Chico's FAS Inc (CHS) 2004 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Chico's first quarter 2004 earnings conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has difficulties hearing the conference please press star zero for operator assistance at any time. I'd like to remind you that this conference call is being recorded. I'd now like to turn the call over to your host, James Palzinski. Sir, the floor is yours.

Good afternoon everybody and thank you for joining us. Before we get started I'd just like read the company's Safe Harbor language. I'm sure you're all familiar with it.

Certain statements contained in today's call including without limitations 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 special 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 reports 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 operations and financial condition.

The company does not undertake to publicly update or revise 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'd like to turn the call over to Scott Edmonds, Chief Executive Officer of Chico's FAS Incorporated.

Thanks James and thanks to everyone for attending Chico's first quarter fiscal 2004 conference call. With me on the call today are Charlie Kleman our CFO and COO, Pat Murphy-Kernstein, our Executive Vice President and Chief Merchandising Officer and Jim Frain, our Executive Vice President and Chief Marketing Officer.

As you saw in the press release the first quarter came in strong with a double-digit comp increase of 20.1%. Indeed a good start to fiscal 2004.

Net sales for the first quarter ended May 1, 2004, increased 52% to a record 257 million, from 160 million, excuse me, 169 million for the first quarter ended May 3, 2003. Net income rose 52.6% to 36 million, or 40 cents a diluted share compared to net income of 23 million, or 27 cents a diluted share, in the prior year's first quarter.

We were pleased with an increase of 50 basis points in our gross margin as well as an increase in our operating margin of 20 basis points to an impressive 22.3%.

Turning to the balance sheet for a moment.

During the thirteen-week period we added $62 million to our cash position that now stands at $183 million. Our inventory's in good shape as well at $59 per square foot.

The Chico's success story is a product story as much as our marketing and store service are a part of our brand DNA it all begins with great merchandise.

Pat Murphy-Kernstein and her talented team have an intuitive relationship with the Chico's customer that gives them insight into what motivates her. It is this relationship with the customer that led us to test our intimate apparel concept Soma by Chico's in the second half of this year.

The summer project is progressing nicely. Pat along with Terri Campana have created a merchandise presentation aimed directly at the Chico's customer.

The first Soma store which is scheduled to open in August here in Fort Myers is built and the fixtures are set. The remaining stores are schedule to open in September and one store will open in October.

We are both confident and excited about the long-term growth prospects of the intimates business for Chico's and its shareholders. We are fortunate to have consulting with us on the Soma project Mr. Chuck Nesbitt an intimate apparel veteran and former CEO of intimate apparel for the Sarah Lee Corporation.

Incidentally, after much discussion we've decided that four of the Soma stores will be adjacent to existing Chico's stores so that these stores will have interior access to allow pass through between the two stores. We concluded that in order to accurately test the customers response to the Soma merchandise we needed to test both types of store formats, stand alone stores and combination stores.

We intend to evaluate the performance of both formats before deciding upon the rollout strategy of any additional Soma stores in the future.

Now a few comments on the White House/Black Market brand.

We're pleased with the progress we are making on the White House/Black Market business. There is an intense focus on our most important asset, human capital. Retaining, recruiting and training the best talent in America is our mission and we are pleased with the response we are hearing from potential employees.

I've been working closely with Patricia Darrow-Smith to build some bench strength in her merchandise department and I am excited to announce that we've hired a new Senior Director of Design and Product, Lisa Converse, who is formerly Vice President of Design, Women's and Girls with Ambercrombie and Fitch.

Lisa is one of the bright upcoming talents in the industry today and will certainly have a positive impact on White House/Black Market's merchandise team. Patricia also continues to develop relationships with product vendors that will be able to keep up with our projected growth.

On the store side we have filled seven district sales manager positions, 18 district trainer positions and have also promoted or hired 200 assistant managers between the beginning of February and the end of April. We are committed to having the proper infrastructure in place prior to ramping up the White House/Black Market store growth in future years. We get closer to that each passing today.

Now I would like to turn it over to Miss Murphy, Pat Murphy-Kernstein, our Chief Merchant.

Thank you, Scott. Good afternoon, everyone.

Upon completion of our first quarter of 2003, we looked ahead to opportunities for the first quarter of 2004. Due to our strong product development, merchandising and planning strategies we were able to take advantage of these opportunities, producing the strong results announced today.

We have already identified further opportunities for the first quarter of fiscal year 2005.

During the first quarter of this year, sales of key items and key classifications were outstanding. For the first three months of fiscal year 2004, T-shirts sold per store at a 60% greater average rate than the same period in 2003.

Good planning, testing of new silhouettes prior to the season, a great color pallet and consistent flow of product to the stores all contributed to driving sales for the quarter. Our linen shirts, which is a key category for spring, are also selling on or close to our aggressive plans.

We saw additional opportunity in this category last year and planned an increase in ownership of linen novelty, shirts and sheer novelty shirts. This strategy accounted for an additional 150,000 units being sold in the first quarter over the original basic linen plan, or an additional $12 million in sales.

At regular price we continue to see strong sell-throughs on these novelty items thus far in the second quarter. Sell-throughs are as strong as 60% in the first week they hit the stores.

In other top news, printed T-shirts sold store per store at an average rate of 131% more than last year for the same time period and they, too, continue to be excellent for the second quarter.

Pants business was strong with sales of linen, ocean beach, both solid and printed and denim exceeding projections. Our basic denim pant sold more than three times the numbers sold in the first quarter of 2003 in an average store, and sales on printed pants were more than doubled.

The quarter also saw a record sales on Travelers, both in novelty and in basic black. This category continues to be an impressive core business and a fabrication that we see the customer continuing to respond to.

Accessories also enjoyed record sales. Jewelry classifications remained the key drivers of the business. However, sales on belts were above plan and scarf business is also strong.

Our average unit retail continues to show improvement. Our density of units per square foot is in line with last year. And a new markdown strategy has produced solid results with markdown inventory turning at a record rate.

In February we made the decision to take all apparel first markdowns to 50% off the original price. Not only have we avoided second markdowns in front line stores but we have yet to experience the need for an additional percent off markdown merchandise since the inception of this new strategy.

Last year we used an additional percent off in 40 of the 52 weeks. This year we haven't had to use this method to move the goods. We have been taking accessories to 50% off the original price for some time now and we will continued to so.

In many both apparel and accessories, this allows for cleaner front line stores, a better and more consistent presentation and the need for fewer markdowns once they hit our outlet stores. As a result, profit margins in the Chico's outlets have also dramatically improved.

We conducted our fall test in April in a select number of stores. Selection was based on geographics as well as store type.

From these results and customer feedback we feel better positioned on key classifications for the fall season. New bottom [length], new silhouettes in our essentials fabrics and new yarns for sweaters were all part of the test. We also tested a boot cut jean which we'll carry in all stores this fall.

Novelty treatments in suede cloth were a hit and will add dimension to our basic program this year as novelty linens did for our spring. Menswear [inaudible] were also tested. We feel excited by the customer's response. All in all we look forward to an exciting fall season.

The Soma by Chico's in intimate apparel brand is on target to launch in the third quarter. As Scott indicated Terri Campana and her team have done an outstanding job in the development of the Soma product so that it targets the Chico's customer.

We feel the product offers all the ingredients that our customers find to be important in this new and exciting category. Great fabrics, style, comfort, a relaxed fit in sleepwear and loungewear and well edited, well targeted bra and panty assortment, with special fit and quality considerations for our targeted Chico's customer.

Mori's team has been developing training programs that will complement this brand extension with intense product knowledge, over the top customer service and attention to detail. The entire team gets stronger every day and each one of us is dedicated to delighting the Chico's customer each and every time she shops with us. Our team spirit and can do attitude throughout the entire Chico's network continues to be the defining difference in our success.

And now to Jim Frain for his comments.

Thank you, Pat. Your merchandising team is making it easy for the marketing department.

When we made our presentation in February at our analyst day I told you the first quarter would be critical to our marketing efforts as well as to Chico's growth overall. We earmarked extra funds particularly for catalog circulation in March, April and May.

Even while keeping with our annual marketing budget of 4% of sales or less, we added millions of extra prospects to our mailings in those months. As most of you know we practice multi-channel marketing so our increasingly focused TV campaign was timed to our catalog drop.

Our magazine advertising is further refined and has become more efficient with runs in larger circulation publications. You can probably tell from our financials for the first quarter that those efforts paid off.

A few numbers from a marketing perspective that underscore Chico's is very much in fast growth mode. Full Passport members grew to over 1 million relative to 700,000 in the first quarter last year, a 44% gain.

We signed up over 243,000 new customers in our stores in the first quarter. In addition we had 118,000 inquiries, primarily from ads, who were signed up from our Passport program for a total of 369,000 new customers in the first quarter alone. That's a 32% increase over last year.

Full Passport members represented over 72% of sales in the first quarter versus 68% last year. They obviously like what they see.

With White House/Black Market we were so encouraged by our first November catalog we have scheduled virtually one catalog a month from March onward. Our results are ahead of our forecast and the response is better than Chico's was at the same point in their development.

We are complementing these catalogs with adds in magazines like In Style, Red Book, Lucky, Marie Claire and El.

Back to Chico's.

Our very positive response to increased prospect mailings this spring at less expense than planned has set the table for a good fall in two ways: A sizeable percentage of the new customers brought in with those mailings will return in the fall, and we will add almost 3 million extra catalogs to prospecting in the fall.

There are a number of key indicators that demonstrate that we have a much larger potential for the Chico's concept alone.

Not only are we bringing in new customers at a higher rate than ever, they are profitable even in the very short-term as well as the long-term. For example, our mailings to prospects in March generated over $2.3 million in sales inside of five weeks versus $461,000 in marketing costs.

We've also shown an ability to keep the customer after the first visit. Passport shoppers signed up in 1999, for example, spent $70 million in 1999, their first year. They still spend over $51 million last year.

That would be a sign of concern if we hadn't signed up significant numbers of customers each year since. For instance, new signups in 2003 spent over $200 million in 2003.

With new prospects coming from a broader range of demographics and our loyal shoppers continuing to spend significantly beyond their fourth year, we feel confident of our revenue and earnings growth in the future.

Thanks, Jim and Pat. It sure makes it easy for cash planning as well with the merchandising and the marketing that you guys produce all the time but I'll get to what I have to talk about.

Good afternoon, everyone, and welcome to another great quarter of improving results over last year's great quarter. Today we'll review the quarter in some detail as well as provide you with a status update on some operational items including the White House/Black Market integration activities.

First let's look at an overview of the first quarter which produced our 23rd quarter of the last 25 that have resulted in net income growth of at least 45%.

The quarter ended up with a 20 basis point overall increase in our operating margin from 22.1 last year to 22.3 this year. The quarter also resulted, as Scott said, in a strong improvement in gross margin as we move from last year's gross margin of 61.7%, to this year's gross margin of 62.2% in spite of the inclusion of the lower White House/Black Market gross margin this year.

On the SG&A, or selling, general and administrative front, we saw a small amount of deleverage principally due to the acquisition of the White House/Black Market. A little later we'll look at more details on both the gross margin and SG&A changes and our expectations for the future.

As in the fourth quarter last year, the White House/Black Market operations added nicely to our earnings per share growth as we estimate they contributed approximately 2.5 cents to our earnings per share in the first quarter. You'll recall at our fourth quarter conference call we noted that they added roughly 3 cents to our fourth quarter earnings per share.

Now considering the seasonal spike in sales volumes that the White House/Black Market always experiences in the fourth quarter, the first quarter earnings per share had only a half a cent behind the fourth quarter are in line with what we and I believe others have expected.

Next let's look a little deeper into the first quarter and we'll start with sales.

The first quarter same store sales increase of 20.1%, our third consecutive quarter of 20 plus comps, certainly was the major contributor to the operating margin increase I just talked about. As always the comp increase was principally driven by traffic and new Passport member signups.

The average unit retail at Chico's increased just over 4.5%, representing our fourth consecutive quarter of price point increases to that range between 2.5 and 6%. The average transaction was also up roughly the same, 4.5%.

These price point increases resulted from mix changes within the Chico's brand, an increase in the sale of the Travelers collection which carry a higher average price point and a slight increase in the pricing of our novelty products. Staying on this topic for a moment we do not see significant deflationary pressure on our price points due to the upcoming quota changes at the end of the year in China, India and the other countries that are affected.

We believe this will affect commodity sales more than the sales of private label goods that offer value and uniqueness in the marketplace. In fact our ongoing tests of higher price points in the Chico's brand shows little resistance by our customers to price point increases as long as we continue to provide products that are viewed as a value by the customer.

On the White House/Black Market front we saw solid year-over-year increases in every month of the quarter both on the same store sales level and with sales at new stores despite being relatively light on inventory throughout the bulk of the first quarter. We anticipate that White House/Black Market should have a more adequate inventory level by the third quarter of this year and we believe this could accelerate the already nice monthly sales increases.

The high teens may account for Chico's that we announced with the June catalog just starting to kick in at both Chico's and White House/Black Market and the solid May results so far at the White House/Black Market certainly bodes well for our second quarter results to be released on August 26.

Next let's look at gross margin where we saw an overall improvement of a half percentage point in this year's first quarter versus last year's. This increase was primarily due to continuing improvements in the IMU or what we call the initial markup.

At Chico's brand was approximately a 1% increase in the IMU year-over-year as well as better than anticipated better gross margins in the White House/Black Market brand. In addition our new distribution center in Winder, Georgia again leveraged nicely as it contributed a four-tenths of a percent increase to the gross margin as a result of decreased operating costs as a percent of sales.

Our new DC is running much lower cost per unit shipped and is generally generating freight savings from being more central to our store base.

The last item that resulted in improvement versus last year's gross margin is very interesting item. The new 50% off markdown strategy that was discussed by Pat and that was implemented at Chico's early in the quarter significantly improved the margins in our outlet division as more goods were cleared through our front line stores and yet the margins in the front line stores were only very slightly down from last year.

These gains I just described in the gross margin were partially offset by increased product development cost particularly for the White House/Black Market division as we continue to add staff as Scott told to you solidify the merchandising and product development areas of this brand. Beyond that, in our investment in Soma by Chico's likely caused a two-tenths of a percent reduction in gross margins as we are intensifying the product development initiatives in this area.

We continue to guide to a decrease in gross margin as a percent of sales for the second quarter in the range of a half point or so due to the impact on the gross margin percent from the White House/Black Market acquisition and to the costs associated with the upcoming Soma by Chico's launch. We do not expect that Chico's can maintain a 1% improvement in the IMU although we do anticipate small increases that are similar to last year.

Beyond the second quarter we are guiding to an overall flat to slightly down gross margin due again to the increasing percentage of White House/Black Market stores in the mix and the initially lower margins at Soma by Chico's. We expect that the Chico's gross margins will be flat to slightly higher during the remaining quarters of fiscal 2004 as compared to fiscal 2003.

On the SG&A front the three-tenths of a percent increase in these costs as a percent of sales was principally due to combining the higher cost associated with the White House/Black Market store operations, and the former headquarters which likely had the impact of increasing the overall SG&A by about a half a point.

In addition the company's initial cost to address the Sarbanes-Oxley initiatives and our continuing focus on improving our technology platforms increased SG&A by about two or three-tenths of a percent as we aggressively begin to address the Section 404 internal control review area.

Lastly, we have been aggressively and in a forward-looking manner filling open management positions relating to the White House/Black Market acquisition in the upcoming Soma launch. All these additional costs were for the most part offset by improved store opening costs in the Chico's concept as these and other costs continues to leverage nicely.

Indirect marketing costs we spend 5.0% this quarter versus 5.1% in last year's first quarter. For all of fiscal 2004 we are still planning as Jim said, that direct marketing costs would range between 3.5 and 4% of sales.

Regarding the overall SG&A we are still guiding to between flat and slight deleverage in SG&A costs in the second quarter of fiscal 2004, assuming we run high, high single to low double-digit comps. Beyond the second quarter we should see some leverage even with mid single digit comps for the rest of 2004.

We are diligently building a strong staff that will effectively manage our three brands and that will begin to leverage at lower same store sales levels once we anniversary the acquisition late this year.

Wrapping up the financial review our operating margin increase this year resulted in a 48% increase in earnings per share for the quarter as we moved from 27 cents last year to 40 cents this year. As I said earlier we estimate that the White House/Black Market operations provided a lift to earnings per share of approximately 2.5 cents in line with our expectations.

Next let's look at some operational areas. First let's look at store openings.

For the first quarter of fiscal 2004 we opened 12 new Chico's stores. We closed an underperforming Chico's store in downtown Cleveland and we expanded or relocated four Chico's stores.

We closed all nine remaining Pazo stores and then converted five of those to White House/Black Market stores all of which are expected to have sales in excess of $1 million in the first full year. Three more of those former Pazo stores will be converted to some of our Chico's stores in the third quarter.

On the White House/Black Market side we opened six additional new stores beyond the five conversions and we relocated two White House/Black Market stores to larger locations. It's very encouraging to see nice jumps in volume and profits just like at Chico's when we expand the White House/Black Market stores. More on the size of these stores later.

All of the store activity resulted in a net increase of 28,000 square feet of store selling space for the quarter, and we are still projecting a 20% increase in square footage growth for all of fiscal 2004. We previously announced that we will open between 85 and 95 net new stores and expand as many as we can which now looks like it will be somewhere between 25 and 30 Chico's expansions or relocations and between eight and 12 White House/Black Market expansions or relocations.

Now of that 85 to 95 new stores it also looks like we will be opening between 40 to 45 net new White House/Black Market stores, ten Soma by Chico's test stores in the third quarter and they will open, and I'll read it slowly to you, Fort Myers, Sarasota, Atlanta, Memphis, Birmingham, Alabama, Houston, Scottsdale, Indianapolis and two Soma's in Dallas, Texas. The rest of new stores to be opened in fiscal '04 will be under the Chico's brand and this is likely to end up being between 40 and 50 net new stores.

In terms of stores by quarter, we opened 13 net new stores in the first quarter. We expect to open 20 to 25 net new stores in the second quarter, 45 to 55 in a big third quarter and the balance in the fourth quarter.

Lastly on the store opening front we are still evaluating what we believe to be the optimal size of both the Chico's and White House/Black Market stores for the future. Granted, each location has its own sizing needs based on a lot of factors but on an overall basis we do look for the average of stores open to come in at certain levels.

The new [Calison] design store at the SouthPark Mall in Charlotte, North Carolina that opened in mid-May not only represents an entirely new store look for Chico's but it also is now our largest front line store at about 3700 net selling square feet. This store will provide us an opportunity to evaluate the customer experience on a larger and new format and we will be closely monitoring this store for the customer experience as well as the reaction to the new design.

We have a second new look store or what we call [Calison] store opening up next month at Phipps Plaza in Atlanta and we have already learned some minor things from the first store that will result in changes in the second store.

Regarding the newly designed store performance so far, it is still way too early to evaluate any sales trends from the new stores because almost all new store relocations start with a bang as this one did and because we are still one of the very few retailers that have opened in this new wing of the mall. As I said, we will be closely monitoring the customer reaction to this new store look before we aggressively begin to open more stores with this look and feel.

With that said and until we have more time to evaluate the results of that larger store format we now believe the ideal Chico's front line store is likely to be in the 2500 to 2800 square foot range versus the current average size of just over 1950 net selling square feet at the end of the first quarter. The profitability from the larger size stores, that is over 2500 net selling square feet, has consistently exceeded the smaller stores and we are looking for the optimal size without losing the ambiance of a boutique.

On the White House/Black Market front we believe the size of the stores at year-end which averaged only 1175 net selling square feet is too low and we will be rapidly expanding this chain-wide average as we identify opportunities.

The five former Pazo stores that have been converted to White House/Black Market stores and which now average 2369 net selling square feet appear likely to be some of the best performers in the White House/Black Market chain although we are still evaluating whether this is size or location. Our current belief is that the ideal size of a new front line White House/Black Market store is likely to be in the 1700 to 2000 net selling square foot range.

Yes, did you hear me right. I used the word front line with White House/Black Market as their first two outlet stores should open in July at Miramar outlets where our number one Chico's outlet store is located.

Further we are planning a second White House/Black Market outlet in Las Vegas in September. We believe this new outlet strategy at the White House/Black Market will allow more floor space for higher price goods and allow to us reevaluate the sales store concept that has been employed in four stores up to this point.

Next I'll give you an update on the key White House/Black Market integration dates and activity. As we discussed last quarter the White House/Black Market personnel all moved from their headquarters in Glen Burnie, Maryland in late January and the merchandise teams are settled in their beautiful headquarters at the front of our Chico's property.

Chico's real estate, store construction, store management, MIS, marketing and finance teams have all been taken over by the Chico's teams except for merchandising which will remain independent and under the guidance of Patricia Darrow-Smith.

Patricia assures the product continues to be customer sensitive to the White House/Black Market target customer as she directs the merchandise teams with their focus on Sydney, the fictional customer. Sometimes I wonder how fictional Sydney really as I seem to know her and what she's all about all the time.

Back to the integration activities, though.

We've moved their distribution activities to our distribution center in Winder, Georgia just after the end of the first quarter. We effectively closed their former distribution center and headquarters a few weeks later and we brought their former systems up on our merchandising, sourcing, sales audit, CRM and financial platforms over the same weekend.

This conversion went much smoother than the Chico's conversion of last year but any time you undergo a massive conversion like this there are minor issues that must be dealt with. We are still working through using the basics of this massive software conversion at both the White House/Black Market and Chico's and we do not expect any significant synergies until at least sometime in fiscal '05.

Back to the White House/Black Market integration, by the end of this month we will have no activities or employees remaining in Glen Burnie, Maryland. We have also filled the bulk of the open positions either caused by the move or required for the planned growth.

The last integration activities left to accomplish are the conversion of the White House/Black Market cash registers to Chico-like registers in July, bringing the White House/Black Market Web site up as a selling Web site in the first quarter of next year, and the launch of our loyalty program later this year after we properly evaluate the needs of the White House/Black Market customer in this area.

Next, a note on the balance sheet and cash flow and then I'll wrap up.

Our balance sheet remains very strong as we ended the quarter with $183 million in cash and marketable securities. Cash flow from operations generated $63.5 million, of which $21.5 million was related to tax savings associated with stock option exercises and $42 million was related to ongoing operations.

This increase in cash flow from ongoing operations compares to $34 million from ongoing operation last year. For cash flow planning our first quarter depreciation expense was $7.5 million, and I would expect that to grow by about three quarters of a million to $1 million each quarter.

Our inventories at $59 per square foot both this year and last year were right about where we like them on the low end of our planned range. As you can see by our same store and overall sales results for the quarter, this inventory level allows us the ability to turn product quickly and still produce healthy sale gains.

The new markdown policies as Chico's described by Pat are certainly turning inventories quicker and reducing the overall dollar amount of markdowns.

To wrap up, fiscal 2004 certainly has started out with a bang as our strong same store sales increases continued throughout the quarter and we posted a near 50% earnings increase. The May same store sales results certainly suggest this trend is continuing into the second quarter at least so far.

We look forward to the rest of fiscal 2004 as we complete the White House/Black Market integration, we launch our new Soma by Chico's test concept in the third quarter, we continue to improve by using our new software platforms, we begin the rollout of a significantly improved cash register system upgrade to both chains in the first quarter of next year and we complete the opening of 85 to 95 new stores amongst other projects. And now well take some questions.

Thank you. The floor is now open for questions. If you have a question, please press star then one on your touch-tone phone at this time. If at any point your question has been answered you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question, that you pick up your handset to provide optimum sound quality. Once again, to ask a question, please press star then one on your touch-tone phone at this time. Our first question is coming from Kimberly Greenberger of Lehman Brothers. Please go ahead with your question.

Thank you. Good afternoon and congratulations on a fantastic quarter.

Thank you, Kimberly.

Scott, I wondering if you can talk to us just looking out a little bit beyond 2004, how are you thinking about new store growth next year? And in particular could you talk about White House/Black Market, particularly given the increase in the store openings announced for '04, Soma, how long would you like to sort of let that business percolate before you decide on your rollout and then how you are thinking about the Chico's business and the ultimate saturation opportunity?

Kimberly, we've been consistent in saying that we're comfortable with 20% square footage growth next year. And specifically on the Soma rollout, if you will, we currently don't have any plans for any additional stores. We're not negotiating any additional leases. We're really focused on launching these ten stores.

This truly is a marathon not a sprint. We're more convinced now than ever that this is a great growth vehicle for us in the future but we have to get it right. We've to get the merchandise right, we've to get the store design right, we need to decide how she's going to respond to the different formats, then we'll think about moving Soma on to the rollout strategy.

As far as the specific number of stores, the breakdown between Chico's and White House, that's sort of TBD right now. Again we really want to get all of our infrastructure in place for White House. We still have a few systems issues. We don't have a loyalty program yet. We really don't want to start dialing up that business until we feel ready to ramp it up.

So for the stores for next year, the combination of the Chico's stores and the White House stores and the expansions and relos will deliver the 20% number and the Soma rollout is sort of TBD and years out. The saturation point, again, we've been consistent in saying that for the Chico's brands somewhere between 600 and 800 stores and we've said that the White House brand could be 500 or greater. Sometimes, someday maybe even equal to the Chico's growth, so.

Great, Scott, that's very, very helpful. And then Charlie, obviously given the huge increase we've had here in cash and marketable securities in the first quarter I'm sure you're getting the question of what do you guys plan to do with that building cash balance? Have you given any thought to that?

Yeah, we haven't given any specific thought on that but our forecast shows that we need to give thought to that fairly quickly. We will certainly be looking at a stock buy back plan that will certainly be looked at. And we'll be looking at other issues like that.

Great. Thank you.

We have no rush to get rid of our cash.

Okay. Great. Congratulations on a fine start to 2Q.

Thank you. Our next question is coming from Dana Telsey of Bear Stearns. Please go ahead with your question.

Good afternoon everyone and congratulations.

Thank you.

Can you talk a little bit about White House/Black Market? As it's progressing how do you see the financial metrics from what you had seen at the beginning? How do you see the gross margin opportunity, SG&A opportunity? And on the core Chico's operation, Travelers collection, you've raised some prices, how is the acceptance and what are you seeing there? Thank you.

Okay. I'll start off and then we'll let Pat answer the Travelers question. On the White House/Black Market like I said in my speech there, we saw an improved gross margin that was ahead of our plan so we're already starting to make some progress in that area. We see opportunity. That's what it's called.

On the SG&A front, we've to get the top line to move. That's the biggest reason their SG&A is so much higher than ours is they have such a lower top line than Chico's and we see ways, I see Jim looking at me, we're going to be marketing these guys and they're going to get a national marketing campaign when they're ready and we think we can change that top line and we see that they're going to have an opportunity that will bring them much, much closer to Chico's than they are right today and we're already making progress on that even in the first quarter. This was our first full quarter of owning them, by the way. Now I'll let Pat answer on the Travelers question.

Hi, Dana. In the Travelers core pieces we really have not raised our prices. If the customer came in and bought no-tummy pant last year she's finding the same pant this year at the same price.

The difference that we're finding and the great opportunity in this particular fabrication is we're doing a lot of product development in novelty. We're doing novelty jacquards, prints, new weaves, things that definitely command a higher price point. So that's where we're seeing the opportunity and the increase to the business there.

Thank you.

Thank you. Our next question is coming from Dorothy Lakner of CIBC World Markets. Please go ahead with your question.

Thanks and let me add my congratulations as well. Nice way to end the retail earnings season. I had a question for Pat. If you could just give us a little bit of an update on your suit efforts. I know you put some merchandise into the Chico's store that were kind of Chico's answer to career dressing, if I can use that term. I just wondered how that merchandise has performed and where you're going to take that?

Then I also wondered on the White House/Black Market side, I seem to be seeing in some of the stores that I've gone through that it looks like the layout's been changed a little bit. It looks like there's more space in the stores now, some tables up in the front. It used to look like there were more racks in the store and I wondered if that's something that you've been doing to all of the stores?

And then last for Jim, I wondered if you had any new insights to give us on the White House customer? You'd at the analyst meeting that initial take was that this was a broader, actually a broader customer base than you'd initially thought. I wondered if there's anything new on that score? Thanks.

Start with Pat.

Hi Dorothy. As far as suits are concerned, you know, our brand identity is still relaxed dressing so we're not really going to position ourselves into any kind of a structured suit offering. However, what we've done is some menswear suitings and related separates that are definitely geared to urbanwear, workwear, if you will.

We've also identified stores that do very well and need this type of merchandise. So we plan to increase our efforts there especially as we move into fall. But it will be based on more of a related separates sell than actual selling two pieces together under one price.

But the reaction from the customer has been great. And we just need to be able to do it our way and keep the growth contained within the stores that really need the, this type of category.

Thanks.

Dorothy, your channel checks are pretty accurate. I don't know what stores you've been in because we haven't been able to affect all the stores but we certainly are working on the visual if you will on the White House stores. While we don't have an entire new fixture plan in all the stores as of yet we certainly are impacting the layout of the store.

And a lot of this effort is being led by Mori MacKenzie who as you know has been instrumental in the growth of this company, this brand. The store ops reports up to her, the visual is reporting up to her and she's having quite an impact on the store layout. But it's been in a very few stores, in very select locations and you happened to be in some of those.

Oh, good.

As far as the demographics for White House/Black Market, what I was saying in the analyst conference was that I was thinking that the potential would be for a broader audience.

Okay.

A fairly broad audience for White House/Black Market. As of the moment we're seeing the target that we selected as far as age and that was 25 to 45, I had indicated, it varies now with our age and income analysis. So that's what we're focusing on but there are significant numbers for, especially for certain product groups in 20 to 25 and in 45 plus. But the focus in target is 25, 45.

Great. Thank you.

Thank you. Our next question is coming from Richard Baum of Credit Suisse First Boston. Please go ahead with your question.

Hi, it's Tracy Kogan filling in for Richard. My question is for Scott or Charlie. You talk a lot about the types of changes or improvements you can make to White House using Chico's expertise, and I know you have a lot of respect for the White House organization. Can you talk about anything you may have learned from White House that you'll now be adapting to Chico's? Thank you.

I guess the way that I would answer that is that the organizations as a whole are very similar. The cross pollenization certainly has been beneficial to both parties. But just speaking very frank we've probably brought a lot more to the party for the White House than we've been able to extract from the White House.

They were a very small company. And the things that we have in common, our culture, the way we treat our customers, the fact that we're so customer focused and customer centric, the way we treat each other, the staff, those are the commonalities if you will.

When it comes to truly running a retail organization, when it comes to the real estate strategies, the marketing strategies, we're really, I think adding a lot of benefit to that side of the equation versus extracting from them.

Okay. Great. Thank you and good luck.

Thanks.

Thank you. Our next question is coming from Neely Tamminga of Piper Jaffray. Please go ahead with your question.

Great and let me add my congratulations as well. A question for you, Jim. With respect to the circulation and your plans for the rest of the year, can you give us a sense of where you're looking to take total circulation, whether by Chico's prospecting customers as well as total or Passport customers and prospecting? Can you give us a sense of where you're taking circulation with respect to the second half?

Well, as I indicated in my statement, I don't want to give too much detail, we have plenty of people copying of what we're doing on the product side and the marketing side so I don't want to give too much detail away. But as I indicated we are particularly interested because of our success both last year in the fall and this year this spring in prospecting.

We actually, even as a whole group, a whole entire group of all the prospects that we mailed out, it's actually profitable, the whole segment of those mailings. And that's even in the short-term. So we're going do more of the same in the fall and it will be around 3 million extra units, that's extra units, of prospecting.

Now is that on top of the analyst meeting what you gave out?

Yes, yes and that's in only three months.

I guess with respect to the White House/Black Market catalog, I don't know if this is really a question for Jim or Patricia or Pat or Scott, but obviously the impact of putting out a glossy is very high and I'm just wondering if you guys are able to buy from market with quite a bit of conviction to support some of the photography that will be broadcasting that product. Can you give us a sense of how the vendors are responding to that at White House/Black Market?

Neely, that's a great question and it's one of the reason why we've been chasing inventory at the White House and Charlie made a comment about them running through the quarter with light inventory. The book, has you know, obviously you guys have seen the impact historically at Chico's, it's having a substantial impact on their customer traffic and she's chasing inventory. And she's spending a lot of time trying to enhance her vendor base and that's part of the commentary of building the infrastructure to make sure we have it in place before we really dial up the mailings.

I mean Jim can drop a book every month but it's the quantity of that book I think that's going to drive the customers. And he's very cognizant of the fact that we're still chasing inventory over there.

And by the third quarter we'd like to be at an inventory level that's much more like let's say the density of Chico's. We thought we could get there earlier but we're chasing real hard now just like Chico's did about four or five years ago but we think we can get it up by the fall.

And having said all that we're on schedule. We should be up to 1 million plus mailings in the fall.

Great. Thanks and good luck.

Thank you. Our next question is coming from Lauren Levitan from SG Cowen. Please go ahead with your question.

Thanks. Good afternoon. Jim, you made a comment that you're seeing a broader range of demographics in the people who are signing up and in the prospecting success. Can you give us a little bit more insight into that? Were you referring to a broader range with respect to age or with respect to income or with respect to where you see these people trading out of? Maybe just a little bit more help in understanding that and what that could mean for the future? Thank you.

That was a good pitch, by the way. It's very important for our future growth. We're really excited about it. What we've seen, particularly over the past year but it's really a two-year trend as we see a broader range of both age and income.

You probably noted that we've had very successful store openings in surprisingly small communities. And they have lower incomes out there in the semi-rural kind of a combination rural, suburban, in between those two areas. We've been doing extremely well. So I'm happy to say it's both broader in income and age, younger and older.

And these areas, into these areas that what Jim's talking about to give you a few examples, we opened up in Winston Salem, North Carolina in a place called the Thruway Shopping center and did over $100,000 the first week.

We opened up Paducah, Kentucky and did $25,000 in the first day we opened up there. We have a store in North Town Plaza that's in Albuquerque that will break the top 20 in its first year. That's how strong these openings have been recently.

And are you at the point where you're able to micro assort to the specific needs of these stores? Are they buying the same sorts of novelty items that may have higher price points at the same sort of rate that you're seeing in areas with higher household incomes?

You know what, I think that's one of the areas of our greatest opportunity. We don't want to get so splintered in the assortment that we're trying to chase every climate need and every demographic need out there but at the same time it does give us opportunity. We now have as many stores in the north as we do in the south. And that really has given us in this past year tremendous opportunity with our ability to focus on northern store buys.

Right now we're having a lot of discussion about the midwest and what that means to Chico's and the types of clothing appropriate for that customer. So I think it presents us with great opportunity. I think our focus has to be on keeping the brand integrity and to still be able to focus most of the product into all of our stores.

Thank you very much.

I tell you what's really exciting in that regard, that we see a remarkable consistency, whether it's rural or suburban or urban, west coast, east coast, in the size of the transaction and what they buy. And that of course is very exciting, that we can keep that transaction size up, even into lower, and I mean that relatively income areas.

Great. Thank you.

Thank you. Our next question is coming from Adrienne Tennant of Wedbush. Please go ahead with your question.

Good afternoon. Let me add my congratulations. Just a few questions for Jim first. Are you seeing any trends in the frequency of the Passport customer coming in? It used to be in the range of four to six. I thought I had seen that it increased to about four to seven and I was just wondering if there was any material shift in that, first of all?

And then secondly, are there any learnings that you've done from the September increase in the prospect catalog? I think the number of signups surged to about 372,000. So just wondering if there were any learnings the percent of conversion to permanent on that, that you can kind of apply to the Q1 prospect mailers?

And then for Charlie, you had said that you were trying to make some progress toward moving the breakeven comp to positive to mid single digit and I was just wondering how that was coming along and then did you mention May to date comps? Thank you very much.

As far as frequency goes, I think we talked about this but we increased frequency for the Passport category which of course is our most important category and our database from about 5.2 to 5.6 times a year. And remember, that's on a much bigger base. So that was really good news, too. I mean that's an average 5.6 for more than 1 million customers.

Okay.

So that's going in the right direction, too.

Yeah.

As far as what we learned in the fall as I indicated we were successful enough with having all of the prospects as a file being profitable in the fall that we did it even more in the spring this year, in the first quarter this year, and we're going to do even more in the fall.

Can you track based on your database, can you track what percentage of those that you signed up to temporary then become permanent and over what a time period?

Oh, yes.

Can you disclose that?

No.

Okay.

I could but I don't want to.

Okay. Fair enough.

We did disclose that our comps were in the high teens. That was a line in our press release.

That's right, thanks.

And in my statement I did say that by the third and fourth quarter we expect to be in the mid single digit comps should give us some small leverage which would be very nice.

And then you said by Q3, the end of Q3?

Yeah, for Q3 or Q4.

Okay.

And beyond.

And beyond. Okay. Great. Then Pat, just a couple questions on the merchandise. We saw a beautiful beaded denim jacket at the analyst day and you were going to test that at a higher price point. I was wondering how that test went and if had you any price resistance on that particular item?

We'll let you know because they haven't come in yet.

Okay. So I was wondering, and that was my, I guess I should have started with, when is that expected?

[inaudible] It looks very, very good. I mean everyone's excited about it but will say we didn't buy a huge quantity on it but we're just testing the waters there to see what happens.

When will that be in the stores?

I want to say September but I'm not quite sure. I believe it's September.

Okay. Great. Thank you so much and good luck.

Thanks.

Thank you. Our next question is coming from Liz Pierce of Sanders Morris Harris. Please go ahead with your question.

Good afternoon and obviously I will add my congratulations. I want to just clarify some numbers that I think, Jim, you had given out on Passport. I couldn't quite understand, you had 243,000 new signups?

We had 243,000 new signups in-store and we had an additional 118,000 from advertising primarily.

So.

For the first quarter alone. And, of course, those are ones that we can record their name and address. We can't start a file without their name and address.

Okay.

Those are primarily catalog requests from advertising.

Jim, just to also clarify, on the catalog circulation I think at the analyst meeting we had about a 35, almost 35 million for circ so that should we expect that's going up to 38?

That's correct.

Okay. And then on White House it looked like it was slightly under 10 million. So that's going up. Did you say a million per month in the back half of the year?

No. I said that we would be, we will probably crack the million circulation some time in the fall July.

Okay. I thought.

To tell you the truth, we're doing further analysis. I won't know exactly what the circulation will be by month for White House. We have that mapped out for Chico's but we have a lot more information to go on with Chico's.

Because I thought you had given us something about a monthly break out at the analyst meeting, was like 2.5 million for July or maybe, I don't know, maybe I've came up with these numbers someplace else?

For Chico's are you talking about?

For White House.

No, circulation. I don't think we gave out any circulation for White House.

Not by month.

I don't think we knew at the analyst meeting. At that time we weren't planning one every month I don't think.

Okay. I'll have to figure out where I came up with that. And then Charlie, on the inventory, $59.00 does seem a little low for, I thought it was kind of in that $62.00 range, but is that, at the store level it doesn't seem like Chico's looks that terribly lean. So is it really--

The exact same number last year so we look just like we looked last year.

Is it White House that's--

White House is low, there's no doubt. They're much lower than that. So they're sort of bringing the overall number down. Now with that said they're only about one ninth of our chain in terms of sales.

Okay. So for the fall you said you wanted it to get to--

We'd like to see some fairly big increases in their inventory. And that will have a small impact, maybe it'd raise us to maybe 60, with the grand total of maybe 60 or maybe 61. It won't have a huge impact on the chain but it will have a huge impact on White House/Black Market.

It seems like with this new markdown strategy working fairly well that perhaps the number comes down just a bit.

That could come down a little bit. It's still awfully early on that like on the new markdown strategy it's only been in place through one quarter, it's a strong quarter for us so it really remains to be seen how well it will work in like a July markdown month but we're going to find out.

And finally, just a quick question for Pat. On what's happening inside the Chico's stores with the spa and the seawear as we get closer and closer to Soma?

Well, spa will continue in both Soma and Chico's so we're doing well with spa in the Chico's stores and stores are loving it, the customers are loving it so there's room to do both in both Soma and Chico's.

As far as seawear, we've introduced another shot of seawear into our front line stores at Chico's just prior to Mother's Day, it did very well, so she's continuing to love the fabric and to respond very well to the product. We will pick up on that as we open the Soma stores. I don't see sleepwear being carried in both.

Okay. Allright. Best of luck. Thanks.

Thank you. Our next question is coming from Robin Murchison from Jeffries and Company. Please go ahead with your question.

Hi, thank you. Two questions. Pat, Travelers, you've added length to the black in terms of pants. What are your thoughts in terms of offering it across the board or what other opportunities might there be for that? It's sort of a nice addition for people with longer legs.

Across the board in terms of all pants being carried in two lengths or are you talking about adding a tall length?

No, adding a tall length. I mean you've got--

Well, we do carry a tall length in certain styles. The response to the tall has been good but very minimum. And we found that by offering it on the Web site that that customer can find it.

However, in terms of short and regular length, they are selling at this point about 50/50. So that has been an exceptionally strong additional offering. We're trying to figure out a way to carry all the pants in both short and medium length but it's very tough when you're trying to balance out a coordinate group to really get the proportions right as far as the buy. What is the inseam on the medium length? On the regular length?

Right.

I am guessing but I'm going to say 29 inches, and the other one is about, I believe an inch and a half shorter, the short length. Tall I believe went up to 31.

Okay. But right now tall would continue to be limited, very limited.

Very limited.

There's not enough.

I would love to have it in everything because I am 5'10" and a half myself but the population does not demand that we carry more tall.

This question for whomever, you talk about increasing the average store size potentially in White House about 1700 square feet, now that's about a 45% pickup in square footage. What happens with the merchandise mix? Does it grow in terms of SKUs? I assume it does. Does it grow in black and white or do you add color? What are you thinking about to fill up that space?

Well, it's sort of two-fold. Certainly we're going to add some SKUs but they're also just way too small. The merchandise presentation leaves a lot to be desired. They have some stores that are 6, 7, 800 square feet. And currently there are different shades of black, different shades of white. You know, we are looking at the possibility of putting some, a little bit of denim in but a lot of that's TBD. Good luck and thank you very much.

Thank you. Our next question is coming from Harry Ikenson of First Albany Company. Please go ahead with your question.

Thank you. One follow-up and then one clarification. On the follow-up, you've talked about a White House/Black Market beating expectations and doing such a great job but you're also talking on the inventory side how you need to get it up.

Two things. Are you having a logistical problem of getting enough inventory or is it just beating the sales? Could you sort of quantify that at the analyst meeting you gave us an intensification number compared it historically to where Chico's was versus where they are at this time. So could you update us on those numbers and then where you think it's going to be and why has it been a little bit slower getting to the intensification that you think?

Then secondly I though on the last call you though that were not going to leverage the DC. It sounded like you did leverage to the DC. How did you do that if I'm right ahead of your plan and what does that mean for the future? Thank you.

I'll take the DC first. On the DC, what we said there is we were not going to leverage at the same base. I believe it was 1.4% or some ridiculous number then. That's because we had dual DCs. This year we didn't really have dual DCs other than for the Web. We were still running dual on the Web.

So we gained a little bit there but we're going to see some leverage here on the DC, it may not be four-tenths but it's likely to be two-tenths and it's likely to be offset by the White House/Black Market acquisition and lower margins there and the Soma cost but there will be some leverage in the DC. This thing is working much better than we thought it was working at the time. And I'll let Scott answer here on the inventory for the White House/Black Market.

Thank you.

I think we're ahead of schedule, Harry. You know if you think about the fact that we bought them in September and moved them in January and we've redone all their systems and just really trying to put the infrastructure in place, have been very careful on the amount of catalogs that we dropped. When we comment and say that they're a little light on inventory that doesn't mean that we don't feel like we're on schedule or ahead of schedule. The last thing we want to do is get inventory for the sake of having inventory. We want the right inventory.

It's been just a few short months that we've moved them to Fort Myers. That business has been through a lot of shock in the last nine months. And we're extremely pleased with their performance across every area including the inventory level.

Well, no, I understand that you're pleased with it and obviously it's been above plan every month but I just was trying to get an idea, also in reference to the, or you gave some intensity metrics back at the analyst meeting. Could you sort of maybe update us on where those are and then where you think those will be versus where Chico's was at this time?

Now, what type intensity metrics are we talking about?

I think it was on a per foot basis, you gave some different measures at that meeting.

I don't think so. I wouldn't have known that. I don't think I had that. We'd like to see them over.

Somebody gave it to us.

Yeah, well we'd like to see them over two units a square foot and they're not there. We're not going to say exactly where they are but they're below two units per foot while at Chico's we're roughly 2.5. We're about 2.8 right now at Chico's and they're below two. So they're chasing inventory as Jim keeps catalogs here.

Okay. Thank you very much.

Thank you. Our next question is coming from Christina de Marval from Sidoti and Company. Please go ahead with your question.

Good afternoon. Another nice performance, of course.

Thank you.

Most of my questions, well, almost all have been asked as we've been on the phone here for an hour and fifteen minutes. Just quickly for you, Charlie, can you give us a little bit more detail on the merchandise margin performance in the first quarter? You said most of it was IMU improvement. Can you quantify a little bit how much is markdown?

Well, like I said we were about one point ahead on the IMU. That's a monster gain on the IMU. As I said, like at the Chico's side that they were just slightly ahead on the markdown rate while the outlets were significantly lower on their markdown rate. So that's how you add all that overall basis. On an overall basis the merchandise markdowns were way ahead of last year and they were offset somewhat when you combine White House/Black Market who was ahead of plan on their gross margin but it's still significantly behind Chico's.

Understood. Can you share what the percentage of full price sales was at the Chico's side of the business this year versus last year?

I don't know that. I don't know that number.

We don't have that number.

Okay. No problem. Thanks a lot.

Okay.

Once again, to ask a question, please press star then one on your touch-tone phone at this time. Our next question is coming from Janet Kloppenberg of JJK Research. Please go ahead with your question.

Hi, everyone, congratulations. I have a couple of questions. You talked about the average unit retail moving up recently and I'm wondering what the outlook is for fall? Do you expect that to increase again? And Pat, have you seen any resistance to price and do you worry that as you notch up prices that the customer could start to get a little upset?

Also, Charlie, I had heard something, when you were talking about the markdowns, the new strategy, I thought you might have said that margins were actually down in the full price stores but they were up in the outlet stores and maybe you were saying markdowns, I'm not quite sure but you really went fast with that so I had a hard time with that.

And I also was wondering if you guys had, I think you qualitatively may have said something about the White House/Black Market comps in May and I'd like to hear that again.

No, we didn't say anything about the White House/Black Market comps other than we're pleased with them. And I did say that the front line stores were very slightly ahead on their markdown rate. That is a slight, very slight larger markdown rate than last year but the outlets more than offset it by a mile.

But the operating margin, contribution margins from the Chico's stores had to have been up in the quarter. Is that correct?

Oh yes. Absolutely. Absolutely. Now Pat can answer about the 50% markdown.

Then I have a couple other questions.

The price points. Let Pat answer first about the higher price points.

You know, also just to clarify, too, that you know our markdown reporting that we report in a lot of our markdowns are related to the catalogs dropping, also. So we do have a promotional markdown that is all reported in there. So all in all the overall response to this new markdown strategy has been very positive on all counts. No reversion of margins.

And as far as the average unit retail, we really think about value every time we talk about retail. If it's not, if the garment is not worth it we work retail back so a lot of times our strategy is to just talk about a better item. Even a tank top. We talk about a better item so we have a cotton tank top, maybe the retail is $22.00, we talk about new yarns, new things, something like that and the value of tank top could be a lot more. It does raise our average retail but it doesn't mean that the value is not there in the garment.

So there has been really no price resistance. We're interested in knowing what will fabrics and what items that she'll respond to, not to raise retail on existing product in the stores.

You mean the mix of higher margin product is shifting?

Yes.

Okay. I understand that. But like the Travelers, you did have a price increase.

But not on core items and not on things that we continue to carry to the customer. So those items are flat to last year?

Pardon me?

Those items are flat on retail to last year? We're very conscious of the fact not to raise existing prices arbitrarily. But where we've gotten added prices in Travelers is on novelty items. New product development has exciting new jacquards. They are going to be a higher retail. And the customer loves them and she's responding. But she clearly sees the value in that product.

Okay. Thank you.

We'll take one more question here.

Charlie I have one more question.

Okay.

Which is, just on your guidance for the mid single digit comps in the back half.

That wasn't guidance on mid single digit comps. That said that we're going to leverage at mid single digit. I was not guiding to that.

Okay. I'm a little confused on the opportunity for leverage. I think you said.

At mid single digit comps in the third and fourth quarter we should see some slight leverage.

Okay. Because you had said that for the rest of the year you though your SG&A rate would be flat to slightly delevered?

No, no, that's what I said for the second quarter. For the second quarter we expect SG&A will be flat to slight deleverage at a high single to low double comp be it will be slight flat to slight deleverage. After that it should be a mid single digit comp to start leverage.

Okay. And what about the gross margins, Charlie? If you could split that between the second quarter and the year that would help.

That I did. But then I said for the second quarter that we expect them to be flat to down.

Right. I have that.

Down to up to a half a point and then for the rest of the year we expect them to be flat to slightly down.

Right. And that's why I'm confused about the leverage opportunity.

Well, leverage has to do with SG&A not, we don't leverage gross margin, there isn't anything there to leverage except for the DC.

I thought you meant the operating margin improvement.

I didn't address that.

Okay. Thank you. I'll talk to you about it off-line.

Okay. One more question.

Thank you. Our last question will be coming from Margaret Whitfield of Ryan Beck. Please go ahead with your question.

I'll keep it to one. You commented on the midwest, smaller cities, lower income, another company comes to mind. I'm wondering what income levels are you selling to? Does this customer require a different mix than your normal stores? Thanks.

No. I think what I specifically indicated before was we were very happy that there was no resistance to the price points of our existing collection to that slightly lower and I emphasized slightly lower income group.

So it's more like 75,000 and up?

Excuse me.

The income level would be 75,000 and up in these stores in the midwest that you're referring to?

Yes, yes. And, of course, the 75,000 to 100,000 income in some towns like Paducah, Kentucky, you would consider yourself probably 150,000 equivalent income in New York City.

Good point. One final question, I got a little card in the mail. If I send a name in to you for a prospect I get $10.00 off. How's that been going and what's the quality of the prospects that you've been getting?

We have a couple of different offers for prospecting. We move between a couple of different ones. But as I said prospecting is working extremely well. So we're very happy with the results.

Thank you. Congratulations.

Thank you, Margaret and we thank you all for attending our first quarter conference call. We'll see you August 26. Bye everybody.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.