue our timely marketing as we anticipate strong traffic in the future. Our call center which handles catalog orders had its best quarter in history as it shipped just under 3 and a half million dollars in sales for the quarter for a year to date total just over 7 million. the call interpret center runs at profit level generally equal to an average store or approximately 30 percent net. Thus it generates profits similar to an entire district of stores and pays for all updates and maintenance at the same time. Moving to the balance sheet, excuse me, first look at the inventory level. We are very pleased with our quarter ending inventories of just over $40 million which increased year over year just over 36 percent while the sales and square footage increased approximately 35 percent and 40 percent respectively year over year. We are turning inventory quite fast, but we do not believe we are missing sales due to the fast turn. Remember our new outlook strategy is producing a much cleaner fresher inventory mix that requires a smaller investment and promotes a faster turn on the Mark down goods as well as it freeze up valuable front line selling space for higher margin goods. the only other significant change in the balance sheet is the almost $15 million increase in cash and marketable securities year to date. This is in spite of a $12 million investment in our new DC and newly acquired building here in Fort Myers and in spite of an investment of a little over $5 million so far in the new software initiative. the capital expense for the six months did total 31.4 million out of roughly 65 million or so that we're going to do this year. By the way we did file our 10(q) late yesterday so that detail should also be available to you. One topic I still get questioned on a lot now is the Arthur Andersen situation and yes, this quarter was reviewed by Ernst and Young and they have completed their initial internal control compliance and prior year reviews with no significant issues. I hope this puts an end to this ridiculous speculation. Now, to repeat same store sales expectations so far in August, we are slightly ahead of our same store sales estimates of 5 to 9 as we are in the low double digit process right now. We still expect future same store sales will likely moderate to the 5 to 9 percent range except for September should be in the low double digit. 0 wrap up, we believe we have a unique brand and huge and growing customer niche. We remain focused on this niche of customers and the sophisticated casual market. We are committed to larger stores and 2000 plus square foot rage that produce larger sales volumes and profits. These stores produced roughly $700 in the first year of sales per net selling square foot and can then be nurtured to higher productivity levels over the next several years. We continue to expand and relocate as many smaller stores as we get the opportunity. We still have over 90 stores that are selling in excess of a thousand per foot. Our new stores combined with the 23 to 25 expanded stores this year will result in a roughly 25 to 28 percent increase in square footage this year and this was a modest comp should result in at least a 28 do 30 percent top line increase this fiscal year which with our improving operating margin should have sizeable profits all year. As we discussed, we also intend to roll out on a [inaudible] basis the new concept Pozzo, next year a year in which we believe we can sustain Chico's growth rate in at least the 22 to 25 percent range. This new concept will allow us to continue a strong growth rate for the foreseeable future. the entire team feels he extremely confident in each and in our potential for future strong growth that will enhance profitability and consequently our stock price. We're still looking for half a billion in sales this fiscal year with operating margins that will be ahead of last year years.

Now we'll take questions.

At this time I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before asking your question. We'll pause for just a moment to compile the Q and A roster.

[Pause.]

Your first question is from Ms. Kimberly Greenberg of Lehman Brothers.

Thank you.

Thank you, Kimberly.

I have a couple of questions about the new concept. It sounds very interesting and very exciting. Can you talk a little bit about the merchandising design team for the new concept? Were any of them transfers from Chico's over to the new concept or were they all new hires? And how is it that you are providing for a vision direction given that this concept seems to be geared toward a slightly younger more contemporary customer?

Our direction is being provided basically from contemporary designs from both Europe and the United States. We're working with some top design people. As far as any people from Chico's being involved in the new concept, the answer is no. As far as the creative aspect of the company is concerned, or any of the product, we will back up Pozzo with our real estate and operations team along with all our M I S.

Okay, great. and then Charlie, just two quick questions for you. On the balance sheet, there is I guess 5 million in debt. Have you given any consideration to paying that off? I know it's sort of small. and then last question on the tailgate party for August, it sounds like that event was quite successful for you. Was that event planned, or did you do it in response to the slow down that you saw in July? Do you have any similar or other kind of promotion left during August or happy anniversary?

Let me answer that small part Charlie.

You can answer the part about the tailgate.

Yeah. We continue to be creative and innovative with the way we reach our customers and we react to what we feel is correct for business and that time. We're always going to come up with new and innovative ways to stimulate our customer and this was just one of them. and in answer to your question, it was definitely planned. But we also look at the business environment and it's obvious that it's difficult out there and we felt that we have to make a special effort. We did and it paid off.

And regarding the $5 million of debt, that's an almost exact same interest rates that we have right now because it's a very cheap debt. Yeah, we've considered paying it off, but there's really no incentive where it's almost the same interest rate as what I earned.

Okay, great. Thank you.

Your next question is from Ms. Laurie Brunner [phonetic] of RBC Capital Markets.

Hi, thanks very much. Scott, maybe you could comment on the productivity of the real estate. I'm wondering if you're seeing any differences in some of the locations, specifically malls versus off the mall formats, like life-style centers.

Laura, we're not seeing any difference in productivity format to format mall versus center strip. We focus on trying to get the best locations in the mall, the best location on the street and there's no difference in productivity from format to format. As far as productivity for new stores, we're seeing that they are a little bet bit better than 0 our older stores.

Okay, great. and then Charlie, could you provide some statistics on your passport program for the quarter end?

We put them up on the web already at the quarter end. They're right on the web. They've been up there for about a month.

Okay. And then is Pat Murphy on the call?

Yes, I am.

Hi, how are you?

Good.

Just a question about denim. I know you launched or were trying some of the half sizes in den denim recently and just wondering how that's going.

To answer your question about den denim, all of our denim is doing extremely well, we had a tremendous response. and we planned for a better denim presence in our stores for the fall season and it has definitely paid off. We wanted to do different washes and along with that, because of the success in the denim camp, we actually sized zero, .5, [inaudible] to give the customer a better choice. Similar if she's between an 8 and 10 it gave her a better option on the fit and it's doing he can extremely well.

Great. Last question in terms of repeat catalogs for the second half of the year, how many repeat catalogs will you do?

Well, Laurie, you probably noticed we're flattered by a lot of the imitation that we're having from our competitors and I really don't want to get too specific, but we will have repeats in the fall. I just don't want to say when.

Okay. Thanks. Thank you.

Your next question is from Ms. Margaret Whitfield of Breen Murry.

A very strong August so far. Wondered if you could provide us some color on the marketing program for the balance of this quarter in terms of TV and any special events such as tailgate. and did the tailgate reach a significant percentage of your passport members? Could you just give us a rough feel for that?

Well, let me take it in two parts. Again, I don't want to give out too many details for the fall. When we're running TV, but I can tell you that we'll be in most of the months for the balance of the year. and by the way, our response from TV during the spring that we just finished an analysis of, we're well ahead of our forecast on two of our key indicators and that is catalog requests and store location requests. So we well out stretched the forecast that we made at the beginning of the year indicating a lot of interest in our product and what we presented to them. the tailgate parties were isolated to our best customers and those that we have the most ongoing relationship with.

So would you say you reached less than 10 percent of your passport members in this promotion.

Yeah, probably.

And in terms of, you know, any way of measuring the TV? I think last year was more or less two weeks every month, the beginning and end of the month. Is your reach expected to be much greater over the fall season?

Yeah. We'll probably average the same amount of weeks, but of course we bought more growth impressions than last year to keep pace with our expected growth. So we feel that we bought enough impression through the fall to give us the amount of new customers that we forecast. and as I've indicated so far so good, we're ahead of forecast with new customers coming into the fall and we're ahead of forecast and sign ups in the stores for the past four projects.

I take it there's nothing planned for September and October at this point that would be akin to tailgate, given the easier comparison?

Probably not, but we're always flexible.

Okay. and pat, apart from denim, I'd seen some holiday merchandise in stores at this early stage. Seems to be selling through rather well. Do you have earlier deliveries for holiday?

Actually, no, they're pretty much on target to last year. the receipt pattern is fairly much the same way, but I can tell you we're delighted with the response so far.

A lot more velvet this year than last or about the same?

You know, as a percentage to the total, I can't say it would be a lot more. We feel that the offering is going to be different so that we feel that the customer will really want to buy velvet again this year, and that was our goal, was to make it very different and very novel. and so far we've had good success with that.

And travelers, any update how the black line and other colors are doing as a percent?

No, I can tell you that we are happy with the way travelers is performing. We are, you know, looking at black as a percentage to total. We really don't want it to get much bigger than what it is, and it's had an acceptable level. It is right on plan and it is turning very, very well. And it still is a presence in all of our stores.

Thank you.

Thank you.

Your next question is from Ms. Liz pierce of we had bush Morgan.

Actually most of my questions have already been asked. But, Charlie, when you talk about the average ticket and average dollar sale, I didn't quite get everything down. I just wonder if you could go over that again.

Okay. We were down roughly 6 percent for the average price point.

Okay.

The overall ticket was down 4 percent as we offset some of that with more units per transaction. That's pretty much it.

Okay. So UPT's were up?

Yes. Only slightly.

Only slightly, okay. and then all the pants wear I haven't had a chance to look at the web but all the passport stuff is on the web?

Yes.

And you continue to convert at the same rate?

Roughly.

Will the new concept have - I know it was early to think about this, but will the new concept have something like a passport membership?

It will have some kind of a loyalty program and it will be entirely different than Chico's program.

Entirely different, okay. and Marvin, when, kind of when do you think the first one will open?

There's going to be 8 opened in February, about the middle of February.

About the middle of February. and when will we know the locations?

As soon as we sign the leases.

Have you signed any?

A few of them.

We have about 10 or 12 outstanding locations and we're very pleased with our locations. But as Scott mentioned, the leases have not completed yet. There's details we need to finish signing out.

Are they going to vary like the Chico's locations vary? Obviously you're going to test different things [inaudible].

We're going to test them in different parts of the country [inaudible] for the first roll out, so we'll have to involve ourselves until we get further along with very cold, cold weather clothes. But basically we're looking at fantastic, fantastic mall locations for this first group of stores.

Okay. Mall versus street?

We will be looking on the street. We will be looking in the malls and in the specialty malls for this concept.

Okay. Similar to what you're doing already?

Similar but different. It's a different customer and we see a different focus, yeah, it's a different business.

Okay. and then just to verify one other thing, you said on the creative aspect of the product, there is no overlap, correct?

There is no overlap at all.

Okay. and you're working with some design team. How big is the design team right now?

Right now there's about four in-house people involved, and we are contracting with some great designers at the same time and we plan on expanding that team.

And will production be domestic or offshore?

It will be both.

Both, great. Congratulations you guys.

Thank you.

Your next question is from Ms. Jennifer Black of Wells Fargo.

Hello, Jennifer?

Ms. Black, your line is now open.

Can you hear me now?

Yes.

Congratulations on great earnings and Liz and I will be waiting outside when you open your first Pozzo store.

I don't doubt it.

Any^way, I wondered if you could talk a little bit about accessories and shoes and then I wondered if you could speak to what you would see as your largest advantages with your new software.

I'd be willing.

What can I answer about accessories?

UNKNOWN SPEAKER:

Well, I just wondered if you could speak a little bit about, you know, how are accessories doing, are you going to have more accessories for the holiday period, you know, are long scarves really what's going to be hot? Do you have anything that is special this year? Maybe you don't have anything that you want to talk about, but is there anything to talk about for accessories that you think is special?

Well, first of ah, the accessories part of our business is very, very strong and actually it's meeting its plan. There's a number of categories that are very exciting. We're doing very well with [inaudible]. Our jewelry continues to perform extremely well. the same as in apparel our first introduction on some of our velvet scarves and so forth as we move into the fall holiday season have done very well. and overall, you know, our accessory business because a bigger percentage of the total any^way actually move into the fourth quarter. So I can't say there's anything in terms of category that's new and different. We are still following the same category, but I do believe that the [inaudible] is exciting for the customer this year. So I feel very, very good about it. I can't give you anything that is out of the ordinary for us.

Okay. Well, there are some shoes in the last catalog that never were in the store, but everybody was saying, are they going to have those shoes? I said, I don't know. and then I saw the leopard sandals, but these were a different shoe and I just wondered if you would be carrying more shoes I think they were leather. They looked leather, anyway, in the catalog. Not the one that just dropped, but the one before.

We are - we really are not planning to carry a greater assortment of shoes. We are changing our shoe assortment as we move through the season. But we did do a little testing where we are featuring shoes on the west side and they are in a limited number of stores and we're just taking - picking, you know, a test to see how that work.

Okay, cool.

From the southwest we're going to get very significant benefit from the software. We're installing HRIF we didn't have before, it will help us manage 4,000 people, a whole lot better than we do right now. Installing global [inaudible] so that we'll be able to manage production much, much better than we have in the past. We're installing merchandising system that will allow us to get reports almost 8, 10, 12 times faster than we are and get more reviews and slices and dices of the [inaudible]. It is going to be fabulous software. It is truly the great [inaudible] for us. It's going to help us get there. We're excited about it.

Will it be also focus odd for example if you are selling way more zeroes than you are 3s and how to rectify your sizing if you need to?

Yes, it will and it's going to help us with lost sales because we know how many lost sales. We're installing that in registers we hope toward the end of this year. We're going to learn a hell of a lot more than we already know.

Cool. All right. Can't way to see you guys. Congratulations.

We'll see you next week.

All right.

Your next question is from Ms. Lauren Levitan [phonetic] of SG Cowen.

Good afternoon. Thank you. You mentioned that price points were down slightly in the second quarter. Can you comment on your expectation for price [inaudible] the back half of the year particularly as you are introducing more - it seems more suede and leather into the assortment this year versus last year and if there is a plan to bring those price points up slightly? And also could you comment on - give us a little bit more color on the performance of the remodeled and expanded stores and possibly give us some sense as to their contribution to comp growth? Thanks very much.

First of all, we'll talk about the price points. We definitely expect the price points to improve as we go into the fourth quarter. the trend will definitely reverse itself and we are focused on that. I think the lower price points were due to a difficult the transition season this year. As far as the store remodel, Scott is right here to tell you about the performance of those or Charlie.

Right in the queue we always disclose every quarter what it would have been had we not all the knocked all the remodels and expansions. [Inaudible] we would have run a 10/4 without them. Double digit without them. We always put it in the Q's and the K's.

Terrific. And, Charlie, you mentioned that you felt comfortable that plans in [inaudible] probably should allow you to achieve 22 do 25 percent growth rate for a minimum for next year.

That's square footage.

I'm sorry?

That's square footage growth.

Square footage growth, okay. and capex budget for next year including Pozzo?

That will just be your standard 65 stores about 350,000 each, plus about maybe 50 remodels at about 300 each and then fill in 5 million just miscellaneous and that should be your capex budget.

We should assume a Pozzo opening even though the first few of them we should assume that those the capital costs are fairly comparable to Chico's [inaudible]?

Yes, they are, correct.

Thank you very much.

And all the design is in-house with Marvin.

Okay. Great.

Okay.

Your next question is from Mr. John sew light as of Buckingham Research.

Hi, I guess I have another question about some of the square footage information. What's the total square footage at the end of the second quarter?

I think it's 600,000 feet on the knows.

On the knows.

Yep.

And then for next year, average store size that you're planning to open?

Scott?

The one thing that we've come to realize, John, is probably the most comfortable shopping size is about 2,500 square feet. That's net. But we don't think that we can achieve that next year in all the deals because we've already got the majority of the deals teed up for next year. As Charlie said, we'll probably average 2000 square feet, but in the end the most comfortable shopping size store is about 2,500 selling net.

Okay. So the new stores for next year right now based on the real estate conditions, you think you're going to average 2000. How does that compare to what the average store size is?

We're about 2100 right now so far this year. We think we're going to end up right around 2000. It's almost the same.

Okay, great. I guess my next question was whether the larger stores had any better productivity than the average stores. It looks like they're about the same.

Generally the larger stores are - they're generally in areas that we know very, very well and they generally do better. the larger stores are our highest profit stores. They're not our highest sales per square foot but they have the most room to grow. They're generally open in the 700 to 750 square foot range. A lot like our model that we have. and they are our most profitable for the most part.

And I know this year has been a little bit tougher in the overall retail environment. Has new store productivity been less this year versus last year?

No absolutely not. We've got a lot better stores this year. I think we're going to end up higher than last year. Q: That's great to hear. Okay. Thanks a lot, guys.

Okay.

Your next question is from Ms. Christina DeMarvel [phonetic] of Sadati and Company.

Hi, everybody congratulations on a great quarter. Very nice progress in August. I have a cup questions first for Charlie more or less a follow-up to Lauren's question to pricing. with respect to the gross margin guidance you issued, can you talk a little bit more about the dynamics you expect between markup and Mark down?

I'll let pat answer that as far as what we expect for Mark downs.

You're talking about going forward for the balance of the year?

Right. I guess second quarter was a little bit more difficult than the first quarter and I think Marvin alluded to in terms of the difficult transition. I'm just wondering -

In the second quarter, because you have the sell through in the first quarter on [inaudible] merchandise was so strong, I think we transitioned ourselves a little bit too soon and consequently we're pretty much put in [inaudible] transitional Mark down in order to move forward into the August and the fall selling period. So that did affect our average price point somewhat. I don't have any future concerns over [inaudible] percentage or our gross margin percentages going forward to the balance of the year. So I think they'll end up strong.

So really, flat to modest increase that Charlie mentioned is from both sourcing opportunities and markup - and Mark downs?

Yes, net of our new DC will come on line [inaudible] margins, we're hoping that will be offset by large [inaudible]. We still expect flat to slightly up.

Okay. and then I guess just more broadly for whoever might want to take this, your comp performance is really nicely defined prevailing retailing environment and I'm wondering if you could share your view about how the economics - how economics are impacting your core customer and how she might be responding, how you might be I guess rising above a very difficult environment.

I realize that the economics are difficult and we all realize that. And the environment is competitive. But I feel that the best companies will still do outstanding business, and the weaker companies will probably do less business. and our job is to focus on our product, our innovation, our creativity, our offering, our quality, our stores, everything that we do well. And I feel if we do that, we will continue to perform well.

Okay. That's it for me. Thanks.

Thank you.

Your next question is from Ms. Robin Merchison [phonetic] of Hibernia South Coast.

A few things. One, I want to double-check that I heard correctly capital expenditures on remodels, 50 at 300,000 each, and then new stores 65 at 350,000?

Yeah, that's ballparkish, yes.

Okay. Secondly, the new [inaudible] jacket, suede and leather as a percentage of mix this year versus last year, is it up or down or about the same?

It's about the same. It's a little bit greater because we had good performance last year on certain things and gave us the confidence level this year. I would have to say the total mix is about the same would be a better response to suede that we did of plain leather, for example. So I would say total mix is about the same.

Have you upped your expectations for the suede based on the positive trend that you had the positive response last year?

Well, because of the refunds last year, yes, we raised our spec Asians this year but I can't say that, you know, our whole outer wear program is geared to [inaudible] weighed and leather. the outer wear is about the same as last year but the greater mix of it is in the suede product.

Thank you, Pat. This is for Jim Frain. Two questions; one, do destination Seattle, this is the third destination catalog that we've had, I guess, the first one was in May, I think?

That's right.

And then one mid summer, now this one in - maybe I'm mistaken, but I thought you were going to just - going to do two this year. And now we're at three. Are we going to do any more this year? And is the cost of production on this catalog any greater or about the same or less?

Well, on the first part of the question, we have to more plan and we like to surprise you with some new destination. The customers love it in sales terms and they've even called in on the most recent one just to say they liked the look of it and some Seattle customers called in yesterday to say that they really appreciated it.

Okay. Then you're getting a great response, then, and in order to keep advertising at about three-and-a-half, it's obviously driving sales enough to enable you despite the higher production cost to keep advertising at about three-and-a-half percent of sales?

Yes. and really, the production costs are really not that much more for the destination ones. You may know or you may not know that postal rates, the new postal regulation, yeah, they went up, the cost, but they kind of favor bigger catalogs any^way.

Uh-huh.

So it's really not that much more in costs to do those.

Okay. and then lastly I just wanted to ask you about the tailgate, the tailgate party invitations. Evidently not all passport members get a tailgate invitation ; is that correct?

That's correct.

Okay. So it's a subset of the total?

Yeah. We have files on our customers, those that want to be contacted. We don't like to contact them if they don't want to be, and the stores are a very close judge to those better customers and they know the ones that like to get a phone call. So those are the ones who call.

Okay. Great. Thank you very much and good luck.

Thank you, somebody.

Your next question is from Mr. Peter gill by of Ariba asset managements.

You guys are pretty [inaudible]. There's no question about it. I tell I all my clients to listen in on these calls to learn something. I wanted to ask you in terms of the total number of women that are out there that would be candidates for your product line. Have you got any estimate of what that number would be in term of the total population?

I don't want to get too specific because we do get a lot of questions about what our target and how big the target is. But I can talk in general term.

Yeah.

That we figure that we've reached less than 10 percent of our target market.

Good enough.

So we've got a lot of room to go.

Secondly, I ran into a number of ladies that love your stuff, but they're a little larger than your zero through 3 and they'd love to have some stuff in your stores that might enable them to go in there and buy. Have you given any thought to increasing your sizes?

We've given a lot of thought, and we're still giving it a lot of thought, so we have no definite conclusion and we may do some testing in the near future.

Yeah, okay. Thanks ever so much.

Thank you.

We can take a couple more questions now.

Your next question is from Mr. Alex Rhotnin [phonetic] of SWS Securities.

Yeah, most of my questions have been answered, but I had a question on advertising. Are you running advertising this week?

Yes.

Okay. and then just a housekeeping item on depreciation, what was it for the second quarter? And what will it be for the balance of the year?

[inaudible] it's right in the Q. 6.9 million for this quarter. It will be rising every quarter because we keep opening stores.

Okay.

Okay?

That's all I have. Thank you very much.

Okay.

One more.

Okay. We have time for one more question.

Your final question is from Ms. Kimberly Greenberg of Lehman Brothers.

Great. Thank you. Just a question for Jim Frain on the magazine advertising. I noticed that you have some discounts, I guess it's $10 of a $50 purchase for example in Marie Claire magazine. Have you done coupons in the magazines before, or have you primarily done just image advertising?

Boy, we hate to call those discount coupons. They're incentive coupons. [inaudible] the biggest part of that is not necessarily - they're not large discounts or large incentives. a good part of that is to track the activity and they do a very good job of doing that, because those coupons are coded. We tested that out on a fairly small basis last fall. It worked really well in the test and we're doing more this year.

Okay, great. and then lastly, Charlie, could you just review your gross margin guidance for the second half of the year one more time?

Yeah. We said they're going to be flat to slightly up.

Great. Thank you.

Okay. Thank you. That's all the questions for now, so I thank everyone for attending the call and we'll see you next quarter. Thank you.

Thank you for participating in Chico's second quarter conference. This call will be available for replay beginning at 8:00 p.m. Eastern Standard Time today through 11:59 Eastern Standard Time on Thursday, September 12th, 2002. The conference ID number for the replay is 531-2979. Again, the conference ID number for the replay is 531-2979. The number to dial for the replay is 706-645-9291. That number again is 706-645-9291.

Thank you again. You may now disconnect.