Chico's FAS Inc (CHS) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, thank you for holding and welcome to Chico’s Fourth Quarter and year end earnings release conference call.

I name is Paul and I'll be your conference facilitator today.

At the request of Chico’s, this call is being recorded today, Tuesday, March 4, 2003. All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question and answer period.

If you'd like to ask a question during this time, simply press star, then the number one on your telephone key pad. If you'd like to withdraw your question, press the pound key. If anyone should need assistance at any time during the conference, press star zero and an operator will assist you.

I'd like to turn the call over to Chico's Chief Financial Officer, Mr. Charlie Kleman.

Thank you very much and thank you for attending our fourth quarter and year end conference call.

On the call is Scott Edmonds, our President and COO, Pat Murphy, our CMO and Jim Frain our Senior VP Marketing. Barry Shapiro, our Senior VP Pazo won’t be on the call.

I'll read the Safe Harbor Statement.

Certain statements contain hearing, including without limitations, statements stating the beliefs, plans, objectives and expectations of the company, or future results or events constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 amended.

Such forward looking statements involve none or unknown risks, including but not limited to general economics and business conditions and conditions within 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 forward looking statements are encouraged to review the company's latest annual report on the Form 10K, the filings on Form 10Q, management's discussion and analysis in the company's latest annual report to stock holders, the company's form 8 K, and other federal securities law filings for a description of 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 if experience or future changes make it clear that the projected results expressed or implied in such statements will not be realized.

I'm turning it over to Scott.

Marvin and Elaine are currently on the road working on the Pazo launch and unfortunately cannot be with us this morning. However they asked me to extend a warm thank you for joining us and to remind you to keep an eye on Chico's.

We're proud of our fourth quarter results, the strength of Chico’s brand is more evident every day.

Our 58% increase in fourth quarter net income is the direct result of the customer's incredible appetite for the Chico's brand.

Even with the threat of war and terrorism looming, the price of oil and gasoline skyrocketing, consumer confidence at a nine-year low and the stalling stock and job market, Chico's continues to set records. This is real brand strength.

This is the Chico's story. It is not about one month's comp sales number. It is about the growth of a brand that is arguably the hottest brand in retail today. Our customers' commitment to the Chico's brand is setting sales records as recently as this past weekend.

Saturday was the highest sales volume day in our history at $3.2 million. Even our local hometown store, which many of you have visited, the bell tower shops, were setting new sales volume records.

We set a sales volume record for the last week. Joining us for today's call is Pat Murphy, recently promoted from senior vice president general merchandising manager to the executive vice president, chief merchandising officer.

Pat is going to share her comments on the incredible Chico's merchandise that is the key driver behind the brand and our record sales and earnings. Pat?

Thank you Scott. Good morning, everyone. Even though we began the year with inventory slightly higher than what we'd originally planned, we expect levels to be back in line with our planned projections by the end of this month.

And despite erratic weather patterns across the country during the month of February, there is no question that responsibility to the Chico's brand is incredibly positive. Our March catalog started to hit homes in the latter part of the third week of February. Sales on those items featured in the catalog are exceptionally strong.

In fact, as Scott said, weekend business in the last week was record-breaking. Overall, our stock turn for the month was good. In those stores not affected by weather, it was excellent. Key items such as tanks, linen shirts, and t-shirts are performing very well, and are on or above plan.

As categories, novelty jackets, pants, in both long and short-sleeved tops are performing best.

Our travelers business remains strong with consistent sell-through on our basic items as well as new items that are continually being introduced into this collection. Response to sea wear has also been excellent. Sea wear is separate pieces made of PIMA cotton that the customer can lounge or sleep in.

The test on this product has proven successful. Even though sea wear comprise itself only a small percentage of the overall Chico's business, its success has inspired our thought processes for other potential extensions to the Chico's brand. We have hired Terry Campana to Ted up our new intimate apparel line.

Her experience has included positions with Federated stores, Victoria's secret and most recently Banana Republic stores. Terry will be joining us in mid March.

Marvin, Elaine, Scott and myself have discussed opening independent test stores for the intimate apparel sometime in the first half of 2004. This will allow us to use our current passport data base to market our new concept. We feel this is undoubtedly a natural extension to the Chico's brand.

And something that our Chico's customer is already looking for. Our accessory business continues to be strong in all categories. With necklaces, shoes, and watches all performing exceptionally well. We feel great pride in our Chico's team.

We feel extremely confident about the Chico's brand moving forward, and we are very optimistic about the current spring seen. Now, back to Scott.

Thanks, Pat. Turning quickly to real estate, as previously discussed, we are planning on opening 70-75 net new stores in fiscal '03. This includes the ten Pazo stores opening this month. Of the remaining 60-65 new Chico's stores, we plan to open approximately 17 stores in the first quarter, 14 stores in the second quarter, 20 in the third quarter, and the balance in the fourth quarter.

As in recent years, we will continue our aggressive relocation, remodel, and expansion program.

Barry Shapiro is on the road opening Pazo stores. So I will provide a brief update on Pazo.

We're opening ten new Pazo stores this month. The first three open this Thursday, March 6. They're on Peach Tree Parkway in Atlanta, Georgia, Saddle Creek in Memphis, Tennessee and in Scottsdale, Arizona.

The stores look fantastic. The merchandise is on the racks. The staff is ready, and we are all very excited about the store opening.

Now, over to Charlie, who will provide more detail on the financial strength in an operational update.

Thanks, Scott. The fourth quarter saw same-store sales increase again, modestly above our guidance as we came in with an 11% even comp increase and again saw improvements in both gross and operating margins.

Our holiday collections were on the mark.

This resulted in our 21st consecutive quarter with a 45% or more increase in net income, of course excluding the terrorist attack quarter.

The year end is up with the highest gross margin ever with 60.5% or since fiscal '95, when we were at $59 million annual sales versus half a billion now.

Our operating margin for the year was the highest ever at 20.1% and done despite of significant invests in the infrastructure during the year.

Before we get to the detail behind the numbers, let's look at interesting overall year-end numbers and the status of operational projects.

First, our company-owned stores ended up at $849 sales per square foot for the year, versus 815 last year.

I know some of you like to look at this on the gross basis and to do this, simply divide by 1.25 as our non-selling area is generally 25% of the overall space.

When you do this you'll get $679 sales per square foot on a gross basis.

For our last fiscal year, we ended up with 99 stores with sales per square foot in excess of $1,000 of the 299 stores that were open all year. In fact, in Linwood village in Dallas led it, standing up with over 2,100 per foot while Atlanta, New Jersey and Austin, Texas and our stores in San Des tin, Florida, all ended up over $1700 per foot.

Lastly, in the same area, we had ten brand new stores that had over $1,000 per square foot in their first full year.

These stores were opened in fiscal 2001 and were in such diverse areas as Arizona, Texas, Connecticut, Washington State, Oregon, California, New Jersey, Illinois, and Arkansas.

That just about covers all markets in the U.S. The average store's sales ended up at 1.56 million versus 1.39 million last year.

Now, interesting numbers in this area show 12 stores in excess of three million and another 45 that were in excess of two million.

Again, these stores were located all over the country, in malls, streets, strips, and specialty centers.

No area of the country, or store type, dominated these high-end stores.

On to just as exciting operational accomplishments of last year.

Last year, we established the infrastructure that will allow the launch of Pazo just two days from this announcement.

Last year, we acquired, equipped and became fully operation in a new distribution center north of Atlanta and closed the Ft. Myers distribution center.

This year, we'll convert the old D.C. to neater office and call center space.

Last year, we launched a new HIS and warehouse management platforms and geared up for fiscal 2003 conversion of all other systems.

Lastly, we continued building bench strength in management to allow us to successfully bridge to a multibillion dollar, multi-concept chain. This year, we're building infrastructure to launch a second Chico's concept aimed at baby boomers in mid 2004. And as Pat mentioned, we're currently looking at the intimate apparel active wear market.

Let's move on to financial analysis of the fourth quarter and year end numbers.

The improvement in gross margins for the quarter of 1.5% from 57.8 last year to 59.3 was accomplished in spite of running two warehouses during the entire fourth quarter and a slightly higher markdown rate quarter over quarter last year.

Offsetting this was the initial mark-ups improved almost a full percentage point, we improved the D.C. to store freight costs and the D.C., store and warehouse shrink numbers improved.

Turning now to SG&A, we came in line with guidance. We indicate the several times we should leverage above a 7% same-store sales increase as we did that as we improved last year's fourth quarter of 42.3% to this year of 41.9%.

Although this isn't as much leverage as one might have expecting when compare compares to Q1 or Q2, we incurred significant one-time Pazo restructuring costs during this quarter.

Our direct marketing costs for the year ended up on plan at 3.5% of sales versus 3.4% last year.

As for the composition of same-store sales for the quarter the average price point flattened out with a two-tenths of a percent increase during the quarter while UPTs or units per transaction were very slightly up this resulted in a average transaction increase of just of under a .5%.

The biggest driver in our sales is an increased traffic in stores and increase transaction.

We still believe that many of the women ages 35-65 are still not shopping our stores yet, thus we continue our timely marketing, which we believe had drive strong traffic increases in the future.

While we're on the same-store sales, we are very pleased that we had over 600 stores days that were directly impacted by the storms and many more that were indirectly affected. We believe that our comp would have been much higher than we thought if it weren’t for the bad weather.

Our call center [inaudible] best quarter in history as it sold just over $5.1 million in sales for the quarter and ended the year at under $16.1 million, a 57% increase over last year.

The call center runs at profit levels generally equal to an average store or approximately 30% net, thus generating profits similar to an entire district of stores in pace for all web updates and web maintenance at the same time.

Moving to the balance sheet in year end results after that, let's first look at the inventory levels.

We're pleased with our quarter end inventories of just under $45 million.

Although the year over year increase was 55%, while the sales and square footage increased 40 and 29% respectively year over year, we were extremely light on inventory last year after the unplanned 22% comps in January, 2002 and the 9/11.

The inventory per square foot at year end was on plan almost and was at $65 per foot, very comparable to 9 of the 10 last quarters.

Also notable on the balance sheet is a $46 million increase in cash and marketable securities after a $65 million investment in capital expenditures for the year and after paying off our $5 million mortgage.

We also saw an increase of almost $100 million in stock holders equity for the year.

Regarding capital expenditures, I'll give you detail. We spent approximately $13 million on the new DC, $10 million on the new software projects and $2 million on Pazo stores and the facilities to house the product development, field and management teams.

Last year's depreciation amounted to $16.1 million for those who need that. Wrapping up the year end income statement, we improved gross margins by 1.2% from 59.3 to $60.5%, while at the same time leveraged SG&A was about 4 percentage point from 41.4 to 40.4.

Leaving us with an operating margin of 20.1% and 54% increase in earnings per share on a 40% sales increase.

Quite a year, even without considering the significant accomplishments during the year.

Going forward, we expect to see the first quarter gross margin decline year over year as we anniversary one of our lowest markdown rates ever in last year's first quarter.

For the other three quarters, we expect flat gross margins overall with flat to up margin us excluding the Pazo activity.

We expect comps will be in the five to nine percent range for March and the first quarter as well.

The SG&A still require as 7% or better comp to leverage until next year when we believe it will drop to 5% or less for leverage.

Beyond that, we tend to bring it town to a 3% leverage level. We end the year with the average store at 1830 net selling square feet and last year, we expanded or relocated 21 stores.

We intend to expand or relocate as many as we can this year to improve the bottom line earnings and allow further growth at smaller stores.

For those interested, our same-store sales would have been 11.8% for the year if we excluded all expanded or relocated stores. That's versus the 13.5 that we reported.

To wrap up, the baby boomer niche remains an unsought after niche that is monstrous in size. We've only just begun to penetrate the niche with a brand that has only established itself in the last three years.

There's a lot of life left in the Chico's model, regardless of Pazo or a brand extension concept we hope to roll out next year. Speaking of Pazo, we open the first three stores in three days and we look forward to showing the 25-35 year old what our product development team and unique merchandizing technique can do to excite them in the apparel area.

We are committed to a 25% square footage growth for future years and proving this with our bridge to building infrastructure investment.

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 or stock price.

We have our first half billion dollar year in now and we're looking for our first billion dollar year somewhere in the future.

Now we'll take questions. Paul, we'll take questions now.

In order to ask a question, please press star and the number one on your telephone key pad.

If you're using a speaker phone, please pick up your hand set before asking your question.

Your first question is from Margaret Whitfield with Brean Murray.

Congratulations. I guess I have a question or two for Pat and one or two for Charlie.

Pat, can you give us more elaboration on the type of products, more information on the products available on the new intimate apparel stores. I take it will also include active wear and how many stores you might be targeting next year.

And also, for Charlie, can you provide information on where you think the inventories might be by the end of the first quarter and what the CAPEX and D&A budgets are for this year?

Hi, Margaret. Well, we are right now in discussion about the mix as far as what we feel these stores should be, and we've had a lot of conversations.

I do want to say that under care or intimate is only a portion of that business.

We certainly see great response to what we had in sea wear, which is more lounge wear, even sleep wear.

The whole active wear phenomenon and for this customer we think is just -- hasn't even been tapped yet. It will be a combination with intimate apparel being the basis.

And how many stores?

We're looking right now to test in six stores.

Okay.

Now, what was your other question?

The cap ex budget for this year and depreciation and amortization and the Q1 inventory levels.

The Q1 should be relatively flat year over year on a square footage basis if it was at this year, if you look at any quarter except the last year fourth quarter. So, it’s been the same for the last 9 quarters

It should be relatively flat at the end of the first quarter. The cap ex budget for the year, you should take about 350,000 times the 75 stores we're going to open, about 275,000 times about maybe 50 remodels, add in five million for the office we're going to redo in the back in DC, add in five million for miscellaneous. It should be near 45 million dollars

I want to go through the logic in case we change anything.

You should add at least 40% to depreciation.

That's going to run faster because of our DC opening up.

Thank you.

Your next question is come Marcia Erin with Pacific Growth Equity.

Scott or Pat, can you talk about the new presentation you showed us at Bell Tower, how that's performing and how you stand on rolling that out.

Are you talking about the new [inaudible].

Right.

Actually, the results have been excellent.

The stores are loving it. The store support team just executed it beautifully, and we see just a -- I'm sure it's a contribute or to the good business that we are having.

Is that now chain-wide?

Pardon me?

Is that chain-wide at this point?

Yes, it is.

And are you seeing more customers? Or you are seeing greater units per transactions, or what's the -- you know, the response?

We're seeing more customers, but I also feel that for the people in the stores, it's just easier for them to sell from this particular floor set because it's set up by life style versus, you know, more of a color presentation. That we had in the past.

In terms of looking at your February business by life style, was there one area that's performing better or worse than the other?

We're seeing great response to the business on really all cylinders, and we are surprised by the response, say, to linen and to t-shirts and to real spring wear that, because of the weather that we've had. So I'd have to say it's across-the-board, including travelers. Travelers has been a very consistent and quite strong.

Great. Thanks and good luck.

Thank you.

Your next question is from Lauren Levitan with SG Cowen.

Good morning. Charlie, a clarification question on the gross margin. Did you say the markdown levels were higher this year versus last year in the fourth quarter?

Yes. In the fourth quarter, they were slightly up.

But initial markup more than offset that?

Oh, yeah.

I was hoping you could comment on the call center figures, the February increase that you cited was quite dramatic.

And I'm assuming you didn't have you know a one-time kind of Oprah benefit you saw in the fourth quarter.

Can you comment on what is happening at the call center? Have you been doing anything different in terms of the offers in the catalog to give incentive?

Jim, why don't you answer that?

Sorry?

I'm going to have Jim answer that.

Terrific.

He's in a photo shoot somewhere.

We're working on the May Catalog, TV and national print ads.

The February business was a consequence of increased circulation of our catalogs, primarily. And it was pretty much to forecast. We're also doing -- we're getting better results from our prospecting, but most of it, in February, anyway, was from the mail-out to our passport file.

We had about the same offer, Jim, didn't we, on the catalogs?

Yeah. It was nothing special about the offer. It's really the increased circulation, meaning that we built up the data base that much more than the year prior.

Okay. So would you expect that we should be looking for similar types of growth in this business going forward if that circulation increase --

Yes.

-- is maintained?

Yes.

Is a lot of this associated with the March catalog drop, since that's what happened at the end of the month? Do you see it quickly in the results?

We're seeing very quick, as Pat indicated, exceptionally good results from the March catalog.

Thanks very much.

You're welcome.

Your next question is from Lauri Brunner with RBC Capital Markets.

Thanks. Pat, I think you mentioned at top of the call that inventory was higher than you expected going in to the year. Could you elaborate on that a little bit?

Well, it was really from where sales were in January, and what we thought we were going to get, but the weather, it was just really weather-related.

It wasn't anything other than, you know we didn't have sales up to our plan and inventory.

But the inventory right now is well under control. And over the last week, the results of what we have out there and the customers' response, once she's in the store, has been terrific.

Okay.

We see no problem to the inventory as we go forward.

Okay, great. And then you guys also mentioned the slightly higher markdown rate in Q4 versus last year. Is that attributable to any specific category of merchandise or was that pretty much across-the-board?

No I can't say it's attributable to any one thing. We came out very clean on velvets and our holiday merchandise. We had a very good year on sell-through.

Our outer wear business was a lot stronger than year before. It's a combination of higher promotional activity and employee -- it was everything. And it just slightly edged up over the year before.

Okay, great. Last question, could you give us an update on your initiative with found.com?

Have you implemented the software and how is that --

No we've not implemented that yet. We've got that, right now, on a delay. They got bought by CRS and there's been confusion as to who is in charge so we're going to wait until the thing settles down, because it's going to be a complex rollout.

So I think we probably will see a six-month delay on that now because of them being bought by another company.

Okay. Thanks very much.

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

Thanks and congratulations, everyone.

Just a question for Charlie, first. How many relocations and remodels are you doing in '03? You said you'll do as many as possible.

Secondly, on the intimate apparel stores, would those be adjacent to Chico's or are you going to try them in different kinds of locations?

And then, also if you could talk about the sales mix in '02, pay Errol, accessories and footwear and so forth, which percentage each represented and which do you think provide real opportunities for sales growth in '03? Thanks.

The sales mix was about the same as it's always been. It was 12-15%. I don't know the exact accessory mix.

It was between the 1 and 15, like it always is. There's always opportunities there for accessories that we're always looking at.

We're really looking at the, let's say, the rollout of this new brand is what we're focused on for brand extension. I'll let Scott answer about all of the rest of the questions on real estate.

Dorothy, on expansions and relocations, we currently have 22 expansions and relo planned, but we have for the first time a full-time real estate person working strictly on expansions and relocations.

That's all Susan does. So we expect that throughout the year, we'll see more opportunity there.

As well as the expansions and relocations, you know, when we remodel a store that we're not able to relocate or expand, it improves the capacity and the shopping experience, which we generally see a positive impact on our sales there.

So by the end of the year, as in past years, you know, between expansions, relos and remodels, you know, odds are it will be around the 50 count.

Relevant to the test of the intimate active presentation for next year, as Pat indicated, one of the exciting things for us about this is this is targeted at our passport customer.

If she's frequenting a center and driving the sales in a store north of $1,000 a square foot I don't know why we'd do anything other than open this store adjacent to or very close to the current Chico's store so our current thinking is the first six test stores would be in some of the top-performing Chico's locations.

Okay. Great. Thank you.

Thank you.

Your next question is from Janet Kloppenberg with JJK Research.

Hi, guys, congratulations. Pat, a couple of questions on the intimate apparel concept. Have you developed a new design team to work with you on this? And are there other new members or a new management team being developed for this concept?

Right now, there's a new group of one, myself. But definitely, there will be new members of this team as we go forward. As I said, we already have Terry coming on board.

Right, but they report to you is that correct, Pat?

Sorry?

The team would report to you?

At this moment, yes. Terry is going to report directly to myself.

Okay.

Janet, we'll build a team around Terry and Pat to support this as we get, you know, get further into the year.

Okay. So do you see -- should the concept be successful and rolled out, Scott, you see a head of stores and marketing, et cetera, et cetera, develop for this concept?

We certainly are going to try to leverage. Again, this is a true, you know, extension of the Chico's brand, targeted at the Chico's customer.

So, you know, what we're hoping to achieve is leverage. With Warren our senior VP of stores, she has the capacity to manage a director of stores and clearly Jim Frain can market the effort, and, you know Mike Kincaid can count the money and we can distribute out of Atlanta.

We're looking forward to a lot of leverage in this endeavor.

Perhaps there won't be that much management infrastructure built around it?

Clearly on the product side, absolutely, because Pat has, you know, she has, you know, she has her hand on the throttle of the Chico's product currently and is very busy.

So we've hired a senior merchant to report to Pat and work directly with Pat in Marvin and Helene on launching this.

At the same time, we're going to bring a lot of bench strength behind Terry throughout the year.

Okay. I was wondering if it will be labeled as a Chico's concept so the consumer will know the target or passport customer will know that this is Chico's product?

Absolutely. It will have the name Chico's attached to it. We don't know exactly what it's going to be called. We have a lot of names we're considering, but it will be by Chico's.

Okay. Thank you. Just a couple questions for Charlie.

Charlie, inventory per square foot, you gave it on a dollar basis.

Can you tell me what it was up on a percentage basis coming out of the quarter? Also if you could help us with delineating comp expectation between the month of March and April, given the Easter shift?

The Easter shift does not affect us much. I'm still at 5.9 for both months.

Thank you.

The $65, I believe I said it was up, I think, 55% year over year, but quarter over quarter, it was relatively flat.

I didn't get the 55%. It's up 55% on a square footage basis?

No not on square foot.

Okay. How much is it up.

On a square footage basis, it's up 55% year over year.

On a square footage basis, comparable inventory is up 55%; is that correct?

That is correct, year over year.

Thank you.

Okay.

Your next question is from Mary Beth Holland of Gold Smith and Harris.

-- way to end the year. How many stores were closed in February due to the inclement weather?

I don't have the exact number of stores that were closed. Some stores were closed more than once.

Like the Maryland stores were closed three or four times each. The Dallas stores, of course, were closed one day, all the Dallas stores.

It was about maybe 20. What I gave you were there were 600 store days affected, because we've got stores -- I can't answer how many stores, because all the Maryland stores were closed four times. Four separate times.

I'm just wondering, you know, Pat mentioned that, you know, the inventories are clean.

I'm wondering if maybe, was the markdown activity greater this February month versus a comparable month, because you a might have had inventory overhangs?

Yes, it was up a little bit during February, not necessarily due to the inventory overhangs, but we have to clear merchandise to get new merchandise in.

Okay. And then, just about the inventory at year end, I'm looking at it sequentially, that --

Right.

Q3 to Q4 last year, it was down 2 million.

But if you look at the year before, that's not true, or the year before, or the year before that in not true.

Last year, as I said, we were abnormally low at the end of the year and we talked about it on our conference call.

We've talked extensively about how low our inventory was at year-end last year.

I'm just trying to -- you feel that, you know, probably explains the 5 million increase that you just were too low a year ago?

Yes.

When doing comparisons, because I'm sure there's a million of that that goes towards the Pazo inventory. My last question is about outlets.

Can you update on the dollar store size and the percentage of the market by Chico's label.

I don't know those numbers. The average outlet is about 3,040 feet.

The average sales are similar to a Chico's store, to like a front line store.

The sales per square foot are significant because they're much bigger. The market labels, that's about 8%, I believe.

So was that down versus the year ago?

It was up versus a year ago.

Okay. Did you finish with 17 outlets?

Yes.

Thank you.

Your next question is from Margaret Jones with ACI capital.

I'm sorry, Tom Kaplan here for Margaret Jones. Nice quarter.

I hate to harp on the inventory issue, but in this environment, one has to be sensitive to inventory build and I don't want to drag it out.

Were there any anomalies of the opening of the new DC that might have pushed up the level of inventory?.

Absolutely not.

100% related to the reduced or suppressed level in the prior year quarter.

That, plus the Pazo inventory and we had a little more at transit at year end than last year. Those all add up to the difference. We're not concerned at all about it. It's down as of now.

When you say down as it is now, do you mean Normally or sequentially?

63 a foot instead of 65. I think the two dollars a foot has everybody nervous.

Coupled with the full-price sell-through, one has to take a look at the 55% jump year over year, although I obviously heard your comments on the suppressed prior year level. Anyway, thanks for the clarification.

Thank you. Any other questions?

Your next question is from Kimberly Hurley with Lehman Brothers.

I changed my last name without knowing it. It's Kimberly Greenberger.

Good morning, Charlie. I'm confused a little bit about the way you're looking at the inventory here.

You indicated that going -- if you go back to the last several years, you guys have -- maybe I misunderstood, have had sequential increases from 3Q to 4Q…

I didn't say increases. We didn't have the same decrease that we saw this year. The increase this year versus the decrease last year.

Are you talking on a year over year basis or sequential basis?

From the third to the fourth quarter, sequential basis.

Yeah. Well, it looks like I have, you know, pretty much every year you guys have a nice, sequential decrease from the end of the third quarter to the end of fourth quarter inventory, but not this year.

In fact, I have to go back to 1998 before I get an increase from 3 Q to 4 Q. What normally should we be expecting from 3Q to 4Q to you guys.

We expect it to change in the 60-63 dollar a foot range. It's two dollars higher than it should have been. We expect it to be in that range.

I have my information on a gross square footage basis. I'm not sure if that's comparable to yours or not.

I'm using net. 1.25, same thing.

On a year over year basis, per square foot, inventory was up about 20%; is that correct?

I'm not sure of the question. Year over year, it was up 55%, I thought.

Right, in total. Didn't you say you increased square footage by 29%?

Yes.

So we get 20% left over as an increase in inventory per square foot.

Okay.

And that was on top of a 15% decrease last year, so you're just saying last year was too lean?

Oh, yeah. Absolutely. We talked about it at great length on our conference call.

Yes, I recall that. I was just looking at the prior year, however, which was up about 20%.

So certainly, just a surge in the prior year also caused the 2001 to be a little bit light. I was wondering, do you expect it to stay at this level on a go-forward basis --

Absolutely. We expect between 60 and 63 a foot.

For every quarter --

Yep, yep. And we're likely to be a little higher in the third quarter, when it does -- that's when the price point's a little higher so you'll see it higher, as we gear up to the fourth quarter, holiday oriented.

So you don't have the same seasonality to your business that every other retailers have?

No we don't. The first quarter by far is our best quarter, always.

Okay. Just switching gears for a second, if we can talk about the Pazo business, as we start to see the stores come online, can you talk about what you think preliminarily the operating margin characteristics could be of that business and how will we sort of be able to evaluate the progress of that business throughout the year? What kind of information and will you be releasing to the investment community?

We're not going to be releasing a lot of information early on this because we want to watch it for a while and see what's going on.

We expect in year one, it will break-even. That is, it will cover all the quarterly costs and we won't lose anything. That's what we expect in year one as a minimum.

We expect it will fall behind the Chico's store economics model by five points, maybe. And after -- at the end of the first quarter, when we file our first Q that has the Pazo stores that's likely to be the first time we start talking about their sales.

Great, Charlie. When you say five points below Chico's economics model, it might be closer to a 15% operating business?

No we run at about a 33% operating margin at the store level now. That's going to run roughly like a 28 or so, we think.

Okay. But on a fully allocated, when you fully allocate headquarters, looks like --

It's going to be a lot more. It's going to run higher because it's going to get the free overhead.

See what I mean? That doesn't make sense to me, because like we're going to do the book keeping for it. We're going to do the story openings for it and a lot of that.

I'm not sure how you'd allocate it or why that's meaningful.

Because it's the only fairway to evaluate the profitability of that business. If they require headquarter services, they should be allocated as such.

Okay. We believe it's going to be a break-even on the whole. On the whole, it's going to be a break-even in year one. I don't know what else I can tell you.

Okay. That's very helpful. Then just a last question for Pat.

On the new concept, the intimate apparel active wear, sleep wear concept you're talking about, did you consider putting those items as product extension within the Chico's stores and what was it that sort of swayed you to opening a new concept for that?

And where do you think your customers currently shop for those product categories right now, before this concept is opened?

Well, we certainly did discuss the concept as it could exist within the Chico's, current Chico's stores.

I'm sure you heard Charlie's conversation on sales per square foot.

It's a question of real estate and what would have to give in order to do this and do it right.

As far as the customer is concerned, you know, we think that she needs a destination. She's probably shopping in department stores, I'm sure some of them are shopping in Victoria's Secret, but we don't feel any offering out there right now gives her a true destination, the way she feels when she comes in and shops our Chico's brand.

Great. Thanks.

Your next question is from Oz Tangun with Southwest Security.

Good morning, great quarter. Couple follow-up questions. In terms of -- Charlie, can you quantify, you mentioned at one time Pazo and corporate restructuring charges in SG&A.

If you can give us flavor as to the break down of the gross margins. You said initial markup as about a percent, but you mentioned higher markdown, quantify some of that? Can you give us some more color on that? Shrink and so on?

Very -- year over year, quarter over quarter, the markdown rate was up slightly.

I don't remember exactly but it was a slight increase in the markdown rate.

The DC did -- I don't know the exact percent, but we ran two warehouses the whole time, and it probably was -- it was probably a couple tenths of a point we lost there, I'll guess. Markdown rates would have been less than that.

It was almost a whole point gain for the IMU and that offset almost everything.

You had 150 base point improvement.

Right. We had a much better store shrink this year than we've had in the past. In freight gained, about three or four tenths of a point too. It was a big gain in freight.

Okay. Great. And did you give the guidance for next year in terms of gross margins?

Yeah, we said we're going to be down -- we're going to be down in the first quarter and then we're probably flat the last three when you consider Pazo. If you take Pazo out, it would be a flat to slightly up.

Down 10, 20 basis points?

More than that. It's going to be at least a point.

Okay. All right. Great. And Pat, in terms of, I know some of these questions have been asked in a different way, but intimate apparel and active wear, you've tested sea wear in the stores, you're saying the response is great.

Are you, before getting those six stores out or after you open the six stores, are you going to be testing some of the products in some of the Chico's stores and is it possibility that maybe going forward some of the stores will be bigger in size and you can maybe accommodate intimate apparel and active wear?

I think as we go forward and given our current real estate plans as far as the Chico's stores are concerned, there will be opportunities, possibly, for a larger than our average Chico's store today that we'd test or put some of this product in those stores.

I think that the possibility for existing space is real and also for additional space. I think we're considering all avenues.

Okay. And in terms of the availability of the March catalog product in the stores, we've been to several stores. They seem to be selling very well.

Were there any issues in terms of distribution, in terms of arrival to the stores? I know it's a huge catalog and there are a ton of products in the catalog. Was it as usual in terms of their arrival of products to the stores?

As far as our distribution center getting the product to the stores, absolutely, we did not see any glitch at all in that regard.

We did have a few products that were actually late in getting here and so they did not get out into the stores in advance of the drop, the way we would want to plan them.

And a couple of styles, we actually had a portion of the shipment received prior to the catalog dropping. So that merchandise is being shipped even now.

So we did have a couple of glitches there. But in terms of going through the DC and our actual distribution center, it was, it was very, very seamless.

And these small glitches, were they related to any vendor issues or --

No.

They're very normal.

No.

They happen almost every catalog, whether we like it or not.

Okay.

Looks like customer seems to be getting in line and putting their names on lists to get the products when they arrive in the stores. Doesn't look like you're missing sales, even if the product is not there. The reception seems to be great.

Yes, it is. Thank you.

Okay. Thank you very much.

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

Congratulations, guys. I have a couple of questions. Pat, the first one is for you. I wondered, with the lingerie concept, what you were going to do with the mirrors, because in Chico's, the mirrors are not in the dressing rooms.

Good question. Jennifer that's a great question. Believe it or not, we've asked it of ourselves many times.

We know we have to create a situation for her where she has a total comfort level, and in intimate apparel arenas, we have to come up with a plan and we're working on several ideas to make her feel totally comfortable and to provide her with the service that is so -- she's so familiar with at Chico's.

So it's a very good question, and one which we will definitely come up with a solution.

Okay. Yeah, because if you -- even if you put intimate apparel in the Chico's stores, you're going to have to come up with something because no woman that I know of is going to want to come out with her lingerie on.

Exactly, yes.

Then my second question on dressing rooms, Pat, as you're doing the remodels, are you finding that you are putting in more dressing rooms?

I just wondered what your average dressing room, if you have that on a per -- you know, how do you calculate that?

Because it seems like there's always a line of people and they're sometimes in the smaller stores.

I'm going to turn that over to Scott.

Jennifer, it's on a store by store basis. It seems like in some of our better market, doesn't matter how many dressing rooms we have. In KIRLIN commons we did $37,000 Saturday.

It was a sea of people in. No matter how many dressing rooms you have in that environment, unfortunately you'll have to wait.

In a small store in Oswego, we probably have six. We’d like to use as a benchmark, six in a store. Laguna, we have four because we only have 1,000 selling square feet. It is on a store by store basis.

Okay. Great. And then I wondered, Pat, if you had -- I'm sure you're constantly analyzing your sizing if you have enough zeroes.

That seems to be the constant complaint, there's not enough zeroes. I wondered how you felt about that.

We look at it all the time, Jennifer. It is a size that is requested a lot, but actually, the demographics prove otherwise. Zeroes run a little less than 10% of our overall business. So we have stores that are designated as size 0 stores. We keep a very good supply of size 0s, everything we carry in a zero for each store so we can easily locate it for our customers.

And actually, you know, in a lot of cases, we overbuy the size just to try to provide the service for that customer. But it is not, by far and away, it is our weakest size.

Okay. That's really helpful and good to know. I wondered if you -- how you felt with IMU opportunities going forward.

I mean, we -- everywhere we can, certainly, if our size situation, the bigger we get, we have a much stronger negotiating power with the vendors and so we're constantly looking at ways to better that IMU, and we are able to you know, negotiate a better price on fabric, on CMT.

Obviously, the more units they put through their factories, they -- the way we -- is the way we can leverage that. So we have a lot of opportunities still on the up side on IMU, both domestically and offshore.

My next question is on transportation costs.

Can you give us an update on -- with just, Scott, I don't know if you're the one, or Charlie, how your -- what you'd fore see over the course of the next year.

Certainly, oil prices are going to be going up here, or there's -- so we're going to see increases.

We were budgeting, though what, Scott, three or four tenths of a percent increase? About a half a point improvement just due to the new DC and its location.

Some of that might get offset by oil price increases, but we were expecting, on a flat oil pricing that we'd get a half point improvement on that. That's a big number. And we've seen so far, in -- for the products shipped in the fourth quarter we did see that improvement as I talked about.

We expect to see improvement, short-term. In the long run, it may be offset by higher oil prices. In the short run, we're going to see gains in that.

But you're still airing almost everything, right?

Yes.

Would there be opportunity by using BESL, or sounds like your business is running --

We prefer not to have markdowns.

They're more expensive than the 1% air costs us or something. I can see Pat smiling.

She would much rather avoid a markdown and bring something in late than pay the air. So that's sort of our strategy. We're not like other retailers. We'll pay the airfare to avoid the markdown.

You guys have done a great job. My last question, can you give us an update on your permanent -- actually, one more after that. Your permanent and temporary passport members.

The numbers we gave at year end are the same. I don't know what they are now. I don't track it every month, only once a quarter. I expect it's going to grow in the same way.

Okay.

It's only been a month since we put the numbers out.

We're right on forecast, Charlie.

I thought we would be.

Okay. The last question has to -- for you, Jim. I wondered if you had had more success -- I've noticed lately, you haven't been doing as many of the 50% off one items and I wondered if you have anything to say about your advertising. It seems as though you're not using that as frequently.

Jim that's you.

Let's say that we're more judicious with the use as every quarter goes on. That is, we are extending the 50 off in certain catalogs to certain segments of our file. So it's much more efficient. That is, we want the big spender to have the best offer.

For obvious reasons. And we've seen an improvement in the average sale per coupon related sale. And now, of course, you know, with virtually a mailer a month, we have to be more and more careful about how we extend our discounts. And it's so far, so good.

All right. Well, excellent job, and where are you shooting today?

We are in North Catpiva, north of San Bell. I'm on a widow's walk of a house and we've finished about -- Pat will be glad to know, we've finished about half of the May catalog's outfit.

So we're shooting TV too at the same time.

Great. Well, thanks a lot, and good luck.

Thank you.

Your next question is from Richard Baum with Credit Suisse First Boston.

Good morning, everybody, and congratulations.

Thanks, Rich.

Jennifer asked a question I was going to ask about the mirrors in the dressing room. But I've got a couple of other follow-ups, if I may.

First is, just on the intimate apparel concept, Pat, are you -- is the plan now to -- that sea wear will go out of the core concept and go into the intimate apparel concept?

It would be a logical conclusion that that type of product, we would want to consider for the new concept.

However, I want to be careful to say this is a test and it's only six stores and we're looking at the, you know, the first quarter next year.

So in the meantime, there's a tremendous interest in activewear. Sea wear continues, and so we want to make sure that the assortment in Chico's is as full as it can be and that we are targeting her needs within the confines of the way we're now structured.

So we will evolve the merchandise to include some active wear, some loungewear, sleepwear and intimate.

Would you consider selling, you know, the same products in both concepts?

I don't see that happening. I mean, I wouldn't rule it out, gint see that happening. I think that the new concept should have its own environment and its own particular product mix.

Just a few, couple follow-ups for Charlie. If you could clarify your answer to Oz about the gross margin.

Did I hear you correctly, you're planning it to be flat for the first quarter, down for the second through fourth quarters?

No, no. Down for the first quarter, and flat for the last three.

And the down first quarter will be by more than 100 basis points?

I don't know that exact answer. I'm expecting it to be at least 100 basis points. I don't know whether it's going to be more or not.

Okay.

We just don't think we can run that kind of a markdown rate as we ran in the first quarter last year. That's the lowest markdown rate that I've ever seen this company run.

I just don't think we can anniversary it. Maybe we will. I just don't think we can.

With regard to the SG&A, again, just understand, you're leveraging at 7, 7 is the mid point of your 5 to 9 range?

Yeah.

)) With he should not be modeling, necessarily, leverage on the SG&A line?

That's correct.

Unless you do more than 7?

That's correct.

Okay. On the February comp number, can you give us some sense of how the comps performed in regions that were not affected by weather, versus those that were?

I did that on my call. We were off here in Florida, we were off some districts were up teens, some were up 20s. In southern California, some were teens, some or 20s. The Arizona market was up mid 20s. Maryland, in that area was down mid 20s.

The Texas market was roughly single digit, because they lost two, two -- northern Texas lost two days to weather.

So they were high single digit. So we saw strong reaction in all the areas but the Mid-Atlantic and the northeast. Some of the northeast was strong as well.

We did, in -- which market? Connecticut. No, the jersey market was up. Some of the northeast was scattered, because most was down.

New Jersey, they travel no matter what's happening.

Yes.

Lastly, on the remodels and relos, is there any way to quantify what the increase in square footage will be from your remodels, relocations, and expansions?

Well, for a remodel, there's no change. For the relocation expansion if you look on our 10 Ks, it's averaged 850 square feet on the average store for the last three years.

I would guess it's going to be in the 850 range. We'd like to get more, but it's all about opportunity. For three straight years, it's run between 800 and 900. I suspect it will be in that range.

You're going to do a total of 50 group of stores?

But you're probably going to have 25 relos and expansions and 25 remodels, Richard.

The remodels don't change square footage.

I got it. Scott, you're a mind-reader as usual. Thank you, guys.

Okay.

Your next question is from Adrienne Tennant with Wedbush Morgan Securities.

Congratulations. I have a couple of house keeping questions.

As far as the operating margin target, do you -- what's your remodeling for the fiscal '03 time period and what do you think the target could get to?

Like I said, you shouldn't be budgeting any increase in the SG&A, because we're planning a five to nine comp which shouldn't leverage the SG&A, and planning a down first quarter and flat for the rest of the year. It's likely to be about the same.

In future years?

We'd like to think we can hold a 20% margin pipe don't know if we can but we'd like -- we for sure want to hold at least a 19.

Okay. And then, on the balance sheet, there's a jump in other assets. Can just explain that?

That is our deferred comp plan we launched this past year. That's a plan where management, they can put aside their salary and not pay taxes on it till later.

You also see that the deferred liability section jumped. That's how you account for the plans, put it into an asset and then a liability. That's the entire increase.

Great. Then as far as -- what was the advertising budget for fiscal, '02. Hand do you plan for '03.

That was 3.5% last year and 3.45% the year before. We’re shooting for 3.5 so far this year.

Thanks a lot.

Your next question is from Elaine Reese with Dreyfuss.

Hi, most of my questions have been answered. I had one other one.

That's on sourcing. Could you talk a little bit about your sourcing, what opportunity there was -- there is going forward, or is there any change in where you're sourcing from?

Is there the potential to buy more opportunistically as you go forward, giving what's happening worldwide.

The sourcing base is very strong, and we see a lot of additional opportunity in the far east.

We see additional opportunity in India, and as far as goods coming out of Turkey, that's probably pretty stable. I don't see a big increase in that part of the world.

All these things come very slowly, though, and I just want toed a all those sourcing opportunities, we move very slowly in this area. We don't ever take a chance on quality. So we move slowly. Yes, we see opportunity overall in this area, but I don't think you'll see it right away.

Nothing dramatic. Peru gives us a lot of opportunity.

We're increasing our vendor base there.

So, you know, it's just something that we are constantly working on.

Thank you.

We'll take one or question and then that's it.

Mr. Kleman, there are no question.

Thank everyone for a fourth quarter conference call and we'll see you next quarter. Bye.

Thank you for participating in Chico's fourth quarter and year-end earnings release conference call. This call will be available for replay beginning at 2p.m. Eastern time today through 11-59 p.m. Eastern on March 18, 200. The conference ID number is 8564733.

The number to dial in for the replay is 706-645-9291. Again, the conference number for the replay is 706-645-9291. Type in 8564733 to access the replay.

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