Chico's FAS Inc (CHS) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for holding. Welcome to Chico's FAS Inc. second-quarter earnings release conference call. My name is Paul and I will be facilitating your conference today. At the request of Chico's, this call is being recorded today, August 27, 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. (OPERATOR INSTRUCTIONS) I would now like to the conference over to Mr. James Palczynski, principal, of Integrated Corporate Relations. Sir, you may begin.

Good afternoon, everybody, and thanks for joining us. Before we begin I would just like to remind you of the company's safe harbor language; I am sure you are all familiar with it. Certain statements contained in this call, including without limitation statements addressing the beliefs, plans, objectives, estimates, or expectations of the company for future results 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 and unknown risks, including, but not limited to, the general economic and business conditions, the 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, management's discussion and analysis of the company's latest annual report to stockholders, the company's filings on Form 8-K, and other federal securities law filings for a description of the other important factors that may affect the company's business, results of operations, and financial conditions.

The company does not undertake to publicly update or revise its forward-looking statements, even if the experience or future changes make it clear that projected results expressed or implied in such statements will not be realized. With that out of the way, I would like to turn the call over to Scott Edmonds, President and Chief Operating Officer of (technical difficulty) FAS Inc.

Thanks, James, and thanks to everyone for attending our second-quarter fiscal 2003 conference call. With me on the call today are Marvin and Helene Gralnick, our founders; Charlie Kleman, our Chief Financial Officer; Jim Frain, our Senior Vice President of Marketing; Pat Murphy, our Executive Vice President and Chief Merchandising Officer; and Mike Kincaid, our Vice President of Finance.

What an unbelievable quarter. There is no doubt that the Chico's brand is the hottest specialty apparel brand in America today. Why? Its outstanding merchandise, on-target marketing, and most amazing personal service. During the second quarter we saw record financial results for sales and profitability and, more importantly, through the pending acquisition of The White House Inc. we have diversified our operations and reinforced our ability to grow and deliver shareholder value over the long term.

First I would like to discuss the operational highlights for the quarter. Our sales were driven by a combination of new stores, an acceleration in comps to 14.6 percent, and excellent results from our catalog and Internet division. We opened nine new stores during the second quarter; and continue to be on track to fulfill our target of 70 to 75 new stores for the fiscal year. Our focus on improving transitional assortments was very successful. And as you can see from our comps, Pat Murphy will give you some highlights in a few moments.

Our operating margin of 22.6 percent is the highest we've ever reported for the second quarter, and for the first time has exceeded our first quarter. Net income was up nearly 50 percent; and our EPS of 28 cents was greatly improved versus the year-ago level of 19 cents; and better than the most recent consensus estimate of 26 cents.

With respect to marketing, while Jim Frain will give you the details, we are pleased to continue to ad names at a strong pace to our Passport customer database. Not only has this directly benefited us by enabling solid growth in our direct (technical difficulty) Internet revenue stream, it keeps driving customer traffic into our stores.

We are pleased and proud to continue to exceed our short-term operating goals and to have momentum in our business as we enter the fall retailing season. With that said, we are equally excited about closing on our acquisition of The White House Inc. I know that many of you participated in the conference call we gave at the beginning of August to discuss the deal, but I would just like to review some of the key points of the transaction. We have now cleared the Hart-Scott-Rodino premerger act, and we are moving toward a closing sometime in mid-September.

Although we are confident that there are many potential synergies between our two organizations, we have been careful not to share too much proprietary information. Once we close on the transaction, we will move quickly to capitalize upon many of the obvious synergies, such as distribution center, marketing, real estate, construction, human resources, and benefits. We do intend to keep their merchandise team totally separate from Chico's. However, we do believe we can have a positive impact on their gross margin through some shared sourcing knowledge.

The White House deal is highly important for our company strategically in a number of ways. First, it alleviates the pressure to incubate Pazo. As you know, we have made certain changes to both the Pazo product assortment and the store presentation, and have seen an improvement in our business since making these changes. With that being said, we are valuating the Pazo situation daily. As we quickly move toward closing on The White House transaction, we will need to decide where we went to focus our management talent. In the end, if we decide not to go forward with the Pazo concept, it will not have detrimental effects on our growth prospects for either the short or long term. And we do not anticipate any material impact to the P&L if we were to discontinue the Pazo test.

Secondly, the White House deal adds a second proven growth vehicle that will allow us to proceed slowly and purposefully with our test of intimate apparel, which we believe is an excellent opportunity for Chico's. We will be able to do this at a pace and at a level expense that presents a minimum of capital risk.

Finally, it removes the pressure on the Chico's concept to be our primary growth vehicle. This will allow us to be more selective with real estate in both concepts, so that we are opening locations with maximum potential for sales per square foot and ability to generate strong comps. We think that this will ultimately enable us to achieve our earnings growth targets with a modest level of square footage growth.

Now I would like to turn it over to Pat Murphy, our Executive Vice President and Chief Merchandising Officer. Pat.

Thank you, Scott. Good afternoon, everyone. I would like to begin by saying that we are very excited to welcome The White House Black Market team into our family. They are very talented merchants, and we have tremendous admiration for everything they've achieved thus far.

As you might guess, from the strong comparable store sales that we have seen over the course of the last few months, our assortment at Chico's has performed really well. I am also pleased to report that inventory levels, which were at the high end the close of the first quarter, are now more in the mid range of our plans and right where we would like them to be.

In our hindsight review meetings of the second quarter of 2002, we saw obvious opportunities for the second quarter for this year. Our first goal was to develop a separate color palette for late May, June, and July receipts. Last year we got too dark too early, and we lost some momentum coming out of the strong first quarter.

We also concentrated this year only on wear-now clothes that would take the customer into early fall. Overall, the strategy worked very well. The colors were up beat, and the clothes were lightweight, with short-sleeved tops and skirts performing better than planned.

We also concentrated on our travelers collection in black, providing new silhouettes, so that our customer could update her wardrobe with fun new pieces. This resulted in strong sales for all three months. Novelty and color in travelers also gained ground, giving us stronger margins for the period.

Other upside to the quarter were jewelry and scarves, jeans, (technical difficulty) novelty jackets, lightweight sweaters, and early strong suede jacket selling in July. (technical difficulty) merchandise turned very well; and overall markdowns were less than last year for the same quarter by almost 5 percentage points. Sales on regular price merchandise were surprisingly strong, even in the month of July. Margins were up in June and up strongly in July.

We are thrilled with the customers' reaction to already delivered fall product in our stores, and we feel confident about third-quarter sales. Accessories continue to be particularly strong, and we see that business strengthening in impact to the total as we move towards the fourth quarter. The September catalog looks very exciting, and it just might be our best effort ever. This piece is already beginning to hit home this week, along with fresh new product for the (technical difficulty).

Chico's has a dedicated team that is tireless in the quest for new and exciting products that will delight the Chico's customer. Just last week we had teams in India and in China simultaneously developing innovative and unique merchandise with our vendor partners abroad.

We continue to make progress on developing a strong assortment of intimate apparel. Cary Campana (ph), who is heading up development and who joined us in March, has all of our full support, and we are very pleased with the initial stages. We continue to believe that we will be in a position to begin test marketing of this concept, which will be cobranded with the Chico's name in the second half of next year. We are confident that this will be a great extension of the Chico's brand, and we believe that through the use of the Passport database we will be able to drive significant traffic to the stores as soon as they open.

In summation, for Chico's we feel very optimistic about the second half of 2003, and we have already set our sights on 2004. And now I will turn the call over to Jim Frain, our Senior Vice President of Marketing.

Thank you very much, Pat. As most of you know, we practice multichannel markets. Our direct-mail, TV, magazine and web efforts are closely coordinated to our merchandising sites (ph). With our product offering stronger than last year, and actually stronger than ever, particularly in new looks and novelties, we had one of our best second quarters ever; and key marketing indicators reflect that. And now a few of those indicators.

Our full Passport members increased by 52 percent over last year's second quarter. Our sales attached to catalog coupons was an almost unbelievable 48 percent of sales this year, versus 29 percent last year. It is hard to beat a combination of great new merchandise presented in unique catalogs delivered to the right customer. It is also a confirmation of our emphasis in merchandising and marketing on full-margin new merchandise versus a greater emphasis on sale last year.

Our inquiries are up 33 percent over last year's second quarter. That is a nice increase, considering we have loaded most of the cost into the first quarter relative to the prior year. The earlier, more aggressive start with TV this year has given us (technical difficulty) and earlier customers added to our database and loyalty programs. This has given us us database growth that will help us achieve our sales forecast, combined with prospecting, we will (technical difficulty) increases in our mailings for the third and fourth quarters. September, October, and November combined will be over 80 percent higher in circulation this year than last.

As Charlie mentioned, our direct sales -- or Will mentioned, our direct sales are also right on forecast. We are 49 percent up in demand sales for the second quarter over last year. Our improvements to our website have created a shift to almost 50-50 web to phone sales, from 47 to 52 percent, respectively, last year. This is not only more profitable, it also allows us to present many more products to our customer. Remember, over 60 percent of our web shoppers are already Passport store shoppers.

We are also very excited to begin working with our counterparts at White House Black Market. We've already begun working with White House on their first-ever holiday catalog. We'll have more news on that as it develops. The White House Black Market has already made a great start with their database, so we will have fertile ground to harvest.

When we say that you will find something new every day in our Chico's promotions, we are of course talking about product. But Chico's is also coming up with new initiatives and new techniques to insure our growth in sales and profit. With out database growth on target and response to promotions at record levels, we're confident of our growth for the foreseeable future. Charlie?

Thanks, Jim. As Scott indicated, we had a record-breaking second quarter, with our highest same-store sales results of 14.6 percent since the third quarter of last year. The second quarter was the 20th quarter of the last 22 that produced a double-digit gain; and was also the 20th of the last 22 that produced an earnings gain in excess of 40 percent. So far in August, our same-store sales are still running in the double-digit area, in spite of the blackout that shuttered approximately 10 percent of the chain for a day or so.

I might add that we are running healthy gross margins, ahead of last year, as our fall selling season progresses along very nicely. The September catalog lands in homes this week. The TV ads are back for the fall season; and our fall product has the most diversity that we've seen in a long time.

Now turning to price points, after six consecutive quarters of flat to down price points, the second quarter saw a modest rise of 2.7 percent in the average price point, from roughly $39 to roughly $40. The units per transaction or UPT has remained stable over this time, varying from 2.3 to 2.5 units; and this quarter was no exception, as the average transaction weighed in at about $95, a 1.5 percent increase over last year.

New stores are opening up on time and opening up in the sales ranges a little ahead of our model. In our management slide show, you can find it; www.Chicos.com. There's a new one out there as of today. Last year's front-line stores are projected to finish this year at an average sales volume near 1.6 million, or just north of $775 per net selling square foot; while last year's stores appear to be on track to do the same types of numbers next year, their first full year.

Last year's stores averaged about 2000 net selling square feet, while this year's stores are averaging just north of 2100 net selling square feet. And the chain average for front-line stores is about 1870 net selling square feet. So far this year, we have (technical difficulty) ten stores by an average square footage of about 1000 square feet each; and all of these stores have responded nicely to the additional square footage.

Turning to the quarterly results, our gross profitability improved markedly, as it jumped from a 60.3 percent gross margin last year to 62.0 percent of this year. That gross margin is net of roughly a 2/10 percent offset associated with the lower Pazo test store margins. The quarterly increase in gross margin, which exceeded our expectations, was largely caused by an improved initial markup or IMU, a new growth throughout the quarter, and a lower markdown rate during the transitional summer selling period.

We realized last year that we had not fully taken advantage of last year's summer transitional period, and we focused on it this year to assure we had more sell-down merchandise. This combined with our continuing focus on improving the IMU, and the start of seeing some efficiencies associated with our new 200,000 square foot distribution center just north of Atlanta, resulted in one of our best second-quarter margins in our history. We have never before seen an earnings per share level in the second quarter that exceeded the first quarter until now. And the gross margin line helped the most in this accomplishment this quarter.

Our SG&A came in right about where we anticipated, as the Chico's portion of the SG&A leveraged year-over-year by about 7/10 of a percent, offset by the impact of Pazo, to come in flat on a consolidated basis at 39.4 percent. Our marketing expense expenditures were essentially flat year-over-year; while our investments in long-term projects are slowing as we gear to launch a software initiative this weekend.

Speaking of that, we are on track for this launch after two years of planning, coding, and training all 450 headquarters staff members. We are excited to get this project behind us and look forward to the efficiencies that can come with it in the future years.

All the items I described above resulted in an astonishing 22.6 percent operating margin for the second quarter, which also generated in excess of $22 million of free cash flow for the quarter, to add to the $19 million of free cash flow from the first quarter. This strong free cash flow, along with our in-depth knowledge of the strength of The White House management team, allowed us to put our excess cash to a much better use as we acquired this young, exciting chain, which is remarkably like we were in 1996, 1997.

The synergies and culture fit here are stunning as well, as we work on the planning required to merge some of these operations. At this point, we do not have any guidance for the dollar amount for the specific synergies associated with this acquisition, although we are confident it will be immediately accretive, and will become increasingly accretive as we move forward in the next year and thereafter. We expect that by the next conference call next quarter, we should be able to fill you in better on forward-looking store openings, net square footage at The White House Black Market stores, and any integration-associated expenses we may incur. We expect to close on this transaction in September, as Scott said. Thus, we will be combining our P&L's at that point.

Beyond that, our guidance for the third and fourth quarters are for mid to high single digit comps, after we close out the August double-digits. Gross margins for the Chico's concept should be up year-over-year, although not as significantly as the second quarter. The combined Chico's, White House, and Pazo entity gross margins should be flat to slightly up in the third and fourth quarter. At a mid to high single digit comp, we are anticipating the consolidated SG&A could deleverage modestly as we absorb the initially higher SG&A rate of The White House, and we start depreciating the fixed cost of the massive software launch this Labor Day weekend. We expect this deleverage of SG&A at mid to high single digit comps will continue into the fourth quarter, and start to level out thereafter as we leverage this software and start realizing the benefits of improving The White House SG&A activity.

Lastly, we expect our tax rate to be largely unaffected by The White House acquisition and to remain at roughly 38 percent. To wrap up, our balance sheet remains strong, with inventories right in the planned 60 to $68 per square foot range. We expect to have in excess of $50 million of cash after the acquisition, with a buildup of cash that will begin immediately following the acquisition. And we are extremely excited to add the depth of management and the White House brand to our Chico's management team.

Both entities will benefit from the combination of similar yet differing in their approaches to managing their brand. Our team is highly confident in our ability to assist The White House in their growth plan. We are excited about the opportunities for the intimates division. We continue to add newness to the existing Chico's brand, including possible strong growth in the direct selling category, as we pursue the partnership with Amazon that is expected to roll out early to mid next year. And Pazo continues to (technical difficulty) incubate.

(inaudible) the software launch is this week. Christmas is around the corner, and the integration of The White House has just begun. As Marvin always says, keep your eye on Chico's. Thanks, and we will take our questions now.

(OPERATOR INSTRUCTIONS) Lauren Levitan with SG Cowen.

Thank you, and good afternoon. I have two questions. First for Scott, you commented on how you were pleased with some of the modifications you've made at Pazo; but you are still treating it as something that could possibly be discontinued. Could you talk about what kind of milestones or what kind of changes you would be looking for, to help you make that decision? And what kind of time frame you are allowing yourself for making that sort of decision?

And my second question is for Charlie. I understand that you will give us guidance on the possible impact of The White House Black Market acquisition when you report the next quarter. But I am curious if there is to be any charge associated with that transaction. Would you announce that at the time it closes? Or would we be waiting for the third-quarter results for that? Thanks very much and congratulations on the quarter.

I'll answer mine first. We probably won't know what the charges, if any, are going to be from The White House. We do not anticipate anything big, regardless. But there may be some sort of small writeoff that we will have to take for whatever it is. We will have to wait for the closing; then you have to get appraisals from all these people; and they will value the assets. No, we're not likely to know that until the third-quarter conference call. Scott, I will let you answer the (inaudible) one on Pazo.

Lauren, regarding Pazo, we have emphasized since the launching of Pazo in March that this was a test. And we've -- in retrospect out of the chute, we probably talked a little too much about it. We changed some fixture presentation in some stores, we changed some of the merchandise assortment, and we've seen some bumps in the sales since then. As far as a timeline on when we would make a decision, I don't think it would be appropriate to make a comment on that.

Neely Tamminga with Piper Jaffray.

Great job on the quarter. Just a little more color on this increase. How much of this do you think was fashion or mix changes, as opposed to just pure markdowns? And kind of relatedly, the gross margin improvement, how much of that was (technical difficulty) versus a pure markdown?

That was mostly markdowns for the quarter that caused the increase. We think we flattened it out for the quarter. But the improvement itself was probably mostly markdown related. Because we didn't have as good a quarter as we would like to have had last year, as you know. So we had a lower markdown rate.

In terms of the intimate products and the timing of that for second half next year, are you talking about maybe testing the product in store yet this year? This holiday, still? Or has that been pushed off?

Well, you know we tested the customer's reaction to loungewear, sleepwear merchandise under the brand C Wear; and we will continue to have deliveries to the Chico's front-line stores in the month of October and November. Although not in every store in the chain; but in those stores that can house it as we segue into this new venture. But, yes, she continues to respond to the product.

Fantastic. Congratulations, and good luck this quarter.

Adrienne Tennant with Wedbush.

Good afternoon and congratulations on a great quarter. Just a couple of questions. The target model has typically been kind of a 19 to 20 percent operating margin. You guys did a very strong margin in the second quarter. Is there anything that you are seeing about the business that leads you to believe that that kind of target model could be something different?

And then secondly, if you could just go over inventory per square foot plans for the second half? And then finally, television, (technical difficulty) week and marketing dollars this year versus last year. Thank you.

We will start with the target. When we absorb The White House transaction that is going to reduce our operating margins; although it is going to increase our profitability. It is going to have the immediate impact of reducing our operating margin. Our goal is to get them back up to these kinds of ranges.

No, we have not changed our target. We would like to be in the 19 to 20 range. It will take us a little more time with The White House, but in terms of profitability we're going to be substantially ahead. What was your second question?

Inventory per square foot plan.

We expect to be flattish year-over-year. Just in the same range, that 60 to 68 range. We have been like that -- I'd got a little summary here; we've been like that over the last 30-plus years. So it should stay about the same.

And finally, the marketing dollars for the back half versus last year? And then TV, number of weeks? I know you are doing September, October, November television. Weeks versus this year versus last year.

As Charlie mentioned, we're on forecast and on plan for our marketing budget. Our spend overall, which is 4 percent or less. And our TV weeks, I don't want to talk about specific weeks, but we always like to play with that a little bit. And we will have approximately eight to ten weeks in the third and fourth quarters, which is analogous to last year.

Great.

And as I explained, I think, on the last call, what we've done is we've pulled a week or two out of each season. And we are just running more dollars and more spots in less weeks.

Right. And you're using more of the regional versus the national?

Actually we do a combination. It's getting fairly complex now, but certain shows we run national, certain shows we run regional. It can run anywhere from 12 markets to over 20 markets. It just depends on the show. If we feel we can make a more efficient buy, we do it regionally.

Okay, great. Thanks very much, and congratulations.

Travis Bell (ph) with RBC Capital Markets.

Pat, could you talk about any new items, if any, that are not currently working or have been below your expectation?

Your volume is very low, Travis.

Pat, could you talk about any new items, if any, that are not currently working or have been below your expectations? Of the new fall product?

Nothing that is below expectation. If anything, we are kind of trying to catch up with the jeans category and an outerwear category and a sweater category. So I can not think of anything that I would state that is below our expectations now.

When your August comp store sales are currently strong in the mid to high teens, there is not much that's not working.

Okay, great. Thank you.

Jennifer Black with Wells Fargo Securities.

Good afternoon and congratulations. You can hear me, right? I did my damage over at the Desert Passage. I am down in Las Vegas at White House. I have a question for Pat. (technical difficulty) Is she on the phone? I wanted to know, I've noticed that there are some really new fabrications, whether it be like an open jacket, and I noticed the silk that is washable. And it just seems like you are getting in a lot of newness and new textures. And I wondered if you could speak to that. And if we're going to see a lot more of that for holiday.

You know, Jennifer, we know that our customer is a very loyal shopper. And one of the things that we constantly challenge ourselves is newness. How do we give her something new and exciting to wear, and something to feel good about? So I think that is always part of our program, is just introducing new fabrics and trying new finishes and new techniques. We just got back from the Far East, and that is (technical difficulty) what we worked on in terms of challenging our vendors to come up with new finishes, new fabrics, new blends. It is an ongoing process with Chico's.

I always go in to do store checks, and then I walk out with a bag. You guys are doing a hell of a job. Congratulations.

Christa Lanigan (ph) with Sanders Morris Harris.

Congratulations on a wonderful quarter. First question is for Jim. Jim, would you walk us through more of the specifics of the increased marketing spend? Both in May, and then you said, again, in September, October, November you're ramping up your spending. Is that more catalog? Is that more TV? Would you help us understand?

I am thinking right now. I just want to clarify. When you say the increased spend, versus what? Do you mean our front-end loading more from the -- into the first quarter? Is that what you're talking about?

Last time we had talked to you, you had mentioned that you were going to ramp up spending somewhat in marketing, both in May for Q2, and then heading into September, October, and November.

Yes, because we have increased spending in two ways. We bumped it up a little bit, as much as a half a point. That's why we started stating 4 percent of our sales going into marketing. And we also took some extra money; instead of spreading it more evenly, we loaded it into the first quarter disproportionately. We did that last year, too. We just did it to a greater degree this year.

And a good deal of that money, not all of it, but a good deal of that money is going into increase circulations of our catalog. And we are very confident of the return on that. Because we've been getting in increased return both from our own database and prospect mailings. We nearly have every prospect mailing turning a profit, which is a little unusual. So it is not that high a risk strategy.

So it's safe to say that your increased marketing spend for September, October, and November is going to be skewed more towards catalog circulation versus additional spending on television?

Yes.

Okay, wonderful. Thank you. And Charlie, just a couple of quick questions for you. You said that you did receive the antitrust clearance for the acquisition. What else is left to close the deal?

That's for Scott.

There's a whole process that you have to go through on the consents with the landlords. There is an awful lot of due diligence. You know, it's quite cumbersome. And we actually got what they call an early determination of the Hart-Scott-Rodino Act; and we were pleased with that. That wasn't the biggest milestone, because we certainly didn't think that we were going to have a problem. But there's an awful lot that has to be accomplished before you can actually close the transaction.

So we can say the biggest hurdle is behind you?

Yes.

Excellent, wonderful. Quickly, Charlie, when you report comps once the acquisition is done, are you going to report them separately by concept? Or are they going to be consolidated? Are we going to --?

They are not going to be either. When we take over White House Black Market, -- We sort of surveyed the retail playing field on these acquisitions, and what we found out is that when you take them over in month one you don't report them as a comp, because they weren't in your sales last year. And you really don't report them till the 13th month. We are debating internally whether or not we're going to publish anything on the White House comps. And we don't have an answer yet for that. Although we are not likely to report their comps separately, because it will be misinterpreted by the market.

Okay, wonderful.

After the 13th month they will be consolidated with Chico's.

Excellent; thank you. We will stay tuned for that, and congratulations again on a great quarter.

Robin Murchison with Jefferies & Co.

Good afternoon. This question is for Pat Murphy. Actually there are two questions. One, is there anything different about the mix, the fall mix, in terms of price point? Average price points moving up owing to a change in the mix? For example, one year when you added suede jackets to the mix. Are we seeing anything like that?

Is that the only question? I'm sorry, Robin.

No, no. There's actually one other question, and it is somewhat related. On the current cover of Oprah Magazine, she has a jacket on that is not your Dallas jacket, but it sure looks like it. It's very close, except for the fringe at the wrist. So the second question is, is it? She can sell anything. And is that doing anything for your Dallas jacket? And I hate to just isolate one item, but it's obviously a coup for you guys, I would think.

I would like to say that we had very good reaction to the Dallas jacket before Oprah even hit the newsstands, so she is certainly not hurting us. But we knew that was a good jacket ahead of time. And as far as the mix is concerned, I do not think there's anything atypical about the mix, except in our outerwear, due to the success on suede last year we emphasized it this year. And that automatically changes the average price on the upward side this year.

All right, so there may be a few more offerings then?

Yes.

Okay, all right. Great. Pat, thank you.

Thank you.

Maribeth Holland with Goldsmith and Harris.

Good afternoon, everyone. Where did Pazo's UPT and average purchase price come in for the second quarter? And how does that compare to the first quarter?

We have not been publishing those kinds of numbers at all. So that is not something that we published.

How about the direction of the two ingredients? Did they improve?

It just goes under the heading of the test. There are only ten stores there and we're not going to drill down to that type of detail.

Okay. How about foot traffic in general?

Our centers are in -- our Pazo stores are in very similar diversified real estate, as Chico's. And I think the retail consumer is coming back. So we've seen the same increase in foot traffic in their stores as we have in Chico's stores.

Okay.

We don't track any of it.

Okay. And about White House Inc., I noticed with their reports that their third quarter last year was a loss. So I was wondering if, for modeling purposes, should we put all the accretion into the fourth quarter of the current year?

We are not even going to pick them up till let's say mid-September or so. So they won't even be in for only half the quarter. So there won't be any accretion in the third quarter.

Thank you.

Janet Cloppenberg (ph) with AJK Research.

I had a couple more questions. Charlie, you said that the inventory was 68 to $69 per square foot. Is that flat on a comparable basis?

No, I didn't say that. I said 63 a foot.

I'm sorry, forgive me.

That was 63 a foot and down a little bit, actually. From the last year we have 67; the year before was 66; year before was 68. But it is right about where we wanted it to be.

Does that mean inventory on a square foot basis is down at the end of the quarter, versus last year?

Versus the same quarter last year, yes, it is down a little bit. That could be due to fabric. There is a lot of reasons. On a per-store basis, I don't believe it is down.

Do you believe it is (technical difficulty) ?

Yes, I think it's up slightly on a per-store basis. Now when you take out in-the transit, and you take out all the raw fabric we own. But it is right exactly where we wanted it; right at the midpoint of our plan.

Okay, thank you. And on the SG&A rate, Charlie, I wondered going forward at this kind of level of double-digit comp, which I know you're not projecting; but should it occur, would we start to see more leverage in the SG&A?

No, I don't think you would. Like I said we're going to deleverage in the third quarter a little bit, because we're going to have the software launch coming up.

You did say that your investments in some long-term projects were starting to decline.

Yes, they are starting to decline; but they are going to start hitting hard the third quarter. We are going to absorb White House, which runs a much higher SG&A rate than us. And we have got a software project launching. So, no, I don't expect -- .

I didn't mean White House; I meant in the Chico's business exclusively, would you start to see the ratio improve?

Not in the third quarter, no. That will be sometime next year. We are going to turn on the software. Like I said, it is roughly a $14 million project, over roughly a ten-year life. So that will add 1.4 million to the overall. It's going to add 1.4 million of expenses the day we turn it on.

So maybe in the fourth quarter and beyond we could start to see more significant leverage in the Chico's SG&A?

I think you are going to see it sometime next year, like I said all long. I don't expect any this year, no.

Just for Pat, I wondered if you had discussed the feel of the interior of the intimate apparel stores? Will it feel like a Chico's store? I know it will be cobranded, but will the environment be different than the way the Chico's stores look and feel?

I'll answer that. Last time I saw you in Starbucks. Anyway, we're actually working right now on the design. The stores don't open until mid next year, so we have a lot of time to work through that. And we're looking at -- we've clearly -- our stores are always evolving. The look of our store. If you go into a store we built, just opened a month ago, versus one we opened three years ago, they are dissimilar in their look. And so we are really trying to take the intimate apparel launch and take the store design to the next level, if you will. And we are working through that process right now.

But will it have some familiarity?

Absolutely; we're not going to -- it will (inaudible) not a revolutionary move.

Thanks so much.

Deborah Liu (ph) with Lehman Brothers.

On behalf of Kimberly Greenberger. My question is on your guidance for the second half of the year. Charlie, do you expect the gross margin improvement to offset the SG&A deleverage?

Yes, we do. We expect that on an overall basis we are going to end up being accretive for the last half of the year with White House. They may be lower numbers, but on the overall basis we expect to gain on that.

Okay, and what is your guidance for D&A?

You can look in the third quarter. It will increase a little bit as we add the software. So you can just add roughly 25 percent to it every time, because we are opening stores at that pace. So you can take the first six months, add 25 percent to it; that should be the last six months.

Okay, thanks a lot. Congratulations.

Kent Green (ph) with Boston America Assistant (ph).

Charlie, great quarter. My question is whether you can continue to grow the Chico's brands at a square footage of 25 percent? Do you see any dominion (ph) of that? I noticed that your store count keeps creeping on up each year as the year progresses. (inaudible) because the base gets bigger.

Right now we're in the middle of evaluating what stores we want to open next year, which brand it will be. Because we have got White House, we have got Chico's, we have got the Pazo brand, and we have got the intimate for their opening next year. And we have got the Amazon, which is not really square footage, but it's going to add a lot of sales we think. (technical difficulty) in the middle of evaluating that for next year right now.

We have already stated what we expect this year, but we've got aggressive growth plans (technical difficulty) state exactly what our percentage is going to be for next year. But we're evaluating it now. And we are likely, by the time we close The White House, to have something to say about that for next year. Because we are trying to evaluate really how many of their stores we are opening, how many Chico's we are opening, etc.

In other words, you really don't see any dominion of opportunities for you to open stores with all of these new formats?

We have got a lot of opportunities, there's no question about that. How fast and how aggressive we want to go after it is what we are right now deciding. Because there is a tremendous amount of opportunity.

One final question on White House. Do they refresh merchandise as quick? Get something in about every week or every day even in some cases?

They have a little bit different strategy. They bring their goods in about every two to three weeks. And they bring in a whole lot of them every two to three weeks. We ship generally every day to our stores. But they bring them in in floor sets, if you will. So they do bring in not quite at the level we do, but they bring it in large lumps, as opposed to we bring it in every day.

Is there any difference in the buyers? Where one format is better than the other one in your opinion?

Yes, we are totally vertical. They are not. So the process of procuring these products is different at White House than it is at Chico's. And that's probably going to -- we're going to try to supplement their gross margin by (technical difficulty) bringing some sourcing knowledge to their business. But they are entirely different (inaudible) than we are.

Thank you.

No further questions at this time. I would now like to turn the conference back over to management for any further comments or closing remarks.

We've got no further comments. We thank you all for attending this conference call. We look forward to our third quarter as we head into a great fall. See you in the third quarter. Thanks, everybody. Bye.

Thank you for participating in Chico's FAS Inc. second-quarter earnings conference. This call will be available for replay beginning at 6 PM Eastern time today through 11:59 PM Eastern on September 13, 2003. The conference ID number for the replay is 230-5239. The number to dial for the replay is 706-645-1991. (OPERATOR INSTRUCTIONS) Thank you for your participation. You may now disconnect.