Chico's FAS Inc (CHS) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Paul and I will be a conference facilitator today. At this time I would like to welcome everyone to Chico's Third Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise.. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star and then the number 1 open 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, December 3, 2002. I would would now like to introduce your speakers on today's call, Ms. Pat Murphy, Senior VP, GMM, Mr. Barry Shapiro, Senior VP of Pazo, Mr. Scott Edmonds, President and COO and Mr. Charlie Kleman, CFO. At this timeMr. Kleman, you may proceed with your conference.

Thank you, everyone for attending our third quarter conference call. I will now read the Safe Harbor statement. Certain statements contained here, including without limitation, statements addressing the beliefs, plans, estimates or expectations of the company or future results or events may constitute “forward-looking statements” within the meaning of the Civil 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 expressed or implied by such forward-looking statements will occur. Users of the forward-looking statements are encouraged to review the Company's latest annual report on Form 10-K, the filings on Form 10-Q, management discussions and analysis in the latest company's report to stockholders, the Company's filings on Form 8-K and other federal security law filings for a description of the other important factors that may affect the Company's business, results of operations and financial conditions. The Company does not undertake to publicly update or revise its forward-looking statements, even if experienced or future changes make it clear that projected results expressed or implied in such statements will not be realized. Now I'll turn it over to Scott Edmonds.

Thank you, Charlie. Marvin and Helene are traveling abroad and cannot be with us this morning however they asked me to extend each of you a warm holiday greeting and as always to keep your eye on Chico's. We're all proud of our record third quarter results. Records such as these can only on achieved through very hard work. Awareness of the Chico's brand is continuing to grow and our customers’ excitement with the Chico’s brand is evident in these record sales numbers

The long-term growth of the Chico’s brand is phenomenal. Chico’s outstanding management team has once again delivered. Net income growth of 74.7%, compared to last year's third quarter is something every shareholder can appreciate. Our November performance is a solid start on the fourth quarter and, of course, it all starts with the great Chico's merchandise. Our Senior Vice President and General Merchandise Manager, Ms. Pat Murphy will now share with you her comments on what drove the third quarter and, more importantly, what she sees moving forward into the holidays. Pat?

Thank you, Scott. I continue to be absolutely delighted at the customers' response to the Chico's brand. Reception to third quarter product was outstanding. Sell throughs on regular price on outer wear, sweaters and denim made us realize how great the potential is for further expansion of this Chico's brand. Third quarter sales were driven by strong sell throughs on key items in apparel. Shirtings in both suede cloth and cotton were very strong. Turtle necks and core sweaters were also outstanding.

Certain categories were identified as having growth potential for the quarter. Denim play a big part in our sales growth against virtually no business last year. Sweaters and cold weather buys also generated substantial volume. Outer wear, sweaters and denim all had better than 100% sales growth increase over the same third quart last year. Velvet, both novelty and basics almost doubled in sales over the prior year. Novelty jackets continue to be very strong and our core travelers collection in black continues to perform on plan.

Accessory business was exceptional in the third quarter, exceeding even several revised, upward plans. Sales in the fourth week of November hit an all-time high for the category. Volume was driven by necklaces, watches, scarves and belts. Our unique and special products targets our customers very well and we feel we will continue to enjoy even greater growth in our accessory area fort balance of this year and all of next year. Make no mistake about it, Chico's is the store for gift-giving. As an example, Oprah led off her "Favorite Things Show" with our Silver Ox Cuff watch. After the show, customers poured into our stores and the call center lit up with calls. We estimated that 75% of those calls were from new customers. Not to mention, sales on the watch are phenomenal.

For December, we have concentrated on new receipts that are [timely] for wear now and yet carry through to early spring. Key items and new fresh colors and gift items such as a velvet Chico's bear are part of the assortment. Our December mailer hits home on the 18th of this month and looks very powerful. There is no question that we all continue to feel very excited about opportunities we have in the current business and extremely optimistic about the strong potential for the future growth of the Chico's brand.

Thank you, Pat. Now Barry Shapiro, our VP of Pazo as well as Outlets, will update you on the progress of Pazo brand, as well as our outlet business, Barry?

Thank you, Scott. First the outlet business. Out lets continue to make good progress. Chico's outlets began 2002 with 11 stores. We have opened five this year with one more to go in December for a total of 17 doors at year end. We plan to open five to seven next year. The current store format is approximately 3,000 square feet of selling space. Late last year, we introduced our Market by Chico's label sold exclusively in our outlet stores. This is product intended to round out the assortment for the outlet customer. Market accounts for less than 10% of the total assortment. We will continue to work at increasing our average unit retail and total transactions while improving operating efficiencies, always with an eye towards our mission of maximizing the valuable real estate in the frontlines stores.

Now on to Pazo. We are scheduled to launch our new brand Pazo in what is now just over 90 days. The target customer for Pazo is a conscious woman between 25 and 35, but we know that the total audience will be both younger and older. The target income is $40,000 plus. She is a woman with her own sense of style who knows how To, and enjoys putting her wardrobe together with great pieces. The merchandise is inspired by the best and most current looks from European and American designers. We will be fast to the floor giving a close to the runway feel.

Merchandise will range from active to career with an emphasis on casual. We will compliment this apparel with an exceptional assortment of jewelry, bags, and belts. Apparel prices range from $16 to $98, with the average being just short of $40. The store will have a unique boutique atmosphere with a European feel, [all fixturing] and features are unique and created for Pazo.

We will open 10 stores throughout the month of March, located in Boca Raton, Florida, Memphis, Birmingham, Dallas, Houston, Scottsdale, Mission [inaudible], California, and Atlanta. These sites were chosen based on a concentration of the target customer and outstanding locations within the center. We expect some of our competition to come from stores like Express, [R and B], Anthropolgy and ZARA. Pazo will pull together the merchandise store look and service in a way that we believe will make us a unique and exciting choice for our target market.

Thank you, Barry. We're all very excited about the potential of the Pazo brand. However, I want to again assure the Chico's customer and our stockholders that the Chico's design and product and development team as well as the field management team will remain completely focused on the Chico's brand. Pazo speaks to a different customer and employs entirely separate design, product development and field management teams to focus on that customer.

Turning to real estate for a moment, year to date we have opened 60 new stores, relocated, remodeled and expanded on additional 37 stores. We have six additional new stores to open by year end and one store to close, bringing our year-end total to 65 net new stores. As previously announced, we're planning on opening 65 to 70 new stores for fiscal ‘03 and this will include the Pazo stores.

Our new Atlanta distribution center which was scheduled to be operational by the first quarter of 2003 is ahead of schedule. I'm pleased to report that last week 81% of all merchandise was processed through the Atlanta distribution center. We're very proud of the company's performance and will continue to focus on building the Chico's brand, launching the Pazo brand, and delivering on the earnings per share. Now we will turn it over to Charlie for all of those fantastic numbers.

Thanks Scott. The third quarter saw same store sales increase that was modestly above our guidance again as we came in with 18.2% comp increase and saw improvements in the growth and operating margins. Certainly, our fall collections were on the mark. This resulted in our 20th consecutive quarter with a 45% or more increase in net income, of course, excluding last you're third quarter. Because of the events in the third quarter last year, we were guiding to stronger same-store sales increases in September and October, and we achieved even better than that as we put up our highest comp quarter of the year. Now, before we get into the numbers I'm going to review the operational issues. As Scott already indicated, our D.C. move is on track and as Barry indicated, Pazo is on track for a first quarter launch. Beyound this, we're also on track with a significant software conversion[s]. We went live with the new HRIS, or human resources solution from Lawson in July. Our new D.C. software from Manhattan software went live in September. We still plan to go live with our new global [sourcing] package from STS (ph.) in the first quarter of next year and the balance of the software, that is, the merchandising, financial, sales audit, etc., from STS and Lawson are still planned to go live in the second quarter of next year. We're on budget and on plan to finish our [Bridge to a Billion] from a software, facilities and distribution perspective. Although we believe this initiatives will bridge us to a billion, as we said, we are, as with the D.C. move, under no pressure to do this any sort of rush. Thus we will mitigate any risks by assuring we are ready for these changes similar to our cash register conversion last year which only went with a 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 to some financial analysis of the third quarter numbers.

The third quarter of this year was our third consecutive quarter of gross margins equal to or exceeding 60%. The 60% gross margin in the third quarter of this year was 0.9% ahead of last years’s third quarter of 59.1% The mark downs were very similar year over year and the IMU or initial markup improved slightly, as we had indicated it might last quarter. We expect fourth quarter margins will be flat to slightly up, probably more similar to the second quarter year over year increase this year.

Going forward, we expect to see flat to small increases in the quarter over quarter gross margin percent, except in the first quarter of next year as we anniversary our best quarter in many, many years. That quarter is likely to be flat to slightly down. We are not expecting the D.C. move to cause any significant degradation to our gross margins in the fourth quarter and we expect an [inaudible] in this area late next year or early the year after. Remember, our D.C. design and merchandising costs are included in cost of goods sold, while store occupancy is included in SG&A.

Turning to the SG&A, we came in essentially in line with our guidance. That is, we have indicated several times previously that we should leverage above a 7% same-store sales increase and we did just that this quarter with a significant improvement from last year's third quarter of 44.0%, to a more normalized 41.9% in this year's third quarter. During the third quarter, the improvement in SG&A from 44% to a roughly 42%, was mostly achieved through tight control of store payroll costs, leverage of our fixed costs and a 0.2% planned decrease in direct marking costs. Remember, as we explained empty last two quarters, we front loaded our marketing to get our customers more aware of Chico's early in the year as we believe this will pay dividends all year long. We have done just that this year and we are likely to do the same thingnext year. We still plan to end the year with a direct marketing budget in the 3.5% range of net sales. Remember, as well, this 3.5% includes all national TV and magazine ads, all Passport costs and most importantly all catalog costs which account for 2 of the 3.5% budget. [Inaudible] a conservative marketing plan when one considers the number and frequency of our very successful catalog drops.

Further guidance in the SG&A area remains the same, above 7% same store sales increases will generally leverage the cost. We realize this may sound high, but it is the price you pay for investments that will benefit the company long-term. We are building the infrastructure with an eye on the long-term as we continue our rapid growth. We expect to see a lower break-even comp by late next year, probably near 5%, as we leverage the significant investments of this year. For future years will allow even more leverage with our goal to get down to a 3% leverage point the year after. These gross margins in SG&A improvements resulted in one of our best third quarter operating margins this year, as we upped last you're third quarters operating margin a full 3% percentage points from 15.1% to 18.1% in this year’s third quarter. This was our third straight quarter with operating margins ahead of last year’s full year operating margin of 17.9%. We're on track for one of our best full year operating margins ever. The [above account] [inaudible] are even more important when you realize that even after all of the store expansions Scott mentioned, 98 of our stores are still running at a clip of over a thousand dollars per selling square foot and the chain is now over $840 per selling square foot.

We continue to expand and relocate as many of these stores as we can. This year we’ve expanded or relocated 17 stores with two more to go this year. The average frontline store is now 1820 net selling square feet and has sales in excess of $1,550,000. As for the composition of same store sales, the average price point was down 0.7% for the quarter due to mix of goods, while UPTs, or Units Per Transaction were very slightly up. This resulted in an average transaction decrease of just under a half of 1%. In the fourth quarter, we believe our price points will show a slight increase year over year. The biggest driver to the same store sales though is still increased traffic in our stores and thus increased transactions. And we still believe that many of the women that are ages 35 to 65 are still not shopping our stores yet, thus we continue our timely marketing which we believe will drive strong traffic increases in the future.

Our call center which handles web and catalog orders had its best quarter in history as it sold just under $3.9m in sales for the quarter. Year to date this total is just under $11m. The call center runs at profit level generally equal to an average store or approximately 30% net. [Thus] it generates profits similar to an entire district of stores and pays for all the web update and maintenance at the same time.

Moving to the balance sheet, let's first look at the inventory level. We are very pleased with our quarter end inventories of just under $40m. The year over year increase was just under 29%, while the sales and square footage increased approximately 46% [from 32%] respectively, year over year. We are turning inventory quite fast but we do not believe we are missing significant sales due to this [inaudible] turn. Remember, our new outlet strategy that Barry told you about, that’s producing a much cleaner, fresher inventory mix that requires a smaller investment and promotes a faster [churn] on mark down goods as well as freeing up selling space for higher margin goods.

The only other significant change in the balance sheet is the almost $36m increase in cash and marketable securities year to date. This, in spite of a $13m investment in our new D.C., which we paid cash for, and newly acquired building here in Fort Myers and in spite of an investment of a little over $7m so far on our new software initiative. The capital expenditures for the nine months totaled $51m out of the roughly $65m or so we anticipate for the year. By the way, we filed our 10-Q this year so the other cash flow details are now available.

To 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 [the] larger stores in the 2000 plus square foot range that produce larger sales volumes and profit. These stores produce first year sales per square foot of roughly $700 to $750 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 opportunity arise or as we can generate. We have over 98 stores that are selling in excess of a thousand, as I said. Our new stores combined with our expanded stores will result in roughly a 28% increase or so, in square footage this year and will result in a top line increase near 40% for this fiscal year, which with our improving operating margin, has added sizable profits every quarter. As discussed, we also intend to roll out on a test basis the new concept Pazo, next year, a year in which we believe we can sustain Chico's growth rate in at least the 22 to 25% range. This new concept, if successful, will allow us to continue a strong square footage growth rate for the foreseeable future . The entire team feels extremely confident in each other and in our potential for future strong sales and earnings growth that will enhance profitability and consequently, our stock price. We're still looking for our first half billion dollar year in sales this fiscal year with operating margins that will be substantially ahead of last year. Now we’ll take our questions.

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. If you're using a speaker phone, please pick up your hand set before asking your question. The first question is from Ms. Margaret Whitfield with Brean Murray...

Good morning and congratulations on the earnings and the strong sales. Question for Pat. She mentioned three categories that have grown substantially. What percent of the mix were they, Pat, the denim, sweater, outer wear and where could that get to next year? Also did you have a read as yet on the spring merchandise that might be in your southern stores? And Barry, I wondered what the objectives are for Pazo given the Lower price points for gross and operating margins? Could they achieve over time margins comparable to Chico's itself? Also for Barry, if you were opening 10 stores in March, I presume of this coming year, what are the plans if any for second-half stores?

We will start first with Pat. You may want to repeat the question. I'm not sure we remember it.

It was the potential for the three categories she mentioned and what percent were they of sales, where could they get to and any read, as yet for spring merchandise and what does that look like at this early stage.

Well, Margaret, as I mentioned, the denim sales were virtually against almost nothing. We did a few novelty jackets last year. We did a few denim pieces but we made a concerted effort this year and I'm not going to give you an exact percentage of the total, but we feel potentially for this customer, we have even further to go in this category. We also did something different this year. We did a key item, which we sized using our size list, 0.5, 1, 1.5, so the fit on the jean is extraordinary and our customers seem to love it. In the outer wear business we absolutely concentrated on special and novelty. So the increase that we are enjoying this year is really at regular price. The sell throughs are at regular price. Last year, our outer wear, we did some leathers and so forth, that were more basic in nature and we took it to another novel level this year. Price points are somewhat high. We have had no resistance to the price points at all and we're just thrilled at the sell through at regular price. So, again, the potential for next year is to kinda reinvent ourselves all over again and give her a reason to buy. Sweaters and some other cold weather buys were, again, against no business last year. We have so many stores located in the north, and we saw that opportunity and we made a concerted effort. We planned for it. The business and the reaction has been tremendous. So, potentially, even next year, I would see even greater potential--.

Would you say the three categories this year are well below 10% of your total sales at this early stage?

You know what, I don't have the exact percentage at my fingertips but if I had to guess I would guess somewhere between 10 [and] 15 percent. Again, that's a guess. I would have to go back and really run the numbers. On spring, we did a spring test in some of our southern stores in October and we’ve got fabulous direction for the coming spring season for key items, colors and certain fabrications so, again, I feel like we have a very good start on the season. As you know, we pretty much start to roll out spring at this time in our southern stores, and I think we just feel very confident about the reaction we got in October. So, yes, we have had great direction there.

Thank you.

Now we will move to Barry.

On the question of margins, when we start up, we will have pretty strong margins. Not as strong as Chico's currently have. Part of that is based upon because we have a limited number of stores, we're paying some amount of up charge to produce the amount of pieces that we are -- as the number of stores grow and the amount of units we buy increases, we will see better leverage on the buy end which will give us a better initial markup and the margin will grow with that.

What kind of number stores do you need to see leverage Barry? 50 stores, 100?

I think by the time we get into our second year, we should be, by the middle of the second year, we should have the buying leverage to hit the kind of initial markups that we want.

OK.

Regarding the second half plans and clearly this is a test, in March, April, May, we will be looking at the results that we get and we will be tweaking those. As soon as we as a management group have the confidence to say, OK, this is ready to roll out, we're prepared and real estate is working on the potential sites for that as soon as we get to the point that we say, yes, this is what we -- this is the format that we want to be in and we will roll from there.

So there could be [inaudible]store openings in the second half, as well.

Absolutely.

But no more than 10 additional.

Absolutely.

Thank you.

The next question is from Ms. Loren Levintan with SG Cowen.

Thanks, good morning. I also have a couple of questions for Pat. Pat, I’m wondering if you can comment on the gift card business, which I know you have added additional emphasis to. Also you commented that the accessories business was very strong. Can you talk about whether or not you see that as a longer-term shift and if there's any shift in your thought process, with respect to percent of business, that might be coming from the accessory business. And lastly if you can comment that there's any new categories over and above the outerwear and denim mentions that you already made, any new categories that are curently in a test mode. I have also have question for Barry after that, please.

First, I will answer on the gift card. We just rolled the gift card out, what was it, a month ago [Mike]? And we're seeing significant increases. But it does not affect our sales. That just goes into our liability account. So we have not realized any sort of benefits from it. But they definitely like our gift card and it was a very successful launch. Now, I’ll move to Pat and she will answer some of the other questions.

Hi, Loren. The accessory business has been pretty steady as a percentage. We generally see a rise in that business as a the fourth quarter as a percentage to sales. I don't anticipate any really strong shifts in the percentage. We did realize greater percentage, increase in sales in the month of November and somewhat in the third quarter, which -- you know, we're delighted with. It's just [that] the sell throughs on the product has been phenomenal. We have identified certain categories we are working closely with our planning and allocation team who has done a fabulous job on identifying the number of skews (ph.). We have segregated out basic items versus novelty items and all of that has contributed to a general increase in the business. As far as new categories are concerned, we are testing certain categories. I can tell you about one which is called C-Wear by Chico's and it's been in some of our stores and we have had phenomenal reaction to it. It's a combination of clothes you can wear around the house and you could go and get your mail at your mailbox. It's well priced it’s in a beautiful Pima cotton. And we do anticipate rolling that out in the spring season. We're always looking at new categories. We feel there are many potential extensions to the brand and some of which I can’t identify on the call here but we're always talking about extensions to the Chico's brand.

Great, thank you . For Barry, I was curious if you could talk about if there are specific plans yet for a loyalty program or something that might be analogous to what you do with the Passport program, and then two quick things for Charlie. Could you revisit with the CapEx guidances is for next year, curious if the fact you've been able to get the D.C. rolling a little more quickly if that changes the CapEx guidance and also he inventory guidance, since you're now starting to lap the revised outlook strategy I'm just curious how we should think of inventory on a year over year basis as we head into 2003. Thank you.

On the question of, for Pazo, the loyalty program, we are currently, Jim Frain and I are currently working on those programs. It is work in progress. We will, in fact, have something proprietary but that is, at this point, work in progress.

OK. For the CapEx guidance, we don't have any new CapEx guidance. The same we've always been given [inaudible] Although we're ahead of it, we had planned to spend it all this year in any event so we don't have any new -- the only thing I would say is we're going to be upgrading our D.C. here into office space and probably spend $4 or $5m on that. So add that to your CapEx budget. That’s something--we already need office space here, so that will be some new CapEx for next year. Beyond that, the inventory guidance is about the same, flat year over year on a square footage basis. It should be relatively flat. OK?

Great. Thank you very much.

Your next question is from Dorothy Lakner with CIBC World Market.

Thanks and good morning and congratulations on the good numbers. I wanted to ask a question first of Barry. The locations for Pazo, you, I guess, listed the various cities those are going into but could you give us an idea of what the mix is, malls to strip centers to village locations?

Sure.

Then I also just wanted to see what the marketing plans are in December, what kind of TV plans you have and going into January on the mailer as well. And then finally, for Pat, the Travelers Collection which has been so successful for you, what percentage of sales was it in the third quarter? Thanks.

Okay, Barry?

On the subject of the types locations that the 10 stores are in, at this point it's a mix between malls and lifestyle centers. At this point we have not yet gone to street locations, though we intend to have the same kind of mix that has been so successful for Chico's. But at this point of the 10, seven are malls -- I'm sorry -- six are malls and four are lifestyle centers.

And this will be more mall-based, won't it Barry?

Yes.

This will be more mall-based than Chico's is. Okay, is that it from you Barry? Jim, do you want to talk about marketing?

Well, in regard to TV specifically for December, we had not planned and do not plan to run TV in December. We put most of our dollars for the holiday season in November. And it looks like it worked out pretty well. As far as January, the [sale] mailer will go out to an increased distribution, of course, over last year, and that can be sometime in mid January.

Now we have Pat—for something--Travellers--.

Hi, Dorothy. You know, we have never said that we wanted Travelers to exceed a certain percentage of the overall sales. And I can tell you that, and that is by design. And I can only tell you that Travelers is right on plan as to where we would like it to be. I can't give you an exact percentage, but we are very happy with its performance.

And in terms of the mix of black to the colors that you had over the course of the quarter --

The colors and novelty we consider on top of the core business which is just black. That's on top of that.

And you're happy with the mix there?

Oh, very. Yes. Very. It's doing exactly to plan. And so we're very happy with it.

Great, thanks.

Your next question is from Ms. Lorri Brunner with RBC Capital Markets.

Thanks very much. Could you comment on the relationship with Amazon that was just announced and maybe talk about the particulars there, please?

You're pretty quick to catch that press release so quick. Jim will comment on that.

As you noted in the release, we're planning ahead already. We expect to be live on their site in time for fall 2003. The reason that we made the announcement is we signed an agreement with Amazon recently and we wanted to let the world know about it. We're quite excited about it. We expect that to broaden our market and bring us a lot of new customers.

Can you go on into any of the particulars there, Jim, in terms of just who controls the database and the names and are there any financial terms that you can talk about?

You know, I really don't want to talk about the financial terms, but I can tell you that it will be as close to our presentation as you would see in a store or on our website that's the philosophy that Amazon wants to work by and that's the one that we want to work by. So you will see the same product and prices that you see on our website. So it will be -- it will be a Chico's store. And, of course, it gives us access to millions and millions of customers that we don't see right now.

And we will have control of our Passport names. If they sign up for the passport, they are our customers and we can market to them. That's not going to change.

Very good. Then a question for Pat. In terms of the merchandise, Pat, maybe you could talk about where you think you have the opportunity to raise some price points next year, if you're intending to do that, which categories would you specifically target to do that. Thank you.

You know, we would look at everything, Lorrie. But--especially in the area of outer wear, some of our novelty jackets. We had some pretty high priced ones out there and we saw no resistance. I think for all of us it's a matter of looking at the value of the item. We never want to put something out just to raise the price. We really want to look at the item and understand the true value of it. We want our customer to feel that, even if she is paying a higher price, she is really getting a good deal at Chico’s. So I think we have opportunity in a number of classifications and we will look at them very carefully. But certainly not to raise prices arbitrarily across the board, but I think it's on an item by item basis that we want to take a look for next year.

Okay. Sure, thanks. And then, Barry, last question would be, are you still seeing an increase in the average order at the outlets?

Yes, it continues to grow slowly but surely. [Indeed], market merchandise is, to some degree, a portion of that, but the average unit sale as well as the average dollar sale continues to grow pretty steadily.

Thanks very much.

Your next question is from Ms. Jennifer Black with Wells Fargo Securities.

Good morning and congratulations. I have a few questions. And I guess my first question would be, you've had so much success in New York, I wondered what your plans were as far as opening more stores in the New York area?

James West is in New York as we speak, Jennifer and looking at quite a few locations up there. And there will be more stores coming in New York.

OK. Then on a larger note, maybe you can refresh my memory, as to how many total stores that you believe that the Chico's concept can have?

We talk about that on an ongoing basis. The current thinking is not necessarily how many can we have but how many should we have. We're going to finish this year with 385 stores. We are going to finish next year, you know, with 450 or more. The year after that, clearly north of 500. And it's whether Pazo wether it’s an extension of the Chico's brand, which we don't seem to emphasize enough in these calls and in the marketplace, that's where we're spending an awful lot of our time Jennifer is what, you know, is next for the Chico brand. It took so many years to build the brand. We just very recently have a very strong brand. We're spending a lot of time trying to decide from the board level down to, you know, with Pat and Jim and everyone, what is the next step for the Chico's brand? Conservatively north of 500. Chico's stores aggressively north of 600. But that's with the current concept that we're looking at.

OK. And then, Jim, I wondered if you could comment on the mailers that you sent out to your best Passport members, the $20 that you could use in conjunction with anything else? I wonder what your response rate was to those. And if you could comment on the response rate to your other -- just to your mailers general. Have you seen the response rate go up?

Well, I don't want to get specific on the response rates but I can tell you we're very happy that the response rates on nearly every catalog this year against last year, are up. And that includes the most recent catalog. The most recent catalog that we have final results on, well, it's not even final results, it's on a segment of [inaudible] that we have final results, is November 1. We don't yet have any sort of final results for November 2, which is what you're referring to the with the $20 dollar note without qualification gift to our Passport shoppers. Actually, that is about a little over a week's response. So it's a good early response but I can't comment about whether it will be above last year. It looks good. But nearly every other catalog in the year is above last year. And that's as a result of better prospecting. And just a better response to our -- from our core shopper Passport, which says, if you love the product, I mean, spring was tremendous, a tremendous increase over the previous year, even if from our core customer and that continued in September, October, and November.

Are you there?

Yes.

OK. One other question, Jim. You know, I'm sure you would do this because you're brilliant in the marketing area, but do you do an analysis as far as with the over 2 million temporary Passport members, how quickly you believe they will become permanent passport members, I mean is there any correlation or do you have any comments about that, because you have a huge opportunity.

Yes. That's what we were -- I actually forgot that. That we saw a dramatic increase this year versus last year in the conversion of the preliminary customer. We very carefully test segments of the preliminary file to see if we can, both, revive ones we haven't heard from in a while and also the more frequent shoppers to get them to cross over the line into a full Passport. And those percentages are better this year than last year. So we have made improvements in that.

OK.

And you're right, that is a huge potential there with $2 million plus customers in that segment.

That's what it seems like. And then lastly, in the Travelers Collection, I know that you spoke about that, but I was curious to know, Pat, if you think that there's price -- if you could raise your prices in the [black] Travelers, is there an opportunity for an improvement in IMU?

Well, I can tell you Jennifer that the IMU currently in that product is very, very good.

I know.

Is there an opportunity -- you know, I think depending on the styling. We're always converting our styling. For example, the first Travelers pant that we introduced I don't know how many years ago, at the onset, we decided not carry it any longer so we have evolved into a different group of pant. And I think things like that will happen as we continue. And of course I should introduce the new item. We could certainly look the price point and have some opportunity there. On existing items that we continue to feedback to the customer, like our tank top has been running a long time, I don't think we have an opportunity to change the price. But on new styles, sure, I think there is an upside.

It just seems like you're already priced kind of under the market but you have your own market so you have some opportunity.

Yes.

Well I spent my $20-dollar coupon. Thank you very much. Congratulations.

Your next question is from Ms. Kimberly Greenberger with Lehman Brothers.

Great, thank you. Good morning. Could I start with -- on the marketing front. Pat, can you talk a little about the December 18th mailer? Is it different from the one that you dropped last year? And then, in terms of the TV advertising that Jim spoke about, did you guys have TV in December last year versus this year? And then a little bit more clarification as we roll into the first quarter of next year on the catalog front I know that you guys initiated a strategy in the April or May time frame of this year to move the catalog forward by one week. Can you talk about when you started that and then if you're going to be doing that with your February and March catalog as well?

Last year, we only is a couple of days that spilled over into the December financial. But there was nothing significant for TV last year. But the December 18th catalog is around the same time as mail drop last year. I would say the significant improvement is in both circulation, because our Passport file and preliminary file is much bigger, but it's also more importantly I thinks [inaudible] it’s a very as Pat already noted it's a very attractive catalog and think a lot because of the product improvement so I expect a much better return than last year.

Jim, then on the catalog, when did you guys start pulling that catalog forward by one week?

If you're talking about pulling it forward into the last week of the month previous to a particular catalog, I think it was in April –

I think it was the April --

Actually, now that I think about it, we did that in January, too. The February catalog we mailed five days earlier last year so that it was in the last week of January [inaudible].

OK. So, we will lap that essentially--

That did not gain us anything. It just moved the sales from one week to another. It didn’t really gain anything in any given month.

Right. You've already essentially anniversaried all of those moves, is that correct?

Pretty much.

Then Charlie a couple of questions for you. You indicated that inventory should be roughly flat on a year over year basis per square foot. Can you give us the ending square footage at the end of the third quarter and also where you anticipate ending the fourth quarter?

I don't know the fourth quarter. We’ve got—how ever many stores we’ve got left [inaudible] 65 times 2000 . We’ve only got one or two expansions. So, [you] multiply [inaudible], I don’t know exactly what-- That's on our website You can go right on our website and get our square footage any time. I think it was 650,000 net sellingsquare feet at the end of the third quarter. And it was 600,000 at the end of the second quarter. But you can go under financial highlights and get that anytime you want. And it will be whatever stores we’ve got left times about 2000.

That excludes franchise stores, is that correct?

Yes. That excludes franchises.

You opened one franchise or there was one franchise store opened this year. So how many – so, do you know when that was opened and how may do you have at this point?

Late October. And, that's the only one that opened this year. We don’t anticipate--the only ones who can open them are up in the state of Minnesota. They can open as many as they want if they can get in the state of Minnesota. So we don't anticipate a lot more franchise openings.

OK. And the total now of the number of franchise stores?

12.

12. Okay. Excellent. Thanks, Charlie.

Okay

Your next question is from Mr. Richard Baum with CSFB.

Good morning, everybody. Obviously most questions have been asked. I just had two that I wanted to follow up with. One for Barry, could you talk a little bit about the sourcing strategy for Pazo, whether you will be using, you know, different factories, different agents that are being used for Chico's and then I have a question for Mike.

Richard, the sourcing will be different. We don't want to be in a position any place where we're competing, such as it is, for time, space, or machines, with Chico's. So our tragedy, again, we have a separate [source in] operation that is part of Pazo going to different places even where there’s a couple of agents that are the same the factories they are using are, by definition, different. So it’s really our intention, for lack of better terms it's better of stay out of each other's way in terms of production.

And what is the sort of --you know, what size sourcing organization are you going in with? You know, could you talk a little about the infrastructure?

Sure. It's pretty small now as the whole organization is. But we currently have, as dedicated, we have five people in our sourcing organization that work exclusively for Pazo.

OK. And then, for Mike, you mentioned about no TV advertising this year. And I apologize if you've answered this, but did you do TV last year in December? And I guess the real question is, on a promotional marketing -- on a marketing basis, does December lineup, you know, pretty evenly with this year versus last year in terms of what you're doing?

By the way, it's Jim, Jim Frain.

I'm sorry.

Jim.

Yes, we had just talked about TV December this year versus last year. And the answer was, no, we didn't have any significant TV. We had a spill over of a couple of days last year. And we hadn’t planned and we do not plan TV this year. The increases in promotional effort are in the circulation of the December catalog. By the way, it's good to remember, too, that we have -- we still have significant segments of our November 1 catalog still active, and we have November 2's catalog active through the day before Christmas. So we actually have three catalogs active in the month of December.

OK. And then just last, this is kind of a whimsical question but it's a question for Pat. I think you describe, I don’t know if it’s an item, a style, or a line that is going to be dedicated for women to go to the mailbox. Did I hear you correctly?

Yes, you did.

Mailbox. I was just wondering if you could describe that a little bit since -- since most of the women I see on my block run out in their pajama's and run back.

There you go. It's called C-Wear, and it’s C-Wear by Chico's. We tested the product early and had a fabulous response. We will be going back into it for spring. It's the type of thing when we come home from the office and want to put on something comfortable but you can still be seen around the house. I think women are going to wear this to run to the supermarket, quite frankly. It's a Pima cotton and it feels great. It's very comfortable, relaxed styling, great colors, and it's the type of thing that if you take Yoga, you might want to wear it to your Yoga class. I see it as being very functional. I think a lot of women will want to sleep in it, so I think it has multifunctions, it’s very comfortable and easy, very appropriate for the Chico's customer.

That's what I'm going to use my $20 coupon for.

There you go.

You will look great in it Richard.

Thanks, guys.

Your next question is from Mr. John Zolidis with Buckingham Research.

All my questions have been answered. Great numbers again. Thanks a lot, guys.

Thanks John.

Next question is from Robin Murchison with Hibernia Southcoast.

Hi, good morning. Pat, are you saying Sea, S-E-A wear?

[Inaudible], C, as in the big sea. C-Wear.

Oh, Okay. Thank you very much. Also for Jim Frain. That companion coupon, the $20 off, did you all do that last year?

Yes.

You did do that last year?

Yes.

And then for Barry Shapiro, Pazo, how many collections will you have a year and how does that compare with the core Chico's store?

Well, we intend to, because of the fast turn, there will be merchandise arriving virtually every week. Turning the whole store easily on a monthly, six week basis, just on a pure rotation basis, not a full turnover. So it's not a pure spring collection, summer collection. It will be on ongoing rolling in of merchandise 52 weeks a year.

Okay. It sounds very similar to the core concept.

Yeah.

Thank you.

Your next question is from Liz Pierce with Wedbush Morgan.

Good morning and all that and my congratulations. Pat, a quick follow up on this C-wear collection. How -- how many skews will that be? Do you even have like --

Right now, Liz, it's confined to a few skews. We took what we considered the must have items. We don't know where the collection will go. We feel very confident about it as a concept. It fits well into the mix of Chico's and we definitely have it in our plans for spring going forward. So you can look for it in the stores then. What will happen and how it will grow we will watch and see what happens and --

Is this kind of like a track suit for an older female customer, I mean that we're seeing that is so popular in the teen market?

I wouldn't call it a track suit. Although we do have some styles in our collection that are not C-Wear that kinda takes on what you describe. This is more, I guess for a better word, home wear, something you would wear to Yoga. It's lightweight Pima cotton, it’s extremely comfortable and versatile and just fits into your lifestyle for however the customer chooses to wear it. It's not the number of skews. It's just the concept. Right now it's pretty contained to a few skews

In terms of at the regular Chico's store you mentioned it a couple of times about more cold-weather product. Are you starting to break out the merchandising, the planning, by more climatic regions and, if so, how many regions are you looking at?

Yeah. Well, we like to still take the approach of seasonless dressing. We still feel very strongly about that. We recognize at certain times of the year, for example, right now in Florida, we're rolling out more spring merchandise to the southern stores, conversely, in fall, third quarter particularly, and fourth quarter, we’ve recognized the needs for things like sweaters, dressing that has a certain amount of wool in it, and things that -- where our cold locations at those stores, have special needs. Because of our size now, we can segment out the buy and plan for those stores accordingly by seasons.

So would you say they're like -- are there four perhaps geographic regions and you're breaking it out?

You know, we really right now look at it as pretty much north and south. Cold versus warm. Yes, we have other stores that are identified as certain location stores and, you know, the demographics in the country differ so we think about southern California a little differently than we would think about New England, for example. But not that specific into four seasons.

Okay. Then in terms of the denim and the sweaters and the outer wear that you talked about that have done so well, are you taking anything out of the mix to make room for that or is that coming through also, pushing more merchandise through the outlets? Is that where you're freeing up square footage for it?

Well, having the square footage in the outlets certainly helps our full price position in frontline stores but I can't say we're really pushing anything out. We look at the whole business as a whole. And try to think of the upside of the potential for a certain category of goods and we would plan for that potential, but we don't want to decide that it's all going to happen in one season. So it's a building process. And, again, I just want to stress that the brands, the Chico's brand has an upside to the potential that we're finding that with every category that we try.

OK. And then, Scott, just -- did I hear correctly or maybe Charlie said this, the square footage of these new stores in 2000?

We have been saying 2000 for a long time for the net selling square feet, yeah.

Okay. I just wanted to make sure I understood that correctly.

But the chain average is 1850 right now—

[Iniaudible]

Okay. Maybe that's where I got confused. OK. And then on the conversions finally, on these stores, these 98 stores that are a thousand plus, how many do you expect that you will do next year?

We actually have a full-time real estate associate working on that process for the first time. It's a full time position. And it's just too early to tell, you know, how many will be able to convert. But we clearly would hope to convert a dozen plus.

But the goal Scott is eventually to convert all of them, you really don't want them --

Yeah, but you don't give up a hard corner doing 2,000 a foot. You just don't do it. So I don't for one minute think we’ll be able to convert them all.

OK. Congratulations and best of luck for the fourth quarter.

Thanks. We’ll just take one more question.

Your next question is from Ozarsian Tangun with SWS Securities.

I'm the lucky one. Congratulations. A couple of quick questions. Barry, if everything goes according to plan, how many Pazo stores will we have in three years?

It's still really too early to tell. We will certainly be aggressive in how we go about it, but it's really premature at this point.

It's a marathon, Oz, not a sprint.

Okay, all right. That's fair. And, Jim, can you [inaudible] just a general overview of what we should expect next year from an advertising point of view?

Charlie told me save it for the the analyst’s meeting--I don't know that the management team has agreed to the whole plan for next year yet. I don’t think-- We will certainly gonna have the same number of catalogues but beyond that I don't know if we have really defined how much TV we're going to do yet.

Okay. Is there anything else that we should be looking to or anything that you can share with us?

Not that I'm going to tell you. We will have a couple of, I think, pleasant surprises, I would say, more on the on the creative side. As you see with the Amazon alliance, we're” also looking to some other channels where we can sell goods in other ways. I notice that a couple of analysts only seem to key on square footage and increases and so forth. But we expect to make money in different ways in the future.

OK. And, Charlie, two quick questions for you. You said that you expect gross margins of the fourth quarter to be slightly up and if you have more than 7% comps you're expecting to leverage SG&A for the fourth quarter as well?

Yep.

What about any feel for next year, in terms of gross margin trends?

We already said that, too, is that we expect them to be flat to slightly up except the first quarter, they will be flat to slightly down. But the last three-quarters, flat to slightly up. First two quarters at least, it will be a 7% sort of leverage point. Beyond that we hope to get it down to 5 by the last half of the year.

Okay. And what is your comp guidance for December?

We said certainly the higher end of the five to nine range.

OKay. All right. Good quarter. Thanks.

Okay, and I think that's all the questions for now.

As Marvin would say, keep your eye on Chico's.

Okay. And we thank you all for coming to our conference call.

Thank you, ladies and gentlemen, for participating in Chico's Third Quarter Conference. This call will be available for replay beginning at 2:00 P.M. eastern time today to 11:59 P.M. eastern time on December 17th, 2002. The conference I.D. number for the replay is 6768574. Again, the conference I.D. number for the replay is 6768574. The number to dial for the replay is 706-645-9291. The, number again is 706-645-9291. Thank you again and you may disconnect at this time.