Chico's FAS Inc (CHS) 2003 Q3 法說會逐字稿

Welcome to Chico's FAS Incorporated third quarter earnings release conference call. At the request of Chico's this call is being recorded today, December 2, 2003. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. James Palczynski with Integrated Corporate Relations.

Thanks for joining us. Before we get started, I would just like to remind you all of the Company's safe harbor language; I'm sure you are familiar with it. Certain statements contained on today's conference call, including without limitation statements addressing the beliefs, plans, objectives, estimates or expectations of the Company, or future results or events, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements involve known or unknown risks, including but not limited to general economic and business conditions and conditions in the specialty retail industry. There can be no assurance that the actual future results, performance or achievements expressed or implied by such forward-looking statements will occur. Users of forward-looking statements are encouraged to review the Company's latest annual report on form 10-K, it's filings on form 10-Q, management's discussion and analysis in the Company's latest annual report to stockholders, the Company's filings on form 8-K, and other federal securities law filings for a description of other important factors that may affect the Company's business, results of operation and financial condition. 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. With that out of the way, I would like to turn the call over to Scott Edmonds. Scott, go ahead.

Thanks James. Thanks to everyone for attending our third-quarter fiscal 2003 conference call. With me on the call today are Charlie Kleman, our newly appointed Chief Operating Officer; Pat Murphy, our Executive Vice President and Chief Merchandising Officer; Jim Frain, our Senior Vice President of Marketing; and Mike Kincaid, our newly appointed Chief Accounting Officer.

We are very pleased with our financial, operational and strategic performance during the third quarter. Net income rose 72 percent to 27 million, or 30 cents a diluted share, compared to net income of 16 million, or 18 cents a diluted share in the prior year's third-quarter. Our outstanding and unique product offerings at Chico's have continued to meet with unprecedented levels of consumer acceptance, as reflected by the quarter's 20.9 percent comparable sales store sales gain.

Our new White House/Black Market stores also ran very solid year-over-year comparable store sales gains during the quarter. We are excited about the prospects for both of these concepts during the remainder of the holiday season. It is important to note that the talented management team of Chico's achieved these outstanding quarterly earnings results while at the same time closing the White House acquisition and rolling out new chain-wide software systems for essentially all of our back office operations, including merchandising, product development, planning, product allocation, finance, sales audit and other systems. (inaudible) achievements underscore the talent of management we've assembled over the years here at Chico's.

During our second quarter conference call back on August 27, we had not yet closed on the White House/Black Market. Since that date we have completed the acquisition, and I am pleased to report that the integration effort is going extremely well. The many potential synergies between our two organizations we spoke about are happening. We moved quickly to capitalize upon many of the obvious synergies such as store operations, marketing, real estate, construction, human resources, benefits, and MIS (ph) systems. As previously stated, we intend to keep White House/Black Market's merchandise team separate from Chico's. However, we do believe we can have a positive impact on their gross margin through some shared sourcing in the future.

Current plans call for the entire White House/Black Market merchandise team to relocate to Fort Myers in early 2004 and their distribution center to move to Atlanta in the second quarter of 2004. We're shooting for a May 1 go-live date to move all of their systems into our new software platforms and plan to convert their cash registers to our state-of-the-art cash registers sometime late next year. We also anticipate launching a frequent shopper club for White House/Black Market sometime early next year. If all goes as planned, we will have completed the entire transition of the White House/Black Market organization into Chico's by the end of the second quarter of 2004.

The two organizations' cultures are as similar if not more similar than we had identified at the time we first approached Rick Sarmiento (ph) and his team to purchase the Company. To summarize my thoughts on the White House/Black Market acquisition and integration, I would say that things are proceeding better than we had anticipated.

I will now turn it over to Pat Murphy, our Executive Vice President and Chief Merchandising Officer. Under Pat's leadership, her team continues to develop merchandise that is the driving force behind all of these outstanding results. Remember, it all begins with great merchandise, and that all begins with Pat.

Thank you Scott. Good afternoon everyone. The third-quarter got off to a great start in August with strong sellthroughs on key items and better than expected sales on long sleeved tops, in particular, printed teas. Also, sweaters, outerwear and novelty jackets. Pants, including denim, exceeded plans for both September and October. Our key (technical difficulty) strong, with suede (indiscernible) shirts and turtlenecks really turning on in September. We aggressively planned the sweater business up over the same quarter last year and succeeded in making that plan each month. We made an extra effort to provide our Kohl's (ph) stores with an additional assortment to meet their needs. We feel we struck the right balance between novelty and basic, and the customer responded.

Our (indiscernible) business remains strong, as we continue to offer (indiscernible) silhouettes that allow the customer to update her wardrobe. Sellthroughs on novelty and basic velvet has been exceptional, and we are in an excellent position to be clean at fourth quarter's end. Accessory business was on or above plan for the quarter and continues to deliver excellent sales and margins to date. Handbags, scarves, belts, and jewelry have all been strong, and we anticipate this trend to continue for the balance of the year. Markdowns remain at very acceptable levels and inventory is turning well.

Our product development and merchandising teams continue their focus on the Chico's customer, and are constantly in pursuit of delivering newness into the assortment. Recently, Scott and I joined Linda Costello (ph) and Karen Hand on a development trip to India. We managed a day of shopping in Paris and some of that development is already underway with our vendors, who are also very proactive in coming up with new ideas themselves. Many of them have hired their own design talent devoted exclusively to developing new Chico's product.

Our intimate apparel test stores are on target to open sometime in the third quarter of 2004, and I am happy to report that the decision has been made on the name for this brand extension. It will be called Soma by Chico's. Soma in Greek means body, and we feel the name perfectly suits this new initiative.

We are pleased with the 16.3 percent comp store increase in the month of November; holiday merchandise such as satin shirts, novelty and basics velvets, silk (indiscernible), novelty tops and sweaters have all been well-received. Higher priced accessories as shown in our November 2 mailer have sold very well. Velvet scarves, beaded bags, jewelry and watches are performing well. We continue to feel strongly about the Chico's brand and we feel positive about fourth-quarter's business. And now, to Charlie for more details.

Thanks Pat. Today we're going to cover several areas, but first we'll dig into those great financial results a little deeper. The third quarter of fiscal 2003 resulted in our highest same-store sales increase at 20.9 percent since the first quarter of fiscal 2001. It produced our best third-quarter growth and operating margins at 61.4 percent and (technical difficulty), respectively, since going public in 1993. The third-quarter was also our 21st quarter of the last 23 with earnings growth that exceeded 40 percent. This increase in spite of approximately $3.3 million of charges that were associated with the decision to end our Pazo test concept stores. Today we're going to spend some time looking at the reasons for this large increase in the operating margin and what that could mean for future quarters.

First, let's start with the gross margin. The gross margin increase from 60 percent even in last year's third-quarter to 61.4 percent in this year's third-quarter resulted primarily from better initial markups, or IMUs as they are termed in our industry, on our fall product offering. This, combined with a 7/10 of a percent decrease in the cost of running our distribution centers and leverage of 2/10 of a percent in our product development costs due to our 20 plus same-store sales increase for the quarter, resulted in this nice gross margin game for the quarter. Regarding the IMUs, we have been experiencing improved initial markups all year, as we have strived to improve sourcing, bring in a more diversified product mix in the novelty arena, and maintain competitive pricing on our basics.

On our last conference call, we indicated we believed we had an opportunity to be more diversified in our fall presentation and we did just that, which resulted in a well received product offering with (indiscernible) IMUs. We do not see as much opportunity in the fourth-quarter for such a large improvement in the IMU, although we believe it will creep up over last year as it has done in earlier quarters. The improvement in the cost of operating our distribution center as a percent of sales results from two main areas -- first, our new 200,000 square foot distribution center north of Atlanta is beginning to operate more efficiently, as we learn to better schedule and use the high-tech laser and (indiscernible) systems at our new DC; and second, during the third and fourth quarters of last year, we were operating 2 distribution centers for most of the third and all of the fourth-quarter, which resulted in last year's third-quarter distribution costs rising as a percent of sales. Although the bulk of these startup costs were incurred in the third-quarter last year, we should see a small improvement in this area in the fourth-quarter of this year as well.

The improvements in gross margins I just discussed were partially offset by a slightly higher markdown rate required to clear the broad diversity in fall product, as well as lower White House/Black Market and Pazo test concept gross (technical difficulty), both of which were not in last year's third-quarter. The gross margins from the Pazo test stores and the White House/Black Market stores each had the impact of reducing overall gross margins by about 4/10 of a percent. We expect a slightly larger impact on gross margins from both of these divisions in the fourth-quarter, as Pazo clears out its final merchandise at anticipated lower margins than the third-quarter and White House/Black Market will be consolidated for the entire fourth quarter rather than just eight weeks, as in this year's third-quarter.

To put all that gross margin guidance together, we look for improved IMUs to continue into the fourth-quarter, although not at the same pace; plus, we expect a decrease in the gross margin as a percent of sales compared to last year's fourth-quarter that could range from slightly down to up to a half a point lower than last year -- again, principally due to the (technical difficulty) and White House/Black Market as I discussed earlier. Beyond the fourth-quarter, we (indiscernible) for about a half a point or so percent decrease in the gross margin as a percent of sales in the first two quarters next year, due to the addition of the White House/Black Market operations, which have historically run lower gross margins than Chico's. Remember though, the White House/Black Market operations are adding significant gross margin dollars to our P&L even though they are at a lower percent of sales. This reduction to the gross margin percent from White House/Black Market will (indiscernible) in the third-quarter next year and then will be behind us in the fourth-quarter as we anniversary our first full quarter with White House/Black Market included in both year-over-year quarters.

Finally in the gross margin area, we do not expect to drastically change the gross margins at White House/Black Market due to any substantial change in sourcing in fiscal '04. We will be working with our merchandising teams to evaluate when, how and if we will move into a more vertically sourced environment. We expect that any such moves will not begin until fiscal '05. Remember again, the White House/Black Market merchandising teams are already putting great product in front of their customers; they're putting up nice profit, and we do not intend to (indiscernible) any of their merchandising philosophies or strategies that are working very nicely. As we learn more about any future merchandising strategies with White House/Black Market, we will let you know.

Regarding the improvement in SG&A from 41 percent even in last year's third-quarter to 37.8 percent in this year's third-quarter, there are also several factors here that come into play. First, the third-quarter Chico's comp of 20.9 percent leveraged our cost very nicely, as one would expect. This was offset by a onetime charge of $3.3 million for costs associated with our decision to end the Pazo test concept stores. This charge, combined with Pazo's SG&A from operations, resulted in overall deleverage to SG&A of approximately 2 percent. Further, the consolidation of the White House/Black Market higher SG&A cost structure for eight weeks of the third-quarter also deleveraged SG&A by another half point. We expect that we will experience deleverage of SG&A on the 1/2 to 1 percent range due to the White House/Black Market acquisition through the second quarter of next year as we continue to consolidate their higher SG&A cost structure with Chico's.

Because of our nice start to the fourth-quarter with a 16-plus comp store sales in November, I would expect this deleverage in the fourth-quarter to be partially offset by leverage associated with these Chico's comps. Again, beginning in the third-quarter of next year, we will begin to anniversary these expenses, and we expect our breakpoint for leverage could drop to at least the 5 (technical difficulty) same-store sales level by then.

Now turning to White House/Black Market sales, we will not be including their figures in our same-store sales calculation until October of next year, but we are very pleased with our sales results that have consistently exceeded our plans since we acquired them on September 5. Our first catalog drop in mid-November allowed the White House/Black Market chain to continue with their impressive sales gains for both new and existing stores and customers. We are currently looking at our calendar for catalog drops for the White House/Black Market chain in fiscal '04, although we are not prepared to answer any questions on this topic yet. We all look forward to welcoming the White House Black Market teams to Fort Myers early next year so we can better plan these types of things together, and because it will be easier for us to learn as much from them as they will learn from us.

Scott earlier mentioned the new software platforms, and during the quarter -- on Labor Day weekend to be exact -- we converted all of our legacy systems from a platform we felt had limited scalability to platforms that should be able to scale up to match our growth plans for the foreseeable future. As with all conversions of this size -- and this was a massive effort that covered almost every system we use today -- it was a difficult conversion with your standard set of challenges, most of which have been overcome or are now not material to our operation. As I have indicated before, we do not expect any significant synergies from this software conversion in the short-term, but rather this will allow us better sourcing communication with vendors, better buying and allocation of goods, more detailed reporting, and many other improved areas by fiscal '05.

This software change, combined with the new cash registers and new distribution center in Atlanta, completes our bridge to a billion project that we have talked about for the last two years or so. We believe we now have the infrastructure and management team in place to profitably handle the activities of a multimillion dollar, multi-division retailer, that could even move into more multinational activities if and when we determine that is appropriate. And contrary to the published story in the Toronto paper, we are not planning any Canadian operations in fiscal '04, but we have not ruled it out for '05.

Next let's spend some time in the store opening arena. Earlier this year we announced that we would open 70 to 75 new stores this fiscal year, and we are on track to do just that. To date we've opened 64 new stores that includes 46 frontline Chico's, 5 Chico's outlets, 4 White House/Black Market stores since we acquired them on September 5, and 9 positive stores. In addition, we closed one Chico's store and expanded or relocated 19 Chico's stores. For the rest of the year, it looks like we will open an additional 6 frontline Chico's stores, 1 more Chico's outlet and 3 more White House/Black Market store. In addition, we will likely close won more Chico's store and relocate and expanded 2 more Chico's stores. This should end the year with 56 net new Chico's stores, 9 net new Pazo stores and 7 new White House Black Market stores, for a total of 72 net new stores. Now considering the 127,000 additional square footage we obtained in the White House acquisition, we will be near a 45 percent square footage growth for the year.

Moving to next year, we have previously announced plans to open 85 to 90 net new stores next year, which, combined with several expansions and relocations, should result in at least a 20 percent square footage growth in fiscal '04. We are well on our way to achieving that goal, as we currently have 10 Chico's store leases for fiscal '04 signed, with an additional 44 in various levels of the negotiations (indiscernible). We also have several White House/Black Market leases signed and 43 more that are in their negotiation (indiscernible). The 9 Pazo stores opened during this fiscal year will be closed next year and at (indiscernible) year end, and 5 will be converted to White House Black Market stores; 2 will become Soma stores -- that's our new intimate apparel line scheduled to open in the third-quarter (indiscernible) -- and 2 will likely close. The bulk of these costs that are associated with the Pazo closings and conversions have been accrued this quarter, and we look forward to the conversion of the bulk of these stores to our existing three formats.

Regarding expansions and relocations, we are still evaluating the right size for the White House Black Market stores going forward. They currently have stores ranging in size from 350 to just over 2200 selling seats, with the average store only at 1175 selling seats and the average store doing just north of $750 per selling square foot. This indicates to us that there is a lot of room for expanding these stores into the 16 to 1800 selling square foot ranges. We have just started looking at these stores for possible expansion, but there clearly is a nice opportunity for many store expansions when combined with the 20 or 30 Chico's expansions we expect to complete next year.

Regarding the Soma test stores, we learned a lot of from the Pazo test stores and we will not be giving any detailed expectations on the profitability, sales level expectations or other details of these stores until that test is well on its way. Remember, it is just 10 stores of our 500 plus stores that we own. Suffice it to say we intend to leverage our 3 to 4 million person database of Chico's customer, and we can't wait to enter this overlooked area of the baby boomer market.

Next a note on the balance sheet and our average retail prices and then I'll wrap up and summarize our forward guidance, which is confusing. Our balance sheet remains very strong, with inventories right in our planned 60 to $68 per square foot range. Our cash position runs ahead of forecast as we end the quarter with just over $85 million in cash and marketable securities after using approximately $88 million for the White House acquisition. Remember, we started the year with about $90 million in cash and we have almost that much right now.

Turning to average retail prices, Chico's average retail price saw an increase in the third-quarter as our average retail unit price moved up 4.5 percent to just short of $47, while the (indiscernible) ended up about the same percent as it moved up from about $107 to about $110. The White House Black Market average retail tends to run in the 35 to $39 range, with about the same number of units per transaction as at Chico's in the 2.2 to 2.4 units per transaction range. Our overall sales guidance for the next three quarters, considering the additional sales associated with the White House Black Market transaction, and considering a minimum 20 percent square footage growth for fiscal '04, and considering (indiscernible) mid single digit same-store sales increase for Chico's from December on, is for approximately a 40 percent overall sales growth in the fourth quarter of this year and a 35 to 40 percent overall sales growth for each of the first two quarters of next year. After the second quarter of next year, our sales increases should tie more closely to our square footage increase, plus an amount for same-store sales increases.

At a mid to high single digit comp at Chico's, the White House/Black Market acquisition is likely to reduce our operating margin percent for the next 3 quarters, as I described earlier; but remember that the White House/Black Market acquisition is generating a growing profit stream that has been immediately accretive and offers enormous profit improvement potential going forward, as we strive to improve their topline through marketing, improve their gross margins through sourcing improvements and improve their SG&A ratio through integration synergies and continued leverage of a much more fixed cost structure than we have experienced here at Chico's. The integration of White House/Black Market into Chico's is so far going exactly as we discussed at our earlier conference calls on this topic, and this acquisition has been everything we thought it would be when we first looked at it. Our management team accomplished a lot this quarter and we look forward to the upcoming year as we complete the White House/Black Market integration, launch our new Soma brand, begin to better utilize our fantastic new software platforms, and continue to bring in exciting new fashions that appeal to the Chico's and White House customer. As Marvin has always said ending these calls, keep your eye on Chico's.

And now we'll turn it over for questions. Operator?

(OPERATOR INSTRUCTIONS). Jeff Klinefelter, U.S. Bancorp.

Congratulations on another great quarter to the whole team. Question is on circulation of your Chico's catalog. Can you just recap for us what the circulation numbers will be up at the end of this year, and what you are planning for circulation increases next year?

I don't think we will talk about next year yet, but the circulation figures for this year -- I will talk about the third-quarter just so we don't get confused. We're up approximately 74 percent versus last year's third-quarter. So as we discussed in the last conference call a few months ago, we intended to boost the circulation. Why? Because the product reviews for the catalogs were so good that we were very confident about the results. So we -- most of that went into prospecting, and most of that prospecting we did in September and October of the third-quarter.

And no visibility on plans here for the fourth quarter for next year?

No, I don't want to talk about the fourth quarter for next year. This year we boosted the circulation of November as well, rather dramatically for November.

Similar plans for December January?

Yes, but not as great as September October and November. But we are right on our forecast right now in response, so we're very pleased with the results.

Margaret Whitfield, Brean Murray.

I'll add my congratulations. Putting all those numbers together, Charlie, could you help us out and give us some level of accretion that you feel comfortable with for this year and next? I take it it was immediately accretive, but, I'm guessing, very small for the Q3?

No, I don't think it was really small. (indiscernible) we've reorganized our operations here; we're not really looking at it as White House accretion. We've got various functions that are providing activities to both Chico's and White House, and we don't really keep track of it in that manner anymore. So no, I can't really give you what the accretion was going to be; I tried to give as much detail as I could as to what the sales would be, what the margins would be and the SG&A would be for the overall company. And we are very pleased that it has added a lot of profit to it, but the way we are structured now we're not really looking at accretion anymore on them.

You said the comps for White House were solid; they're not in your comps as yet. I wondered if you could quantify that?

No, we're not going to quantify that. No.

The mailing -- I wondered how many catalogs went out for the White House?

That's Jim.

Jim?

Approximately 400,000 units. We looked at that relative to Chico's mailings as a rather large test. Relative to White House's database, it was a pretty good mailing. And I will just say that we got very good results (indiscernible) to date.

So you might be continuing with the same next year?

We will have a significant program next year, but I don't have any details on what that will be specifically month-by-month. But we will, probably, around February's analyst conference.

Yes, I would say by then.

But you have to be here to hear it, Margaret.

Okay. And for Pat, you talked about the opportunities in the fall and holiday. Can you give us some insight as to where you see the opportunities for Chico's for the spring line?

Margaret, it's all about newness, and we are constantly looking at new techniques -- whether it's an embroidery technique, finishing on garments, new blends -- and I see a lot of excitement out there, a lot of which we're creating ourselves. So I think we have -- the product that have we put together so far I think represents a lot of newness and excitement for this customer (indiscernible) she's going to want to buy.

Adrienne Tennant with Wedbush Morgan.

Let me add my congratulations. Just a couple of questions. One, the ending square footage at the end of the quarter? Secondly, inventory plans for the fourth quarter, kind of heading into the early part of next year? And then finally, I just had a question on loyalty programs. Any plans at White House/Black Market, and whether the passport programs -- whether you have thought about actually having that roll over to Soma, and having that ability to use it over there when you actually launch that concept?

First I'll go on the square footage. We keep that on our website; you can look it up any time. All the historical square footage by quarter is on there. It's 951,000 square feet at the end of the quarter, of which 131,000 square feet were associated with White House/Black Market. And we'll put that up once a quarter. And the second part of your question was on inventory levels?

Inventory levels for the holidays and going into the early part of next year.

They should be about the same, between 60 and 65 a foot. (indiscernible). At the end of the third-quarter, White House/Black Market was a little light, while Chico's was on track.

Jim needs to answer the question on the passport (indiscernible).

(indiscernible) first, loyalty program for White House/Black Market -- I don't have details on that yet, but we will probably not mimic our passport program. There are different ways (indiscernible). We're analyzing frequency and so forth and average purchase, and we have a lot of new information of course, from the first catalog mailing. So we are analyzing that right now. We don't want to be premature with setting down any formulas for benefits and so forth. As far as Soma, yes (indiscernible) that will be seamless with the passport program. So the customer will have all the benefits -- the Soma customer will have all of the benefits of the passport program. And as Pat mentioned, we will be drawing on our nearly 4 million database to market the Soma concept.

So if you have already reached passport net status, then you will just be incrementally buying at Soma?

Correct.

Okay. Did you come to any conclusion on the real estate, whether it would be attached or separate, or where you might have those locations?

Because it's absolutely targeted at the Chico's customer, it just makes sense to put the Soma stores adjacent to some of our top performing locations. And that is exactly what we are doing. Like in Atlanta and Birmingham, Alabama and Dallas and Houston and Scottsdale -- these are markets that we have incredible Chico's stores --

Thank you for holding how may I help you?

Sorry about that. Anyway -- so we concluded that the real estate effort for Soma needs to be adjacent to or very close to in the early stages the top performing Chico's locations.

Do you have an initial plan for the number of store openings next year?

10.

Robin Murchison, Jefferies & Co.

You were doing an online survey on your website for the intimate apparel. I wondered how long it ran? What did you learn? Any concerns about loyalty to existing brands? (indiscernible) there was a question in there that talked about foundation brands, and just wondering what -- if there's anything you can say about that?

I don't know where this music is coming from, (indiscernible) you have some background background music --

I don't know either.

We are not ready to talk about what we have learned because we have not even analyzed the results yet ourselves. All I can tell you is we got an excellent response, and (indiscernible) mind blowing. I think we had more than 11,000 responses. So we have a lot to analyze.

My second question was why wait till next year to begin the loyalty program for White House, but I guess if you're going to - if it's going to take a bit of a different turn in terms of frequency of customer's shopping habits and that sort of thing, that's what you're trying to pan out at this point?

Yes. We haven't even owned them a full quarter yet.

The new catalog looked good, and I understand you got a pretty good response to that (indiscernible) that's on the White House.

Thank you Robin.

Lauren Levitan, SG Cowen.

I first have a question for Pat. Pat, you commented that you (indiscernible) some higher price points in this most recent book. It also seemed to have much more of a gift focus to us than in the past. Can you talk about if you are seeing more of Chico's being seen as a gift destination during the holiday season or if you still see it largely as a self consumption (technical difficulty). My second question is with respect to the new concept, it looked like some of the merchandise that could end up in the new stores in terms of loungewear and activewear, seems like we're seeing some of that in Chico's. I'm curious if you could comment on the response you have been getting in the Chico's stores to those types of products, and if we should expect to see that ongoing even as the new concept is launched?

I'll answer your last question first about the activewear and leisurewear. We do see that there is room for both in both Soma and Chico's. I think we have to do it in slightly different ways. The merchandise in Soma will be less active in nature and more at-home wear if you well, but with an active twist to it. As far as better priced merchandise and whether we see it as a gift store, we hope that we are seen as a destination for people thinking of gifts for their friends and family in the fourth quarter, but I can also tell you that the response from the stores on the higher priced jewelry -- and we did give more of an accessory focus to this mailer -- but that some of the responses from the stores were that even though they were higher prices, our customer was buying them as gifts, but she was definitely buying for herself, too. So it's kind of hard to sort out; she is just really responding.

Within the accessories assortment, have you increased at any stores the square footage or the (indiscernible) available to accommodate an increased accessory presentation for the fourth quarter? Is that something we should be watching for?

We look at every store and the potential for accessory business. And this year we actually did a small test, and we impacted -- we did not really go into a great deal of fixturing, but we did impact the assortment in some of these stores. We have also identified better price points, stores that are able to handle better price points and that are looking for more unique things. So we did that in accessories but we also do it in apparel as well.

One last question on the gifting side. I know you started your electronic gift card program last year. Can you give as an update on that, and if you're continuing to see comp growth in that after anniversary in the electronic gift card?

I haven't really looked at that. I'm not really sure what we are doing on that. We'll look at that after the holiday season because that's when the bulk of them are sold. We really have not looked at that or spent a lot of time. It's been a very nice program, though, for us.

Richard Baum, CSFB.

Add my congratulations on a fabulous quarter. I have 2 questions. The first is, just with regard to the White House/Black Market catalog, I saw it as well and I thought it was really terrific. I'm just interested in what inputs or what changes were brought to this catalog, apart from what the Company normally would have done themselves? White House/Black Market -- is this something completely new, or did it have the Jim Frain touch to it?

First it was completely new for White House/Black Market. That's why it was so much fun. I don't know if it has the Jim Frain touch, but it certainly has the Chico's retail services touch. That is our quasi in-house agency, as you know. We supervise the creative and we have some very good people. We have already separated out two teams and we have a separate team now for art direction and graphic design. And actually it was a great first effort for Joy (indiscernible), our art director for White House/Black Market. So we were really -- we had a lot of fun doing it. But the most fun is when you see the dollars role in, and that has been fun.

That always tends to make your day better doesn't it?

Yes.

Just a follow-up on this. I know it may be difficult to generalize, but since you have acquired White House/Black Market, I think you have indicated there were many more similarities, certainly, than differences, and even more so than you had anticipated. If you could indicate what the three or four biggest surprises to you have been since the acquisition, either on the positive side -- probably mostly on the positive side it sounds like -- that would be -- I would love to hear your comments in that regard.

On the positive side, Richard, would be the strength of their merchandising team. They have assembled quite a team, and they had a very strong board. And (indiscernible) was on their board and had a very positive influence on Patricia Darrow Smith (ph), and then they went out and hired a very strong GMM. And they have assembled a very strong team. That's probably -- we knew that their merchandise effort was very good. I would say that that's probably the best surprise on the positive side. Probably the second best surprise would be their response from their database, with the catalog that we put out. We were a little concerned that we may not have the response from their customer that we have gotten sort of spoiled and used to with the Chico's customer, and we had a very strong response there. And probably the biggest surprise on the downside is some of their staff not being willing to relocate down here. Thankfully they were sort of middle management and down staff; most of their senior and executive management is coming to Fort Myers, but we were a little surprised that they wouldn't see the opportunity to sort of join the Chico's company from a financial and upward-mobility-to-their-career-side. So hopefully that puts a little bit of spin on that area for you.

I wouldn't mind some upward mobility myself. (multiple speakers) a resume. Lastly, this is kind of a micro question regarding Chico's itself and your markdowns. Just recently in the store -- normally you have your markdowns in the very back, and in some of our shopping over the weekend we saw like two or three small rolling racks of merchandise that had been 30 percent off; some silk top; a black kind of suit pants and top -- and I was wondering whether that was -- those were items that didn't sell through as well as you would have liked, those were planned? Or any comments that you can make with regard to the markdown activity.

As far as the regular markdowns, they are indeed in the back of the store, and we don't have any plan to change that except during real sale periods which would be during the month of January. And I am not sure exactly what you saw, but I'm thinking that possibly you saw what we would call a POS offering to our customer, which would be a great item at a great price. And hopefully they were together and there was a single price point. And I think if you are referring to that, we do have several what we call POS activities running in our stores currently. some of which were definitely planned, some of which we take advantage of a slight break in the price to move some additional units through the balance of the season. But overall, the markdowns units are at the back of the store.

Will you be doing those for the balance of the holiday season?

The POS?

Yes.

We do them all year-round. We actually target certain categories of merchandise. So yes, some of them would be definitely planned at certain points in the season.

Elaine Reese (ph) (indiscernible) Dreyfus.

One question. I was a little unclear about the inventory. Could you share with us what the inventories were this quarter versus last year this quarter?

They were in the $63 range this year and last year. So they are in the exact same range year-over-year. The dollar increase is really associated with the White House/Black Market acquisition. We added 111 stores that we didn't have last year, so that's the dollar increase. But the overall increase I believe was a 33 percent increase and the sales were up over 50 percent.

Roxanne Meyer, CIBC World Markets.

Let me offer my congratulations as well. Just a few questions. I know that, Pat, you mentioned that newness in the first half is just going to -- you know, the first half merchandise; there's going to be a lot of newness. But can you go more specifically into any category or fabric that you think is going to be very different from last year? Second, I wanted to know -- the guidance for December seems to reflect a little bit of a down trend from November, considering how strong November is, and just looking at the comps for December not being too far different from November? Third, I just wanted to know how you spell your new concept Soma?

Soma is spelled S-O-M-A. And as far as -- I will let Charlie talk about the comps for December -- but as far as newness for next year and special fabrics, I would just rather keep that with us temporarily. We're really working hard on the assortments for the first quarter of next year, and a lot of them are already (indiscernible) very excited. But I really wouldn't want to go into any specific fabric or category right at this particular moment. We're still fine-tuning and culling the assortment. So I would feel better if you talk about it at a later date.

As far as the comps, the December January period as you all know is a very sort of unpredictable season. It can be affected just by what they say in the newspapers about the season, let alone what the customer wants. So we just feel very conservative as a management team. We don't have any problem with projecting high single digit comps for the month of December. Whether we do good or not, we will see. But that is right now where we are projecting for. It's not necessarily down trend per se, it's just where we feel comfortable in projecting in an environment that is usually unpredictable.

Oz Tangun, Southwest Securities.

Great quarter. A couple of quick questions. Charlie, I wanted to clarify your comments about the gross margin and SG&A. The overall improvement was 140 basis points. You said that markdowns were slightly higher. Are we talking about 20 or 30 basis points higher?

I didn't give the number. I'm not sure I knew (indiscernible) number. It was very slight. There was a slight increase.

Okay. So I guess the rough increase on the overall IMU was about 150 basis points then?

It was near a whole point, and we gained a lot of ground in our outlets as well. They ran significantly higher margins than last year. (multiple speakers)

I guess you're expecting the IMU to be less than the third quarter, the improvement on the IMU?

Yes, absolutely.

And you're expecting the Pazo and the White House impact -- negative impact to be larger than the third quarter?

White House because it was only through 8 weeks of the 13; it will be all 13 weeks next quarter. And Pazo (indiscernible) their final stage of declaring merchandise.

Sure. But if I take into account some improvement from the distribution center and so on, I come out with flattish type of gross margins.

We said it could be a slight down trend to up to a half a point.

Okay. On the SG&A side, I guess if you didn't have the charge or the deleveraging from White House, then you would have had maybe 450 basis point improvement on your SG&A then?

I don't know it would be that high, but it would be up there. Pazo was two percent itself.

Okay. So in terms of the fourth quarter guidance, net net, you're expecting some decline?

That is on a mid single digit comp, too. Mid to high single digit comp.

Alright. So if the comps are higher you may actually see flattish or some leverage?

Just like the third quarter, yes. We ran a 20.9 percent comp in the third quarter, so that offset all of it, and in fact, even improved it. It still remains to be seen what our comp is going to be for the whole fourth-quarter, but if it runs in the 20 percent range for some reason, then yes, it will offset that.

Okay. And finally, in terms of your sales guidance, what kind of square footage growth are we going to have fourth-quarter over last year?

I don't know fourth-quarter; I would have to go look that up. (indiscernible)

Call him back tomorrow (multiple speakers)

(multiple speakers) -- huge if you consider the White House square footage. It will be huge with the White House square footage that we've added.

Finally, in terms of the intimate apparel concept, are you guys tinkering with maybe having a combination store? First nine stores or the first test stores -- are they going to be all stand-alone stores? Are there going to be any combination stores, or are they other versions that you are thinking about?

We looked at and worked with our architects and with our entire executive management team, including some of our board members who have experience in the intimate business. We found it was very hard to merchandise a store when it was a combo store, because we're trying to -- obviously, we think that the customer and the environment that the customer wants to shop in for intimates is different than the environment we currently have at Chico's. So (indiscernible) all except for one store that I know will be sort of a superstore, but we will have a pass-through (indiscernible) an arched pass-through of some sort, the rest of the stores are stand-alone. But adjacent to and very nearby, a high performing Chico's store.

One final question. In terms of the (technical difficulty) price, I guess it's fair to expect an increase within (indiscernible) pretty much every quarter? Is that fair to assume that?

No, I would not say that. We had an opportunity that we identified in the third quarter that we could bring in higher price points. I don't know that's going to apply in the spring, so -- and I'm not sure passing (indiscernible) ready to answer whether that will apply in the spring. We don't expect declines, but whether there are going to be increases around, I'm not exactly sure.

Christina DeMarval, Sidoti & Company.

Good afternoon. Well done, everybody. I guess some housekeeping questions for you, Charlie. First on the SG&A charge, I think you said on your prepared remarks that it was 3 million, but as the press release says, the total charge was 3.6?

Right. There was $300,000 at the gross margin level. I talked almost exclusively SG&A.

That answers that. I'm (indiscernible) -- I don't suppose you might break out for us how much or what the revenue -- what White House/Black Market did in total revenue, and what the gross margin percentage might have been?

No, we're not going to give that kind of data out. We know once we do we have to forever, so we're (multiple speakers) not going to do that.

Can I just ask what the ending store count was? On White House/Black Market?

It's on our press release right at the bottom of the (multiple speakers)

Okay, well I will finish reading it.

111.

Excellent. And then, Jim, if you're still there -- I'm wondering if you can update us with the passport club membership numbers? If you can share with us how they are progressing towards their goal for the year, both in terms of --?

(indiscernible) at the end of the third quarter, and (indiscernible) republish it.

It's about 48 percent growth over last year. So we are -- that's right on our forecast. So we're quite happy with it.

Let me just ask a bigger picture question for any of you guys out there. Everything seems to be coming together so well just in terms of execution and strategic issues. Is there anything out there that might concern you that you might share with us?

Rephrased, like you ask us all the time -- everybody -- what keeps us up at night. It's the merchandise. Pat, she is challenged with creating unique exciting merchandise month after month after month after month after quarter after quarter after year after year. And that is -- we believe that we are very sound operationally, very sound financially. And it all -- as I have said in my opening statements, it all gets back to the merchandise, Christine. That is what keeps us up at night is are we out there in front of the customer bringing her exciting merchandise? Which is why Pat was just -- I was with her in France and India, and why she's out of here tomorrow morning on another trip (indiscernible). And she puts an awful lot of miles on out there trying to make sure she knows what's going on. So in the end it's all about the merchandise.

Can you update us on anything on the competitive front, in terms of -- I know you are always about five steps ahead of your competitors, in terms of --?

We even hear some of the big box guys out there now talking about trying to copy what Chico's is doing. But all we really do is read the articles and move on, because we don't need them telling us that are customer needs freshness and newness; we know that.

Alexandria Jennings (ph), Searchlight Capital.

Great quarter. I was calling about the December comp guidance. I believe the recorded call said mid to high singles, and just now you said high singles. Can you just clarify that?

Mid to high is where we are.

Okay.

Mid to high single digits.

Janet Kloppenburg (ph), JJK Research.

Hi guys. Congratulations on a great quarter. Just a couple of other questions for Pat. Just to get back to the IMUs and the higher average retail. Was your mix of novelty products higher in this quarter versus a year ago? And will it be the same in the fourth quarter?

I can't say it was higher. We concentrate on novelty far more than I would say any other retailer, so it's a big part of our business. But I can't say that it was any greater than, let's say, the fourth quarter last year. I think we did a better job on a lot of things this year than last year. We did a much better job on, for instance, our velvet assortment, which far outperformed how it performed last year. So I think the opportunity was and (indiscernible) fell through at regular price. But as far as the balance of the assortment, I really can't say that we did anything differently.

And Charlie had said that you remained very competitive in terms of pricing on the basics through improved sourcing. But I am wondering if, because of the strength of the fashion of the assortment both on the basic and novelty side, if you were able to just bump prices up a little bit in the quarter?

We really concentrate on value, and we really work what we feel is (indiscernible) price for the item back. So some of the negotiation is done at the (indiscernible) level, but we really don't make any changes to fabrics or just arbitrarily raise the price just to raise the price. (multiple speakers)

-- if there's more in the product, you might be able to get more for it?

Oh truly, yes. The more detail in the beading and some of the embroidery techniques, and some of the processes that we do, I really don't feel like anyone else is doing them (multiple speakers) I think our customer realizes that she would expect to pay more for that same or similar item at another retailer.

Did I hear you say that the level of novelty will decrease as we move into spring?

No.

Charlie, did you say something about that?

No.

So we should look for more of this, kind of more detailed, higher novelty oriented product?

I think you should look for a consistent approach in terms of a good balance between novelty, and our customer likes basic items as well. So it's a great balance between novelty and basic and (indiscernible).

, Thanks. The Soma stores -- will they all say Soma by Chico's?

Yes, they will.

Okay. Wanted to confirm that. Charlie, is your guidance for December comps -- I wrote down mid single digits during your talk, but it sounds now like it's a range of mid single to high single?

Mid to high single digits.

For both December and January?

(indiscernible) December. We have not given anything for January yet.

And you haven't given us an outlook for '04 comps?

No. This is going to be mid to high single once we know (indiscernible). We're going to be very conservative (indiscernible) when we forecast our comps, and that's the way we'll be --

I was just wondering, Charlie, if the December outlook -- which is still fine, but a bit down from where you have been all fall -- had to do with maybe inventory levels not being able to support a higher level of comps?

No, absolutely not. No. We were just running very strong in the fall and we're just starting the holiday season. So we really don't know as much about it. We knew during fall once we put a 20 on the board that it was going to remain that way for a while, but we don't really know on holiday.

My last question is, if you could comment on the productivity of the new stores in the quarter versus last year?

They're about the same as what we have talked about. The (indiscernible) they're just slightly ahead of our store economics model that we give. So we're doing just slightly north of (indiscernible).

(OPERATOR INSTRUCTIONS). Laurie Brunner, RBC.

Could you talk about the mix of real estate in '04? Have you talked about percentage in malls versus lifestyles versus street location?

I think it will be about the same as it has always been. We haven't varied from our percentage in a long, long time.

Have you talked about the number of White House/Black Market store expansions you will do in '04?

We're actually just working through that. We're having to work through that with the landlords, Lauri, and really what the opportunities are. And again, we've only owned it for a quarter. (indiscernible) to be very aggressive there.

And then Jim, I guess, on the passport program -- could you talk about the growth that you have seen for the customer who is under 35? You had given us an update a while back; just wanted to get more of an update there?

As you know, our target (indiscernible) has been 35 to 55 for sometime, and we haven't changed that target. Just to eliminate or try to eliminate any confusion, our best customers are older than that 35 to 55. And the meat of the order is somewhere -- 45 (inaudible) 55. I have not seen a change dramatically from quarter to quarter in a couple of years of the proportion that's 35 to 45, or 45 to 50. Having said that, (indiscernible) the right proportion that we're bringing in enough new and younger customers. For us, a younger customer is 35 to 40. We've seen the right proportion and the right numbers coming in. And the critical thing no matter what their age, we're seeing significantly more and on forecast on our aggressive forecast of new customers coming in, new sign-ups into the passport program. That is probably the most critical number for our future, and it's a very good one.

Liz Pierce, Sanders Morris Harris.

Congratulations everyone. Jim, just while you are on this, could you just repeat -- did you say your best customers are the ones between -- who are older than 35 to 55?

I am saying that the range is slightly older for the actual spend of our existing customer, but our target is still 35 to 55. And that's simply that we have enough to guarantee our future.

Right. I guess that's what I (indiscernible) clarification (indiscernible) meaning as in spend?

Yes.

What about conversions? Can you update us on what the conversions are about per month?

If you're talking about our crossovers, I can just tell you without (indiscernible) all of the numbers Charlie is pointing out remind me --

They're on the website (multiple speakers). (indiscernible) we converted 220,000 in the first nine months, and we had 778,000 net sign-ups. So it's staying about the same.

I've got that right here. Jim, for next year, should we just presume a comparable schedule in terms of number of catalogs (indiscernible) of the monthly?

Yes, roughly. What we will be tweaking -- and I'm not going to talk about the details of what we are tweaking, but I will give you more information at the conference -- but we expect that we will be tweaking things like circulation, page counts. And as we get -- we just get better and better, I don't know, it just keeps increasing the response rate. And that is because our models are that much better.

And then the November catalog was somewhat different in terms of its whole aesthetic. How was -- that was well received I presume, given the numbers?

Yes it was, and we were very happy with it. (indiscernible) the question that Pat has, you've got to provide enough newness to keep things nice and fresh. And you notice if we do that every couple of months. We've tweaked it a little bit. A little more sophisticated, or just a little different; a little uniqueness. At the same time, you balance that with consistency so they know it is from Chico's. That is what we keep balancing every month. I'm glad you noticed it.

Charlie, should we -- in terms of the total marketing spend for next year (indiscernible) about 3 to 4 percent of sales like it has been?

We have not set that yet for next year; we're still working on our budgeting right now. So we haven't really set that, but we've been running between 3 and 4 percent the last 3 years.

So that's probably what you'll end up this year?

This year we said we would be near 4; from 3.5 to 4 is what we have been guiding to.

Okay. And then, Pat -- if she is till there -- I know that a comment just came up about some of the big box retailers trying to mimic. Do you have any idea on what specifically they are doing, in terms of is it Travelers, is it something else?

I don't know specifically what they're doing, and the most I know is that they are targeting the same customer and they are trying to kind of identify the Chico's look. So I'm not sure what that means, but I've really encouraged the group here, especially from a product development side, to try to not concentrate on that. We need to be aware, but I just think that our goal is to move forward and create the newness and excitement ourselves, and try not to focus on exactly what they are doing. But I haven't heard anything about Travelers at all.

I think the thing that I saw on Target just talked about more lifestyle rather than anything (multiple speakers) very specific.

Right, exactly.

Pat, what about the sourcing issues for '05, and what your thoughts are (inaudible) moving product production?

Are you talking about the (indiscernible) for '05?

Right.

We have met quite a bit on that. We've had a lot of discussion. And I think we're trying to still sort out what are the issues as they pertain to specifically our product mix. So I really can't answer specifically right now what we think we should be doing.

In terms of the merchandise teams at White House, when you said that some of the people unwilling -- are there any vacancies in the merchandising team at White House?

Sure. We are moving their business to Fort Myers, and there are people with children in the schools and spouses that have jobs that can't move. And there are some vacancies that we are trying to fill, but again, none of them in a critical key position that we -- that would be material to their business at this point.

Finally Charlie, I haven't had a chance to listen to the sales release since it was released simultaneously. But could you just tell us how things played out for the holiday weekend?

For the holiday weekend we had a shift in our catalog expiration dates. Last year we had an expiration -- we had a coupon expiring on Monday after Thanksgiving; this year that same coupon expires December 24. So we ran high single digits through that, and we were very pleased with that. We expected that the fourth week would be the lowest week. We will take one more question.

Bob Ladder (ph), (indiscernible).

I saw you disclose goodwill intangibles totaling 93 million from the White House acquisition. You paid only 90 million -- I was hoping you could explain the accounting and the inventories, etc.? I will get off the phone so I can hear your response. Thanks.

(indiscernible). Per the accounting on that -- and this is very technical -- you have to gross up the intangible assets. We hired a firm to value the intangible assets for us. That is number one what you have to do on the accounting. They valued the intangibles, and then when you get it you have to gross it up for deferred taxes under FASB 143, I believe it is. So you will see this (indiscernible) 11.5 million liability there for deferred taxes. Why the accountants make us do this we don't really know, but it is accounting (indiscernible) and you have to do it. And that raises it by about 11.5 million. And that is in the goodwill number, but it's based on the other intangibles. I guess that's it for now.

Thank you all for joining us and we'll look forward to sharing some good news with you next quarter.

Thank you, ladies and gentlemen, for participating in today's teleconference. This does conclude today's presentation. You may now disconnect.