Chico's FAS Inc (CHS) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen and thank you for holding. Welcome to Chico's first quarter earnings release conference call. My name is Paul and I will be your conference facilitator today. At the request of Chico's this call is being recorded today, Thursday, May 29th, 2003. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time simply press star then the number 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. If anyone should need assistance at any time during the conference please press star zero and an operator will come back on line to assist you. I would now like to introduce your speaker today Mr. Charlie Kleman CFO of Chico's. You may proceed.

Thank you very much and thank you for attending our first quarter conference call. I'll now read the Safe Harbor Statement. Certain staples contained herein including without limitations statements involving the expectations of the company or future result or events may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements involve known or unknown risks including but not limited to the 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 forward-looking statements are encouraged to review the company's latest annual report on form 10-K its filings on form 10-Q which was filed last night for the first quarter, management's discussion and analysis in the company's latest report to stockholders the company's filings on form 8 K and other federal securities law filings for 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 experience or future changes make it clear that projected results expressed or implied in such statements will not be realized. I now turn it over to Scott Edmonds our president and COO. Scott.

Thank you Charlie and thanks for everyone attending our first quarter 2003 conference call. We have Marvin Gralnick joining in from the road our CEO and founder, Jim Frain, our Senior Vice President of Marketing, Pat Murphy, our Executive Vice President and Chief Merchandising Officer, and Mike Kincaid our President of Finance. The 22.1% operating margin we obtain in the quarter that witness the war in Iraq extreme weather patterns and a struggling economy is nothing short of an exceptional performance.

Chico's continues to lead the industry with its operating margin leaving little room for doubt that our business is incredibly strong and our future is indeed promising. Even after six consecutive years of double digit same store sales Chico's continues to post results clearly within our previously stated guidance of 5% to 9%. Our first quarter comp of 7.8% again leads the majority of the specialty retail apparel sector. During the first quarter, the Chico's brand opened 18 new stores, relocated four stores, expanded two stores, and remodeled seven stores. These new stores which represent the excellent locations we are getting from the landlords are opening very strong and we look forward to many years of strong cash flows from these stores.

As in the past, the relocated expanded and remodeled stores always see a marked improvement. We are on track to again deliver on our new store opening commitment of 60 to 65 new Chico's stores for fiscal 2003. As you all know we also opened ten Pazo (ph) test stores in March. As I stated in the press release it is too early to draw any conclusion on the Pazo test at this time. We are learning a lot from the Pazo customer and have been making certain changes to both the product assortment and the tort presentation. We believe these changes will give us the best chance to achieve a acceptable and financially rewarding customer response so it is only appropriate that we limit our Pazo comments on this call to the impact Pazo had on our overall operating margins and Charlie will discuss these.

Pat Murphy our chief merchandising officer and her team continued to do an outstanding job creating merchandise that is exciting to the Chico's customer. Our success depends on our ability as an organization to set ourselves apart from our competition through our product assortment. Newness is critical. Pat knows this and works tirelessly to develop new concepts and present new fabrics. Pat will share her thoughts on spring, summer and fall product with you in just a moment. Our marketing department under the leadership of Jim Frain continues to add a record number of names to our database. Jim will share with you are our Passport club membership numbers and our current marketing strategies. With our current market penetration somewhere around 10% we're still early in the growth cycle of the Chico's brand. So where do we take the Chico's brand from here? We previously disclosed our intent to test an intimate apparel line in 2004. We are currently planning to test this with six to ten stores, some stand alone and some combination stores with exist tings Chico's proud.

We will leverage the Chico's brand by including the name by Chico's in the yet to be determined name of this line. This will bring brand identity and credibility to the product assortment day one. Plus, we will have a database of well over 3.2 million names that already know and trust the Chico's brand. This will be instrumental in assisting and building a brand name during the launch of the test of this new product category. Our direct business which includes the web and catalog sales continues to grow. Begging the question, can we or should we be doing more through these sales channels. Our accessory business is something we rarely talk about yet we have a tremendous customer following to our accessory business.

In fiscal 2002 we did over $65 million dollars in accessory business which by the way is more than the entire company did the year we went public. Again, begging the question, where can we take our accessory business? Our balance sheet is extremely strong with over $120 million in cash and marketable security and zero debt. It is certainly noteworthy that the growth of the Chico's brand and the strong balance sheet were accomplished during the bear market of the last three years. If we were able to achieve this success during these tough economic times what will be it when the economy rebounds? Here we are on maize 29th, 2003, with the Chico's brand, $120 million in cash, zero debt, a new state of the art distribution center, all new software that can handle a multi-brand multi-channel billion dollar plus business a rebounding economy and last but certainly not least a management team that has methodically -- that has been methodically assembled over the last several years to take advantage of the exact position we find ourselves in today. Our second quarter is off to a solid start in May as we try to bump up to the top of our five to 9% guidance. And now to Pat Murphy our chief merchandising officer for some of her comments on the product. Pat.

Thank you, Scott. Good morning, everyone. For the first quarter, 2003, we managed to achieve what we feel to be very strong results, especially against an unbelievable first quarter in 2002. Reception to our spring summer merchandise has been very positive. Inventory levels are on plan. Good sell-through on regular priced merchandise has resulted in a well balanced assortment with fresh new receipts for the second quarter. At present, we see no weak spots in the inventory. As all classifications are pretty much selling to or slightly above plan.

Certain classifications have shown particular strength. Our linen, linen blends, sheer fabrics, denim, novelty jackets, shirting's and layering pieces, crop pants and printed bottoms, both skirts and pants, have all been very strong. Our travelers collection continues to be a key label. We have paid particular attention to the need for constant introduction of new bodies in this core fabric, and it has paid off with excellent reception from our customer. Sea-wear has proven to be a worthwhile test for customers response to soft, comfortable dressing she can relax in or sleep in. Several deliveries of this merchandise has confirmed the opportunities that exist for introducing a full assortment of intimate apparel and sleepwear to our target customer in 2004.

Bob by Chico's is another label we've tested in comfortable yet active inspired separate for Yoga lounge or weekend wear that can address our customers' total lifestyle sometime needs. We see this type of dressing continuing in the Chico's assortment as well as being part of the mix in our intimate concept next year. Our fall in May has given us great direction for our upcoming third and fourth quarters. In particular, we have excellent results on corduroy, swayed cloth and new bodies, sweaters and a new fabric we call essentials which can be worn dressed up or dressed down and we see it as a perfect woven complement to our travelers collection going forward for the third and fourth quarters. We also feel optimistic about the opportunity we have in the second quarter due to what we feel to be a better mix of product than what we offered in the second quarter of 2002.

We have paid particular attention to the color pallet this year versus the mistake of turning the inventory too dark too quickly for May of this year. Our May catalog merchandise has been extremely well received and we feel that June and July will prove to be equally effective due to a well edited mix. Also with the weather finally warming in the northern tier of the country, the customer pent up demand for wear now yet forward looking product. Hopefully this will result in stronger sell-through on new receipts and a opportunity for better margin results through the period. With the ongoing terror alerts in the world, and the SARS scare, our travel, like everyone else's has been restricted.

We have managed to keep our product development moving ahead through our strong relationships with our vendors and through the miracle of technology. We feel that even though the better way is working on site with our suppliers, by sending electronic images and the constant receipt of FedEx's into the building has kept our product development team full steam ahead. We are currently planning a trip to Safari in July. Every individual on our team are totally focused on our customer. We are committed to communicating with her through regular visits to our own stores, and to having our suppliers know her as well as possible. We are constantly searching out new sourcing opportunities that can bring us continued strong margin in the level of quality that our customers expect. We continue to feel optimistic about our customer, and we care about her reaction to the Chico's brand. And now I'll turn it over to Jim Jim Frain our senior vice president for marketing. Jim.

Thank you, Pat. The first quarter of this year has been a unique mix of challenges, opportunities, and accomplishments. As in last year's plan, we front-end loaded the marketing expense and effort into the first quarter. I'll have more details on that in a minute. The reasons for front-end loading our schedule are twofold. One, we had a very good March and April last year. We wanted to make sure we could surpass last year on comp sales and for new stores as well. We achieved both goals. Two, we wanted to make sure that we brought in enough new customers. Those that we bring in for March and April will be some of our best -- sorry, will be some of our best customers, in the third and fourth quarter. I'm happy to say we brought in more new customers than our target, which bodes well for later in the year.

Now, for some specifics. Our active database stands at over 3.2 million, with 716,000 Passport customers, and over 2.5 million preliminaries. We had over 195,000 signups in the first quarter and an average of 25,000 each month converted to full Passport. We are spot-on, on our forecasted targets for our database and loyalty program. Our Passport loyalty program including full Passport and preliminaries accounts for over 90% of our dollars customer spent this year. It's obvious, it's the backbone of our marketing strategy. The other components of our marketing program are designed to bring customers into the database, and in turn, provide names and addresses to mail to. We had over 236,000 inquiries in the first quarter this year, versus 155,000 last year. That's an increase of over 52%.

Most of those inquiries came from magazine ads and TV. They are either catalog requests or store location requests, and come in over the phone and on our Website. TV response specifically was up over last year, so our strategy of putting in a stronger buy in fewer weeks worked. Incidentally, I've had questions about our $50 coupon in our May catalog. This was planned several months in advance, as one of four different offers to four different segments of our file. The $50 offer was to the best of our passport file with a virtual guarantee of a high average transaction return which we received. We're quoting a range of 3.5% to 4% of sales spend on marketing for the year. We decided in February to increase our marketing spend in prospecting for our catalogs. The flat economic environment and war fears in February had us concerned not only for spring but for fall. Conversely, our key indicators for TV and magazine ad response and our prospecting efforts which were confirmed in the March catalog were very positive so we upped our forecasted spend for May, and are planning additional prospecting in September, October and November. By the way, our prospecting on average is profitable. Our entire prospecting program. So not only are our page counts increasing for specific months, but our circulation will be increasing as well.

As long as our positive results continue to come in from all segments of our mailings, we will continue this strategy. As most of you know, we produce our own creative for catalogs, magazine ads and TV. The TV for the spring that has worked so well has -- continues our strategy of selling the whole Chico's merchandise concept rather than a particular item at a particular price. The lead line is, it was a Chico's kind of day. Nice and easy, colorful, comfortable. And we remind the prospective customer, you'll find something new every day at Chico's. So we're presenting our target customer with two attractive propositions. A relaxed fun world that will make you look good and feel good, and it's a world that will be continually renewed. With our key marketing indicator showing record breaking response this spring, we're confident we'll continue to see a good response from both new customers and our most loyal Passport shoppers.

Thanks Jim. And I'll wrap it up here. As Scott said the first quarter saw same store sales increase within our previously stated guidance of 5% to 9% range and also within our own internal plan as we ended up with a 7.8% comp increase. The May comps which are currently in the high single digit range, are coming in at or above our plan and we are pleased with these results both from new store productivity and overall gross margins. Regarding the May comps, these are progressing nicely, without the impact of the June catalog which is only now beginning to land in homes and more likely only have a small impact on May. During the quarter, the average price point and average transaction almost flattened out as we saw a drop of just over 1%. The average units per transaction remained flattish for the quarter.

Our call center which handles web and catalog orders again had its best quarter in history. As it sold just over $5.7 million in sales for the quarter versus $3.6 million in the first quarter last year. The call center now runs at profit levels generally equal to an above average store both in excess of 33% net profit, thus it generates profits that are similar to an entire district of stores, and pays for all web updates and web maintenance at the same time. The first quarter of this year produced our second highest operating margins in our ten-year public history at 22.1%. As Jim indicated this required some additional marketing efforts that reduced our operating margins by about six tenths of a percent but allowed us to kept our store traffic strong in a very poor environment. This was a active environment and we are pleased with its success on the bottom line.

Our investment in Pazo during the first quarter resulted in a 7 tenth decrease in operating margins or approximately a one cent per share pretax cost. This is relatively minor when one realizes we are establishing a new brand from ground zero. We expect a similar impact in the second quarter with lessened impacts in other quarters. Let's move on to more specific discussions of the gross margin and SG&A. Last year's first quarter produced our highest gross margin since 1994 and we anticipated a 100 basis point drop this year as per our guidance on this last call. We came in slightly ahead of that with only an overall 70 base point drop of which ten basis points of that related to the effect of the lower margins in the Pazo brand. We are still guiding to flat year over year gross margins for the last three quarters which reflects slightly up Chico's margins offset by a small Pazo impact.

Regarding the increase in SG&A of 150 basis points, Jim and I have already spoken regarding the reasoning for the 60 basis point increase in marketing spending for the first quarter. The other big reason for the increase in SG&A as a percent is Pazo. We underestimated the cost of launching Pazo and the cost associated with building a new brand and thus increased our SG&A by 60 basis points. The balance of the SG&A increase is related to the extremely low cost structure in the first quarter of last year, caused by the knee jerk expense reductions associated with the aftermath of September 11th. We essentially had our leanest cost structure in that quarter and exceeded our expectations at the time, those knee jerk cost reductions were not in place last year after Q1.

Now, guidance for the second quarter SG&A remains the same for Chico's in that our leverage point is still roughly a 7% comp excluding the now known effect from Pazo. We do anticipate the same type of deleverage with the Pazo activities in the second quarter but we are not planning an increase in marketing expense which would also affect our SG&A as a percent of sales. We have a lessened SG&A effect from Pazo in the third and fourth quarters as we continue moving this new brand. Moving to the balance sheet we ended quarter with an inventory unplanned. At $59 per square foot it might even appear light compared to last year's $64 per square foot but the bulk of this decrease is in raw fabric which is purely related to the timing of purchases at quarter end. Our store and warehouse level inventories are right where we want them to be. Our cash and marketable securities position again reflect the strength and momentum of Chico's as it improved by over $22 million in the first quarter of this year versus last year's $16 million increase in the first quarter.

On the smaller note, our receivables increased just over $1 million due to increased tenant improvement moneys due from landlords on the new Pazo concept along with a couple of insurance settlements that have now been finalized. To wrap up Chico's first quarter earnings much 27 cents versus the 23 of last year continues our strong results with industry leading operating margins and healthy same store sales increases combined with strong cash flows quarter after quarter after quarter. Although Pazo offers more initial challenges than anticipated we are tweaking this brand so it can produce better results as we move further into FY '03. 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 your stock price. Now for questions. Paul.

At this time I would like to remind everyone that in order to ask a question please press star then the number 1 on your telephone key pad. If you are using a speaker phone please pick up your hand set before asking your question. One moment please for your first question. Your first question is from Kimberly Greenberger with Lehman Brothers.

Good morning. I have a quick question for Jim, follow up for Charlie. Jim, you indicated in your prepared remarks that the average transaction size for the customers getting that $50 certificate was high indeed. Can you comment whether it is above or below historic transaction levels that you've seen from those customers?

Well, since it was a test to a segment of our file, I can't comment on how it stood against last year, because we actually didn't do a test to that particular segment of the file. But I can tell you, for those customers, traditionally month in and month out, it was as high or a little bit higher, actually, than their average transaction, which we normally count on. That was approximately the top 20% of our file for Passport shoppers.

Okay, great. Charlie, a follow-up on the SG&A. In your 10-Q you indicated that the negative leverage on general administrative and store operating expenses was driven primarily by an increase in store operating expenses associated with increased compensation, occupancy and other costs. Can you just talk about how you contrast that with the press release this morning which indicated it was really Pazo cost, and marketing cost?

That was the overall cost increase because of new stores. There really is in the 10-Q we have to comment on what the overall raw dollars increased by. And that's mostly store compensation. New stores is what causes the overall dollars to arise but the actual increase in just the percents was market and Pazo and to a smaller degree all those costs.

Okay. And then --

It is really two parts to the paragraph in the 10-Q and you should read it as such.

Right, I did, okay, thanks. And then in terms of the first quarter comp you indicated also in the Q that it was 7.8 including the 27 stores that you expanded and it was 6.1 excluding those stores that were expanded. And you guys indicated that you don't believe the effect is material. Can you just comment on you know what level of differential between those two levels you would consider to be material?

I don't think it is the level of differential. When you have got a 1.7% difference on some much your stores we don't think that's material regardless of the level. I don't think the level is important.

Okay. And then just a clarification. Did you say that the increase in marketing expenses you experienced in the first quarter would not carry over into Q2?

Yes.

Great, thank you.

Your next question is from Lauri Brunner with RBC.

Thanks very much. Regarding the extra marketing cost it sounds like you maybe pumped up cost in the first quarter in anticipation of a difficult economy and so we're going back to more normalized levels in Q2. Is that because your outlook on the economy is a little better? And then if we do see the economy worsening for the second half will you take the opportunity to maybe increase marketing cost again in the second half?

Well, the first part of your question, in the second quarter, the planned and both of them were planned, that is goosing up the first quarter, and will be more mellow in the second quarter, I don't think we would have changed and will not change what we planned to do a couple of months ago in the second quarter which is tune it down. Regardless of what the economy's doing either way. We more look at our own results, and happily our own results don't mirror those of the economy.

Okay, great. How about the third and fourth?

The third and fourth that was part 2 of your question. As I indicated we will beef up our mailings in September October and November. The why of that is that we've gotten such a good response from prospecting, particularly from the new model that we developed over the past eight months, and so we expect to beef that up.

Right. But we do expect it to be -- that it will stay within that 3.5% to 4% range for the year.

Great, very good. And then Scott maybe you could comment on the team that is really -- that you've assembled to launch this intimate apparel concept, who is involved there. Could you give us some details on that please.

It is being spearheaded by Pat Murphy, Lauri. We hired Terry Campana (ph), she reports directly to Pat. Terry has only been with us, driving the development of the business, Terry has only been with us about 12 weeks so it's pretty early in the story and we're currently interviewing for other staff. But that's why we're saying that this test will happen sometime in '04 and that gives us quite a bit of time. They've narrowed down key vendors. They've gotten a lot accomplished in the first 12 weeks but the primary staff is Terry and Pat.

Okay, thank you very much.

Next question is from Lauren Levitan from S. G. Cowen.

Could you give us an update on the IT program? I know you've got a bunch of programs set to roll out later this year. Could you give us a sense of whether the earlier or later timing is looking to be the outcome and the outlook ton the cost situation there?

Right now we are still quite positive we are shooting for August 31st. That's our day of cutover if you will of all the systems. We are still shooting for that, we're on track for that and the $14 million or so hasn't changed at all so we're on track for this thing. It took us a while to get running but we're running real good in this area.

Do you still expect the same reduction in your leverage plan at Chico's will be accomplished going into next year?

I don't see any changes to that. That should happen some time next year.

Okay. And you didn't mention anything about your comfort level with current estimates for the second quarter. Can you comment on that?

We don't really comment on that.

Okay.

We let you guys do it and we do comment on that through press releases.

Okay. Pat you mentioned this new fabrication which was more of a fall analog to travelers. Can you get more specific whether it's in the stores already?

It's been tested in the stores and we've had excellent results from it. We feel very good about it. It can cross between -- we can do it in casual styling but it really answers work wear, you know, it's a fabric that women will feel comfortable wearing to the office. But we do see it as a third and fourth quarter fabric primarily, although I do see it selling in the beginning of the spring season. And you know, it's a woven fabric, it's a ray on blend and you know we work some time on developing it and the response has been excellent where we've tested it so we feel very, very good about it going into the third and fourth quarter.

Great, thank you. And then Jim you mentioned these incremental catalog and TV exposures later in the year. Or incremental prospecting. Can you talk about any shift like we saw in March where you dropped one big book as opposed to two smaller ones some are there any other along that line that we should be watching during the year?

There's not a big shift from last year to this year. But as I mentioned in September, October and November, we plan to do more prospecting in each month. We'll just add that on to our planned calendar.

Thank you.

Your next question is from John Zolidis with Buckingham Research.

We can't hear you John.

That question has been withdraw. Your next question is from Harry Ikenson First Albany Corporation.

Most of my questions have been answered but I would like to follow up on prospecting. You said that was very successful. Can you tell us about the response rate so we could frame that versus industry standards, I assume it's positive but quantify it a little bit. And secondly are there any other new plans that you haven't talked about yet that you can help us with as far as possibly to leverage the brand further, whether it's other new products that you didn't discuss on the call yet or any new marketing initiatives. Thanks.

First, on the prospecting rate, no, I don't want to quote you any exact rates much return. But as I indicated, nearly the entire prospecting program, at least for the past eight months or so, has been profitable. And that is taking out all of the cost for the mailings, and so on, and cost of goods of course and so forth. So when you have a prospecting program that's profitable, we feel pretty confident. That's why we're increasing our prospecting in the fall. And as far as new product introduction, I'd like to leave that to Pat. And any areas that we're doing in marketing that may be new, I don't think there's anything new that we haven't told you in previous calls, the next thing coming up is Amazon.

In regard to product could we talk about the product development a little bit particularly intimate apparel, how is that going particularly in the broader area at this point? Thank you.

Particularly in the apparel?

Intimate apparel. The key part would be obviously the Brower products, I was curious how that was going.

The good thing about the intimate apparel is that we have been in a very short time as Scott has said we have been working very diligently with key suppliers in the industry and a lot of them have already been here in Fort Myers. We have worked with them also at their location in the business of developing product specifically for Chico's. And we've had excellent results. As you know, the development on the core, the broad business of this is the longest lead time. So that's what we're concentrating on right now, and we feel we have a very good list of suppliers and key vendors that we feel will be on board for our initial launch when we decide to go.

Harry, with the momentum of the brand you can imagine how excite some of these key vendors are to be involved in Chico's in the launch of intimate. We've had just a tremendous response from the top foundation vendors around the world and we're real excited about their excitement.

Thank you.

Mr. John Zolidis is next up.

Hi, guys, can you hear me this time?

We can hear you.

Two quick questions. One I wanted to talk about the signups for the Passport clubs a little more in the first quarter. Can you give us a sense that you got an acceleration in Passport club signups to go with the increased marketing spend?

Yeah, we had -- we had both. And that is, on both ends, I quoted you some figures on inquiries that we were up 52%. And it was actually a bit better than that, because February of course we had depressed sales because of all those -- all those store days that we had closed. But in March, for instance, we had 97,000 inquiries alone in March, in response to advertising. Which is a record by far. It's more than 20% higher than our previous best month, which I think was the Oprah month from the watch being on the Oprah show. We had a terrific response in the first quarter and that was reflected also in signups. We're averaging over 65,000 signups a month to the Passport program. And obviously, we must have had some success of recently, if we're now up to 90% plus of our sales are coming from either Passport or preliminary, that is, members of the loyalty program.

Okay, that's great. Can you compare the signups per month in the first quarter to the signups per month in the fourth quarter?

I don't know that I can do that right this second.

I think it was about 60 a month in the fourth quarter.

Hold on.

I think it was 60. And that tends to be our biggest signup usually of the year. Usually our first quarter is the lowest signup of the year.

Eight to 10% somewhere around there?

If you look quarter over quarter. You have to be careful because the first quarter is always our lowest signup rate of the year and the fourth is apples our best. You're comparing our best to our worst.

And that's even though the fourth quarter in the past typically had greater -- I guess you're right. Even though the first quarter has greater sales volume than the fourth quarter?

There are not as great signups. These are loyal customers that shop in the first quarter. There are not as many signups generally.

We had greater signups just from the Oprah program.

The first quarter was the Oprah quarter.

November-December we had 40,000 signups alone from that one area. It kind of skewed it a little bit. If I remember from last year it was somewhere around 50,000 a month that were signed up in last year.

Other than that fourth quarter.

Okay, great, that's helpful. And then on the -- my second question was on the leverage point, I know you want to keep the leverage point around 7% comp. I guess I don't understand what you're reducing, given the increase in cost there Pazo and the increasing market.

That was 7% from Chico's. We will deleverage because of Pazo in the second quarter very similar to the first quarter. Excluding the Pazo cost. When we first gave that 7 we did not think that Pazo would not have that impact, we now know it will, at least in the second quarter.

Okay, great, all right, thanks a lot, guys.

Next question is from Adrienne Tenant from Wedbush (ph) Morgan.

On an aggregate basis on a percentage basis, the number of pages circulations in total circulation for fiscal '03, how much is that supposed to be up?

Jim Frain Okay, hold on a second. We will have merely double the aggregate pages, if you are referring to the number of pages times the circulation.

Yes, we'll do it that way. And from the analyst meeting the September, October, November increase in prospecting is above and beyond that, right?

The prospecting is above and beyond that. That is the circulation. But what will always do is, we always balance the two. So we don't go too overboard. So I expect that we will shave some pages from what I intended to do four or five months ago, but we will increase the circulation.

Okay. So on a page and circulation basis, still expecting to be up, you know, 20% to 25%?

On a page and circulation basis?

Yes.

No, it's higher than that. The aggregate.

I think at the analyst meeting we shared about a 40% increase, didn't you? It was a page times circulation amount.

No, higher than that Charlie. If you would like or I can give you more specific figures after the call if you like.

That would be great.

I'd have to check back, because we -- you know, we always do this every month. We add or delete a few pages, and we add and delete sometime circulation. In this case we're adding circulation.

But you're saying that on balance, you'll be approximately the same, even though you're increasing the prospecting for the back half?

Correct. If you take the aggregate of times circulation, yes.

Okay. And then as far as television, it looked like television continued throughout May. And what are the plans for the rest of the second quarter for television, and then into the back half, what months will you have television?

We'll have -- the months that we'll have TV for sure are September, October, November. And we have an optional week or two that we'll play around with, and we'll decide, well, closer, much closer to the mark of whether we'll run that extra week or two.

Okay. And those are all going to be national?

No. We do actually, a rather complex blend of regional, national, and local markets. I mean, we might have a blend of 22 different markets on some of the buys.

Okay. And then Charlie can you give us the number of transactions, year over year, quarter over quarter?

That I wouldn't know. I'd have to look that up. I don't know what the number -- I'm sure it's up significantly because for the quarter, the average -- the average transaction dropped about 1%. So 7.8% comp we must have let's say 8.8% increase in transaction. But the raw number I wouldn't know.

It's actually much higher than that.

Because of new stores. We have new stores as well. It is more like 30% or so. We have new stores that add transactions. On a comp basis it is probably up about 8.8.

On a comp basis, okay. And then on I guess the break-even comp in past calls, the thought was that by the end of fiscal '03 comp would come down to a 5% range.

That's what we're hoping for.

So still on plan?

I don't see any reason to believe otherwise.

Okay. And then finally, a question on Pazo. Have you disclosed the store economic model for Pazo yet?

No, we have not.

Okay. And we've been in the stores and one of the things that we've been finding is the bottoms are running a tad small on the small side. Is that something that has been an issue or feedback that you've gotten?

No, it's not.

Okay. That's interesting. All right. Okay, great, thanks so much.

Thank you.

Your next question is from Ozarslan Tangun with Southwest Securities.

Couple of questions. Jim are page counts and circulation going up for June and July versus what you shared with us in February?

June and July I believe were about the same as I presented earlier in the year.

Okay. And in May, I guess you had TV in the first week and then you have it in the last week?

No, no. We -- I believe we spilled a little bit into the second week but no, we wouldn't have it in the last week.

Okay, so you had TV in the first couple of weeks and then you're not going to have TV and you won't have TV in the second quarter except for May?

That's right.

And then you will start again late August?

It could be late August, it could be early September. We're waiting and seeing and going through some numbers.

Okay. Other than the May catalog, what did the customers receive in May? In terms of -- and you had the $50 gift certificate to the top 200,000. Did you send anything else? I think I remember a post card.

Yes.

Was there anything else in terms of coupons or anything else?

Yes, we had a separate mailer that went out to a segment of our Passport file.

That's what you're talking about that's the coupon mailer that you just mentioned.

Well, no. The $50 coupon, though, just so we don't get confused between the two, was carried along in the May mailer. And then we had a separate mailer that went out to a segment of our Passport shoppers.

Was it a $20 coupon or something?

That's correct.

And who did receive that?

A segment of the Passport file.

Okay. Was it similar to the $50 in a sense that did it have a pre-spending or a qualifier?

The $20 one did not have a qualifier on it, because it was to very good Passport shoppers. By the way, it was mirroring something we had done the previous year. Just to a bigger segment of the file as our whole file grows dramatically.

Okay. And I guess the $50 gift certificate, you did send last year to the same customer base, coupon for 50% off any one item, right?

Correct.

So -- but if you compare those two, what is -- is $50 gift certificate working better tan the previous one?

To tell you the truth I don't know yet because all the numbers aren't in for that catalog. But preliminary numbers, it looked like it was working really well.

You expected a higher response rate didn't you Jim?

For the 50 bucks? I'm hoping for one. I think it will pan out that way but we'll see.

But when did the coupon go out, wasn't it in the first part of May?

Yeah, it was carried along -- the $50 coupon if we're talking about that one, was carried along with the May catalog. That was dropped all at the same time.

And that was late April.

Uh-huh.

The last date, last date to use it is --

Is Saturday, I think it's -- well, hold on. Why guess?

I think it's Monday.

Hold on. The catalog coupons, any of the coupons in the catalog, the Promo ends 6- 2.

June 2nd.

I wanted to clarify something. You said that May should not benefit from the June catalog, did I hear that right?

Not much, no, not much.

Why is that?

Because it's just hitting now. The U.S. post office is not always timely, if you will. We thought it would hit earlier this week. It didn't hit really until yesterday so it's only going to get a couple days of May which ends on Saturday.

Okay. So excluding anything from the June catalog, the May comps are in the high single digit?

Yes.

Okay. And then in terms of your SG&A guidance, I guess does that mean that you're guiding us, you know, 60 basis points higher in the second quarter versus last year?

Yes. If we're running that 7% comp, yes.

Okay. And then any -- what about the third quarter and the fourth quarter?

There will be some sort of a lessening in fact. I don't know about the impact. We got to know what we're doing with Pazo as we tweak it.

We will expect some percentage of sales increase?

I don't know what the number is going to be yet.

Jim I think this question last been asked but can you give us a sense of the response rate trends over the last couple of months?

The response rate trends? Well, you know, I'm not going to quote you any exact numbers. But we -- we are really satisfied, and that is really satisfied means they're slightly above our forecast which are pretty aggressive. So we're really pleased with the past couple of months, the response returns.

Okay. And then finally, any plans for new Pazo stores either later this year or early next year?

Too early to tell, Oz.

Thank you very much.

Thank you Oz.

Your next question is from Ann Marie Peterson with Thomas Weisel Partners.

This is a question for Pat, in terms of the average rate of retail price, how do you look at opportunity through Q2 through Q4, do you think there's an opportunity to increase that and if so how? And then the next question for Scott on Pazo, what sort of marketing efforts or market did you do surrounding the opening, did you do direct mailing, et cetera, thanks.

The average retail by nature for the season for the third and fourth quarter the average units will increase, and you know, we look at average unit retail on a daily basis. So even with not all the product being on order yet, we see a significant opportunities in certain categories like, you know, novelty jackets cetera and some of our velvet, some of our holiday merchandise, sweaters, outer wear, et cetera. So by the nature of the season our average unit retail will get larger.

Year over year or you're talking seasonally?

It's too early to tell because we don't have all the product mix in place on order.

This is through product mix not through price point?

On obviously to product mix and the reaction to the customer to what we initially put out there and of course what we have on order coming in.

Great, thanks.

When you factor everything in it depends on where it's going to go.

Anne-Marie, I'm going to bounce the marketing question to Mr. Frain.

We had a fairly modest effort for opening of Pazo. Maybe for obvious reasons we had a zero database when we started. So we didn't want to spend money on marketing until we learned more about the customer. And we are building up the club Pazo program. They're designing very good job of signups. And we're already analyzing the nature of the response from the club Pazo program. That is, the average spend and what they're buying and how frequently they're buying. So we're learning. And we expect that we'll hold back on any major marketing effort until we learn more. I think that's the prudent thing to do.

And then Scott I know you don't want to comment specifically on Pazo but if you could help us understand directionally the tweaking that you're making or that you're doing in terms of merchandising store operations marketing if you could just rank in order of importance the categories where you're making some things that would be helpful.

Anne Marie that's the exact kind of detail we don't want to get into. We are learning an awful lot from the first eight weeks of being open fully as a ten-store chain. And you know, everything from the category she's responding to the sizing that she's responding to, some of the fixtures, the whole presentation. We're not going to drill it down much further than that.

That's fair. Thanks.

Thank you.

Your next question is from Margaret Whitfield from Breen Murray.

I had a couple of questions first for Jim. I think you mentioned in your prepared remarks in light of the $50 gift certificate and the $20 gift certificate that there would be two other segments addressed and I wondered what you're planning in the way of additional gift certificates this year. And also, for Scott, I wondered you made some interesting remarks about the opportunities and accessories and for the direct business what the time frame might be for that analysis. Also, Pat, could you comment on the suppliers that you're working with in intimate apparel and what the mix might be between intimate and active wear as in spa wear, sea-wear for these new prototype stores, and for Charlie I'm wondering what that impact was for that $20 certificate I got last week, how the weekly trends run thus far in May and if you enjoyed some nice traffic trends over that rainy weekend last weekend?

Jim do you remember the question?

I think I remembered the marketing part of the question. Yes, we had, Margaret, to sum up, we had four different offers that we were testing. By the way, that's not too unusual. We might test two or three or four or five different kinds of offers to different segments of our file. Nearly every month we have --

Cataloging.

Yeah, yeah, because of course now that we have such a big database, we can't just simply mail out the same offer to all segments of our file. Because we find that they respond differently, different segments, depending on how much they spend each visit, and how frequently they visit, and so on. The $50 coupon, I think I indicated before, is working out pretty well. And we'll see whether it beats out the 50% off any single item with a qualifier. Both of them had qualifiers by the way.

Marketing, we always see trends, whenever we drop a coupon or a post card, we -- like to our Passport customers, we always see improvement. So I'm not going to comment on what the weekly trends were yet for May because we've still got half a week left to go but we saw improvement when that thing started hitting there's no question.

Will there be they mailings of that nature or coupons in June?

I think I've told you already that we're pretty much sticking in June and July and August to what we had mapped out earlier in the year. We don't -- we don't have any additions to what is mapped out.

Okay.

Hi, Margaret. The only thing I can tell you as far as intimates is we have met with a lot of people for the industry and I can tell you overwhelmingly the response is excellent. We are in the process of determining our needs and so forth and so we feel very, very, very good about it. And we are also including some vendors that we are currently working with in apparel that we feel can contribute to this initiative. So -- but as far as vendors outside of the current people that we're working with from foundations and sleepwear, just the reaction has been very strong. And I don't really want to comment who they are individually, because we're just sort of getting started and firming up our plans.

And the split between intimates and active wear?

I don't think we can really determine exactly what it will be. We are working with models right now, Terry is working with planning and allocation, we are working on plans, we're working on units per square foot and all of it is going to be massaged and worked on again until we feel confidence that this is the mix we're going to go with. But right now I really wouldn't want to give you any, you know, specifics because I really don't know what they are exactly.

Okay. And the opportunities for Scott in accessories in the direct business?

Well, the story line there the message we're trying to send to the investment community and to everybody is how early it is in the growth of the Chico's brand. We've just established the brand over the last 24 to 48 months and we've only begun. You know, we look at our accessory business, we look at our direct business and we're down here every day trying to figure out how to grow the business. We're committed to growth. We're testing Pazo, we're test intimates, we're testing accessories and we're going to grow the business through these different vehicles. And I think sometimes, investment community has a tendency to get too focused on certain areas of the business, and they're not looking across the entire landscape.

So any action perhaps next year on accessories or is it too soon to say?

It's too soon to say.

Okay, thank you.

Thank you.

Your next question is from Liz Pierce with sanders Morris Harries.(ph).

Sorry for the background noise. I'm sitting in an airport. I don't know if Jim or Charlie or who wants to answer this but I had a chance to look at the previous or most recent slide presentation on the Internet and noticed that the mix on permanent Passport customers had dropped while the temporary one had gone up and just curious about your thoughts about that as well as the transactions shifting a little bit.

That's the way it is in the you first quarter of every year. Like if we compare this to the first quarter of last year it's very similar. The first quarter is not -- it's not the same as did other three quarters. So you will not see the same mix. But by the end of the year, I expect you'll see the same mix.

Okay. Still very high but I did notice a shift so that's helpful, thanks, Charlie. And then to answer, you said about your break-even comp next year still remains 5. Is the following year still 3?

That is a goal we set yes.

That is excluding Pazo, correct?

No next year that should include Pazo. I don't know about the year after. That's way too far out.

Okay, great. And this just a silly question probably but the whole lawsuit in California is that just a non-issue?

Well, I mean, litigation is a part and parcel of doing business these days and I think everybody knows that but we put out a press release you know denying the allegations and we intend to defend them.

Okay. But there is no rule that they have to wear the clothes, correct?

No, that is not our policy.

Not your policy?

Correct.

Notices of my other questions have been answers. Thank you.

We'll take one or two more and then we'll have to be signing off here.

Next question is from Dorothy Lakner from CIBC World Markets.

You mentioned earlier that you thought in the second quarter there was a better mix of product versus the second quarter last year as well as a better color pallet. I was wondering if you could provide a greater detail about what makes it better, the mix greater than it was a year ago. And then just on the intimate apparel concept, assuming that -- just remind us when the timing of the store openings for that concept, I'm assuming it's late 2004. Just remind us of that, thank you.

Yes. Well, as far as second quarter is concerned, you know last year, the first quarter was so strong that one of the situations was that we were bringing in goods that had been slated for June, we actually brought them in May. So some of the mix got very dark very quickly last year. So just by the nature of that alone, we made a conscious effort, we actually developed a color palette for the second quarter. We did not want to make the same mistake this year. We concentrated on the fabric mix, we concentrated on clothing and a significant better color palette this year. If you look at the May catalog this year and if you look ahead to June and July, of course you can't see July yet but we feel that the upside in and the opportunity here is just terrific, only because we didn't do a good job last year.

Would you say that there's more of a variety of fabrics offered right now, than there was a year ago?

More of a variety? I think that there's some interesting new fabrics out there this year. There's some wonderful linen blends that are out there and new combinations on fabrics, some sheer fabrics that we didn't have a year ago and the customer is responding very, very well but can I not say honestly that I think there's more. I think the mix is a little bit different this year. And then some of our true fabrics like travelers is still very good. Our linen goods are still performing wonderfully well and tee shirts and some of the things you can expect to find at Chico's are very much in place.

Okay. Great, thank you.

The second part of your question on the intimates timing, I don't know if we've really set an exact timing. Our schedule is going to be as we feel confident in the development of the product and the product mix. And we know it's going to be 2004.

Okay. Thank you.

I wanted to mention something. This is Jim again. There were a couple of questions on the gross pages, that is, the number of pages average for the catalogs times the circulation. This year, versus last year, it's actually much higher. I just found my sheet on the comparison between the two years. We had approximately 600 million pages that went out last year. And this year, it will be somewhere around 1.3 billion pages. So it's more --

That sounds like a goal for sales some day.

So it's more than -- so the paper people are happy.

Okay. One or two more questions then we'll go.

Next question is with Christina DeMarval with Sidoti.

The gross page count would be doubled and that would be implied with the numbers you just gave out?

For the entire year I was quoting. I'm quoting 2003 versus 2002.

Okay. I guess it's more for Scott, with respect to the intimate concept, just wondering if there are any thoughts for the retail concept particularly for the stand alone stores in location size its or is it too easy so say,

This is for the Chico's customer so we're going do right where our top Chico's locations are.

But I presume the stand alone stores will be a little bit smaller?

We're working with Pat and Terry on the product assortment and that will determine the exact assortment.

I guess for Charlie I don't know if you mentioned this you up front but with respect to the gross marriage which looks very nice, and the mark down rates in the first quarter, I think you suggested they weren't going to persist for the rest of the year. Just wondering if you could decompose how the gross marriage actually did in the first quarter in terms of mark down versus IMU?

We had a relatively flat IMU for the year and higher mark down rate but it was very comparable to the year before that because last year was an exceptional year. We went into it with the extremely low inventory, we went into it with an extremely low inventory so we had an extremely low mark down rate which was very unusual last year and we had a much higher sell-through which happened after September 11th. So we were up against a quarter we just could not match. So the mark-down rate was very much -- it was a little built lower than just two years ago. But not much. Okay?

Okay.

That answers that I think.

Okay. And then in terms of I guess you're not going to break out how this balances out going forward or -- in terms of the IMU?

We expect some small gains that will likely be offset by the small losses of Pazo.

Okay.

So we expect some IMU gains. I can't tell you whether the mark down rate will be higher or lower. We would like to see the opportunity for mark down higher in Q2. I see Pat shake her head yes.

I know you don't want to get into specifics and somebody said the pants are too small. My observation is you could go a little smaller and shorter. It may be narrower for tall people.

Duly noted. Thank you Chris.

That's it thanks.

We'll take one more here. Maybe there are no more.

Mr. Kleman, we have three questions left in cue. Would you like to proceed with these three?

We will take just these three. No more queue.

Your next question is from Mary Beth Holland with Goldman Smith.

For those who someone who is five foot eight don't make those too short in Pazo. Average transactions, I know you spent a lot of time you know talking and listening to your baby boomer customer. And it seems as if the baby boomers purse strings are still being pulled by her children. It looks like these handouts are continuing. Are you starting to notice that she's scrutinizing her purchases for herself?

Gosh, Mary Beth, I can honestly say I have not. You know, the stores that we're in and the customers that we get to talk to, if she's excited about the product, she's there. I mean, she's interested in buying it for herself. So I think that's our goal is to keep her excited and keep her interested. I have not really seen it diminishing in her desire to spend for her cell. I would have to research that but I don't see it happening.

Okay, great. And my second question is to Charlie. You know, with the business being so solid for so many years, and the current tax environment that we're in is there any thoughts in the near term that you might initiate a dividend payout?

We have not talked about that yet at the board level but certainly as they reduce the tax rates or dividends it becomes more enticing but we're very early on at that, we have got a lot of cash but it really isn't that much when we've got a lot of things we're looking at. I would say no at this point but if George keeps going and reducing it there is more of a likelihood I would say.

Thank you.

Your next question is from Kent Green with Boston American Asset.

Great quarter, Scott and crew. My question pertains to accessories. If in fact -- is that classification big enough and can you augment it with some other outside purchases to they about a separate store sometime or would you create a store within a store or how would you accelerate you know accentuate that more than you are actually doing?

I think that the reaction to our accessories that is been so strong that it's something that we do talk about. I mean, could it be a separate category and a separate brand unto itself, I think that's certainly within the realm of possibility. I think that we with other classifications as well would consider any extension and increase to this brand. And as we're getting the reception, those are the kinds of things we're looking at. But there are no absolute plans to do it right now.

And just on a time frame, what is if, after Pazo, is the sea line the next one that you would look very, very closely at or you know, possible separate line or whatever, store within a store or even a separate store? It is --

Intimate line, that's part of the intimate line. That's in the intimate stores.

But the intimate I'm talking about, is that big enough classification?

Absolutely.

That's a huge classification.

So that would be after Pazo, that would be obviously in the queue as No. 2?

Yeah, that we've announced we're going to do in FY '04.

Very good thank you.

Okay last question.

Your last question is a follow-up response from Lauri Brunner with RBC.

Pat two parts first, how are the vintage items, how did they perform in the first quarter and is that something we'll continue to see in the mix in the rest of the year and sweaters a couple of times, will we see a bigger sweater presentation as a percentage of the mix second half this year versus last? Thanks.

Lauri the vintage we did as a brand within a brand. Really as we find things and as we're able to develop these special products, the one we have out in the store now is an embroidery we did in India is hand done, butte beautifully done, the reaction is excellent, very, very strong sell-through. Yes, as these items are available to us and as we can develop them they will be as part of the mix. I see it as fringe and frosting, nothing to develop in a very major way. As far as sweaters we learned so much last year on sweaters the reactions, the sell-through was great in Northern stores that it is a continued and upside for the business opportunity this year in third and fourth quarter.

Great, thanks very much.

Okay, thank you everyone for attending our -- the first quarter conference call and we'll see you for the second quarter. Thank you.

Thank you ladies and gentlemen for your participation. You may now disconnect at any time.