Chico's FAS Inc (CHS) 2004 Q2 法說會逐字稿

Good afternoon, and welcome to the Chico's second quarter fiscal 2004 conference call. At this time all parties have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. James Palzinski. Sir, the floor is yours.

Good afternoon everybody. Before we get start here, I'd just like to remind you of the company's Safe Harbor language. I'm sure you're all familiar with it. Certain statements contained here in, 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, the conditions in the specialty retail industry. There can be no assurance that the actual future results, performance, or achievements expressed or implied by such forward-looking statements will occur. Users of forward looking statements are encouraged to review the company's latest annual report on form 10-K, its filings on form 10-Q, management's discussion and analysis and 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 factors that may affect the company's business results of operations 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'd like to turn the call over to Scott Edmonds, President and Chief Executive Officer of Chico's.

Thanks James, and thanks to everyone for attending Chico's second quarter fiscal 2004 conference call. With me on the call today are Charlie Clemens, our CFO and COO, Jim Frain, our Executive Vice President and Chief Marketing Officer, and Pat Murphy-Kirstein our Executive Vice President and Chief Merchandising Officer who is calling in from Scottsdale, Arizona.

As you saw in the press release, the second quarter came in strong with another double-digit comp increase of 14.1%, indeed a solid second quarter. Net sales for the second quarter ended 7/31/04 increased 46.9% to a record 255 million from 173 million for the second quarter ended 8/2/03. Net income rose 45.1% to 35 million or 39 cents a diluted share compared to net income of 24 million or 28 cents a diluted share in the prior year's second quarter. We were extremely pleased with our industry-leading operating margin of 22.3%.

The Chico's success story has never been more exciting than it is today. Everywhere we look we see signs that our brand momentum continues to gain strength. Jim Frain will give a complete update on our customer data base for both Chico's and White House but I can tell you that these numbers clearly indicate that the long term potential for growth of both the Chico's and White House brands is bigger than we had previously identified. The industry leading results we have consistently produced go hand in hand with the investments we continue to make to sustain our long-term sales growth and superior profitability. We've made investments such as the White House Black Market acquisition which added approximately 2.5 cents in earnings per share to the quarter, and the launch of our Soma by Chico's intimates brand.

And regarding Soma, while we know a lot of you on the call are anxious to hear about the opening, we will not be providing any information or answering any questions today regarding the Soma launch. We have 603 total stores in the company and only three of these are Soma stores, two of which opened today. It would not be appropriate to draw any conclusions from what we have seen at this juncture. Several analysts on this call have visited the Soma store and I'm sure they will be sharing their opinions in the near future. We would, however, encourage each of you to visit a Soma's by Chico's store to experience the outstanding product and the highly personalized service not previously available to our customer in the intimate apparel industry.

We continue to add executive talent as needs dictate and in the second quarter we added two key executives to the team, Chuck Nesbitt (ph) and Alise Lore (ph). Chuck Nesbitt, who joined us earlier this month is the former CEO of Sara Lee Intimate Appear. Chuck will serve the company as Senior Vice President, Strategic Planning and Business Development. Alise Lore, who also joined us earlier this month will serve the company as Senior Vice President, General Merchandise Manager and will add bench strength to our merchant team. Both of these talented executives will play a key role in our business for many years ahead.

Turning to the White House for a moment, it's hard to believe that it's already been a year since the acquisition. We are more excite than ever about this young brand's potential. As most of you know White House Black Market was founded by Rick Sarmiento. Rick hired Patricia Dara-Smith shortly thereafter. Patricia served as the Chief Merchant and Rick was the operations guru. Since Chico's acquired White House one year ago, Rick has worked very closely with Chico's management to integrate virtually all of the White House operations into Chico's. Today Chico's handles all real-estate, construction, store operations, distribution, finance, human resources, and marketing efforts for the White House Black Market. While Patricia Dara-Smith and her team continue to set the fashion direction and merchandise the stores.

Rick now believes that we have fully integrated all operations into the Chico's infrastructure and he feels comfortable to step down from this position as President of White House Black Market so he can spend more time with his two beautiful daughters in Maryland. We are extremely confident that we have fully covered all of Rick's operational skills, although Rick will be available to consult with our management on an as-needed basis. Rick Sarmiento has a great deal of integrity and a lot of class. He will always be a friend at Chico's and of course to his baby, White House Black Market.

In closing I would like to remind everyone that the driving force behind Chico's strong results is great merchandise. Pat Murphy-Kirstein (ph) and her talented team work extremely hard and extremely smart to put new unique and creative merchandise in front of our customers. We just completed a two-day review of spring '05 merchandise and it was nothing short of amazing. Pat and her team continue to find ways to be innovative with fabrics, new silhouettes and color combinations. The specialty apparel sector is a very competitive sector. None of our so-called competitors have any insight into what Chico's will look like in spring 2005. Those of that do, can't wait. Now to Pat from Scottsdale, Arizona.

Thank you, Scott. Hello everybody. And as Scott said we are here in Scottsdale, Arizona, for the exciting opening of our new Soma store so I will be somewhat brief.

The momentum from our first quarter results continued into our second quarter with customers' response remaining strong to our key item offering as well as the introduction of newness and novelty that Scott spoke about through the season. Sales actually exceeded expectations for both May and July. Business in the southeast was particularly strong and overall we were very pleased with results for the quarter. Our key item business remains strong with T-shirts selling at an accelerated rate to the plan and at more than 100% increase to last year for the same period. Novelty T-shirts was unusually strong with an increase of over 200% to the same period in 2003. Linen and linen blends continued strong throughout the second quarter. Our basic linen performed in shirts and in pants. Novelty linen added a whole new dimension to the entire spring season with overall sales at 110% greater than last year in the same category. Our camisole and tank business excellerated beautifully despite cooler weather set backs in certain regions. Our pant business went to all lengths from crop to ankle, and sell-through's on denim pants and jeans were good even in July while sales of Ocean Beach, linen and linen blends far exceeded our expectation.

Our core travelers business continues to exceed plan. The July travelers promotion of buy any three pieces and get $20 off your purchase, was a huge success. Sales on travelers has continued their momentum to the month of August as well. Poncho sales added a lot of plus business both in accessories and in appear. We sold ponchos in many different fabrications, both woven and knitted, including our traveler's fabric and we expect sales on ponchos to continue right through the Fall and holiday season. Again, accessories showed record sales for the quarter with jewelry remaining strong as well as belts and sunglasses.

Overall our average unit retail continues to improve. We are very pleased with the sell-through on summer merchandise. Our inventory is clean, and we were well positioned with Fall product at the beginning of our third quarter. We have pulled back somewhat on our first and second quarter mark-down strategy in apperal, as the results in the first half of the year were just too good. We will continue to take prices to 50% off the original on first mark-down where warranted. Otherwise our initial mark-down will be at 30% off regular price. The weeks of supply continues to be very acceptable on markdowns and the percent of ownership is considerably less than last year at this time. In accessories we will continue to take 50% off the original price in certain categories for their first mark-down.

Our Fall key item projections are on target to plan and we have seen a terrific response to the new Fall merchandise in the stores. Outerwear, sued cloth, tweed, denim and turtle necks are all selling well. We feel optimistic about the balance of the third quarter and we are confident that our customer will respond well to our holiday offering. Our Soma store opened at Bell Tower in Ft. Myers, Florida, last week. And we were very pleased with the store presentation, the merchandise assortment and the customers' excitement. I am calling in from our new Scottsdale location and I am happy to report we also feel very enthusiastic about this store, the wonderful sales staff and the same terrific product assortment.

I'm very pleased that Alise Lore has joined us as Senior Vice President, General Merchandise Manager. Her background and excellence as a merchant will be a significant contribution to Chico's as we go forward. We are excited about both the Chico's and the Soma team. Both are focused on the customer and her lifestyle needs. Their dedication has been inspirational and shows in both the product and service in our stores. Again, our spirit and can-do attitude continues to be the defining difference in our success.

Now to Jim Frain for his comment.

Thank you, Pat, and thanks for making it easy and a pleasure to market our products.

The table we set for our second quarter by the front end loading of our marketing efforts in the first quarter. In May we continued our aggressive promotional efforts, particularly with extra prospecting of our May catalog. Our key marketing indicators are very solid through the second quarter. For the first half of the year our promotional sales, which are those sales attached to catalog coupons, are up over 43% over last year. The strength of our loyalty program members is shown by their representing over 93% of our sales in the first half of the year. We've also had over 500,000 inquiries from advertising and PR in the first half of the year, that's almost 20,000 per week. We signed up over 480,000 new customers for the passport program. With this combination of new sign-up and crossovers from preliminary passport our full passport members stand at over 1,115,000 versus 788,000 at the same time last year. Our total active database is over 4.7 million versus 3 million at the same time at the end of the second quarter. That's a 57% rise.

We've had a great response to White House Black Market mailers in the past two quarters as well. Even without a loyalty program, we've signed up over 120,000 new customers in the second quarter. That has helped us build a database that accounts for over 65% of sales already. And now I'm happy to announce that we have enough information and have done enough analysis to kick off our loyalty program this Fall. We'll call it "The Black Book." We will have similar benefits to Chico's passport program with a 5% discount on all sales and free shipping. However, we're going to make their hurdle a little lower to join as a full member of the Black Book with $300 in sales. This is very important. We've also discovered in our analysis that our age and income in the past six months of transactions. Indicates that a wide ranges of ages buy White House Black Market product. It's a huge opportunity when women from 20 to 55 find your product appealing.

Back to the Chico's side of the fence, we continue to see a broader appeal related to income. For instance, we're having very successful store openings in smaller markets like Paducah, Kentucky, and Des Moines, Iowa. These markets have relatively lower average income house holds, this relates also to increasing success with broader market mediums like TV and larger circulation women's magazines. That's why we're comfortable broadening our target customer to 75,000 plus household income instead of the more narrow 100,000 plus household income. Which obviously increase the opportunity by as much as 70% greater. Or to put it another way we've only tapped 9% of our target group thus far. With a broader demographic target for Chico's on income and a wide age range appeal for White House, we are confident of significant growth opportunities for both brands over the next several years.

Now I'll turn it over to Charlie Kleman.

Thanks, Jim, and good afternoon everyone, and welcome to another great quarter with results that have significantly exceeded last year's great second quarter. Today we'll review the quarters in some detail as well as provide you with a status update on some operational items. First we'll start with a financial discussion and first we'll look at an overview of the second quarter, our 24th quarter of the last 26, that has resulted in net income growth of 45% or more. That is 24 of 26. As we've discussed in previous calls we expected up to a half point percent decrease in both the gross and operating margins due to the effect of the White House Black Market acquisition last year. The quarter ended up actually slightly better that that with only a 30 basis point overall decrease in our operating margin from 22.6% last year compared with a solid 22.3% operating margin this quarter and so far this year. It's worth noting that our operating margin for the first six month only decreased by 10 basis points despite the acquisition and we are very proud of this.

At the gross margin level. We saw a year-over-year decline of approximately 50 base points due primarily as I said to the lower merchandise margins of the White House Black Market division that were not included in last year's second quarter. We also continued to make investments in staffing the White House Black Market merchandising and product development team as we gear this division up for more rapid growth. In contrast gross margin in our core Chico's business saw a nice increase. The 50% off initial mark-down policy within the Chico's stores, frontline stores, which we discussed last quarter significantly improved the margins at the Chico's outlets while only slightly reduced the front-line margins. This lead to an increase in the overall Chico's gross margin. As Pat said our analysis in the 50% off policy that we tested earlier in the year suggests that we likely turn goods a little too fast and as she indicated we now believe that we can improve Chico's margins again slightly if we execute a blend of the 50 and 30% markdowns.

Further, as we have been seeing in the past few quarters the Chico's brand continued to enjoy a slight increase in the initial markup during the second quarter compared to last year's second quarter. Last week in the gross margin area we saw a nice 30-point basis point decline in the cost of operating our relatively fixed cost distribution center located north of Atlanta. We've seen improved freight cost, lower labor cost per unit and we continue to believe that this DC can scale up to serve 1200 stores. Further, we are pleased that this distribution center can continue to turn around goods from the time they arrive at the D.C., to the time they hit our stores in one to three days, and yet we're still able to leverage these costs with that turn around. This ties right into our customer service, our culture and our flexible as an organization and we're very proud of that.

On the SG&A, or selling, general, and administrative front, the Chico's business saw a nice leverage in store costs including payroll and occupancy as well as other general headquarter costs. This leverage was offset for the most part by the higher costs as a percent of sales that have been experienced by the White House Black Market stores, and to a smaller degree by costs associated with the Sarbanes-Oxley compliance that we're all dealing with. Overall we saw leverage of 20 basis points in our SG&A cost as a percent of sales and we believe we may now be able to see small leverage on a 5% or so comp for future quarters. We spent a lot of time this quarter and the last three quarters talking about the impact of White House Black Market on our gross margin and SG&A as a percent of sales. But, let's not for get one thing, earnings per share which is what drives our stock price and your shareholder value, as in the previous two quarter of last year, and the first quarter of this year, the White House Black Market operation added nicely to our earnings per share growth. We estimate, as Scott said, that the White House Black Market that their operations contributed approximately 2 to 2.5 cents to our earnings per share during the quarter, that is consistent with the last couple of quarters.

From now on I'm glad to say that we're going to begin to anniversary the acquisition in our year-over-year comparisons will be normalized. Hopefully we can shift some of this discussion to talk about leverage in the White House Black Market brand and our overall headquarters cost as well as the earnings per share this growth should help create. Next, let's look a little deeper into second quarter sales. The second quarter same-store sales increase of 14.1% was our 27th quarter of the last 29 that have been double digit. As always the comp increase was principally driven by new traffic and new passport member sign up. We added about 86,000 new permanent members during the quarter and another 211,000 temporary members. The average price per unit at Chico's frontline stores increased just over 1% for the quarter. The average retail at the Chico's outlet -- at the Chico's outlets was up much higher due to our test of the 50% first mark-down at front-line stores. We expect to continue to see small improvements in the average unit retail for the rest of the year.

On the White House Black Market front we saw solid year-over-year sales increases in every month of the quarter despite being, again, relatively light on the inventory throughout the bulk of the quarter. The merchandising teams we're building for this brand are still adapting to their new home in Fort Myers, the impact of the new catalog jobs, and the time of the the merchandise flow that surround these catalog jobs. We still anticipate that the White House Black Market brand should have a more adequate inventory level by late in the third quarter, or early in the fourth quarter of this year in time for the holiday retailing season and we look forward to these density improvements which should add to the already substantial trend in sales increases.

Moving to Chico's, we're pleased with the high single-digit August comps that we are experiencing at this time. Although hurricane Charley that strangely enough hit on Friday the 13th, they took a good shot at us. It probably only reduced our overall comps by about point or so although it's very difficult to measure the impact on stores that did not have to close. We had some where between 15 or so stores close between a weekend and a week. We expect our two Sanibel stores that are still closed, that they will open sometime next week and our only store that will remain closed for some time is on Captiva Island. We do not expect any material impact to our income statement as we have adequate insurance for all these stores if needed. With little disruption at our corporate headquarters and with the September destination catalogs just starting to kick in we certainly look forward to our already good start to the third quarter with our earnings results to be released on November 30th.

Now that we have the bulk of the White House Black Market acquisition behind us on a year-over-year basis the future guidance becomes a little less complex. We continue to guide to flat to slightly down overall gross margin as percent of sales through the third and fourth quarters due to the increasing percentage of White House Black Market stores in the mix and the initially lower margins at the Soma by Chico's test stores. Within the core Chico's brand we expect the gross margins to be flat to slightly higher during the remaining quarters of fiscal 2004 as compared to the same quarters for fiscal 2003. On the marketing front for all of fiscal 2004 we are still planning the direct marketing costs should range between three and three-quarters and 4% of sales. Regarding overall SG&A guidance we should see some small leverage even with mid single-digit comps in either the third or fourth quarter.

Rapping up the financial review our overall 47% quarterly increase in sales combined with an industry leading 22.3% quarterly operating margin resulted in a 41% increase in earnings per share for the quarter as we moved from 28 cents per diluted share last year to 39 cents per diluted share this year. As I said earlier we estimate the White House Black Market operations provided a lift to earnings of approximately 2.5 cents a share which was in line with our expectation.

Next, let's look at few operational areas. First let's look at store openings. For the second quarter of fiscal 2004 we opened seven new Chico's front-line stores, one new Chico's outlet store, and we expanded or relocate four of our top-performing Chico's front-line stores. So far in August, we've opened up another eight Chico's front-line stores and we remodeled one more. On the White House Black Market side we opened 14 additional new front-line stores during the second quarter, one new White House Black Market outlet store, and we expanded or relocated an additional three White House Black Market stores while closing three White House Black Market sales stores. We are abandoning the White House Black Market front-line sales store concept in favor of a more traditional outlet strategy, similar to what we've done in Chico's. During August we've opened another four new front-line White House Black Market stores and closed another sales store for White House Black Market.

I guess I also don't need to remind you we've opened three Soma's so far in August, but I will anyways as we're all very proud of this exiting new concept. All of this store activity resulted in a net increase of 46,000 square feet of store selling space for the second quarter and an increase of 74,000 square feet, that is net selling, for the six month period. We are still on track to complete an annual increase in square footage growth of at least 20% for fiscal 2004. We've previously announced 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 around 25 or so Chico's expansions for relocation and between 8 and 12 White House Black Market expansions or relocations. Of the 85 to 95 new stores, it looks like we'll still be opening between 40 to 45 net new White House Black Market stores, the 10 Soma by Chico's test stores in the third quarter, and I'll repeat where they will open and that is the three that have opened as of today are in Ft. Myers, Atlanta, and Scottsdale. And you'll see new Soma by Chico's stores that will come in September in Birmingham, Memphis, Annapolis, two in Dallas. During October we'll open the last two Soma by Chico's stores in Houston and Sarasota. The rest of the new stores to be opened during this fiscal year will be under the Chico's brand and this is likely to be between 40 and 50 net new stores.

In terms of stores by quarter we opened 13 net new stores in the first, 22 net new stores in the second and we expect to open between 45 and 55 in the third with the balance in the fourth. Also in the new store arena early in the third quarter we acquired the Indianapolis franchise store back from the owner. Although this doesn't change our overall store count it puts more square footage under our direct control and reduces the number of independent franchise owners from four to three. Lastly on the store opening front we are still evaluating what we believe to be the optimal size of both Chico's and White House Black Market stores for the future although we think we've got the current look of the Chico's store pretty much where we want it. The two calison (ph) designed stores, which are somewhat larger formats at the South Park mall in Charlotte, North Carolina, and at Phipps Plaza in Atlanta are meeting our expectations. We have already started designing all new stores in this format or variances of this format and once we flush out the older design stores that may still be waiting to open all new stores, remodels, expansions and relocations will be using some variance of the new look calison (ph) that depends on the planned sales volume. In fact, you can see more of our newly designed calison (ph) look stores at Hubner Oaks in San Antonio, Texas, in Wheatton, Illinois, and Tallahassee, Florida, and at Village Point in Omaha, Nebraska. And to answer a question we frequently get we do not intend to remodel stores just to change to the new look although we will remold those with the new look when we deem a remodel is currently necessary. The progress on the redesign of the White House Black Market store look continues, and we expect to see a new store design by late this fiscal year with the new store look rolling across all new and remodeled stores sometime in the first quarter of next year.

We see tremendous opportunity here both in the look and the functionality of the store to accommodate more unit and improve the sell throughs. One other important point here, by spending the time on this project and thoroughly analyzing our needs versus cost our construction department has brought the cost of this new beautiful look in the Chico's and Soma stores to a level that is very close to the cost of our previous store look. This is quite an accomplishment when you see the striking difference. On White House Black Market integrate I'll briefly touch on them now which have essentially been completed as we only have one Virgin Island store left to convert to the Chico's like cash register. All White House Black Market software and activities that we have intended to centralize have now been converted, moved, or otherwise impact as we see necessary to this point. Now it's time for to us start concentrating on building sourcing and product development infrastructure to leverage the band and to make the White House Black Market brand name into a household name as we continue to strive to do with the Chico's brand. Rather than concentrating on integrating the White House Black Market we can now focus on taking this brand to the next level.

Our search for a new CIO is going very well with interviews ongoing, and we expect to have our candidates narrowed down very shortly. The strength of our balance sheet, our brand, and our culture has brought world-class candidates to us from all over the United States, and we look forward to starting a partnership with a senior executive in the information technology arena. As you know, we installed new systems about this time last year. We are still getting used to using these systems for the basic operations. We look forward to more fully utilizing these systems to obtain the benefits they offer which includes leveraging on investments and improving our methodology. With that said activities in this area are going smoothly and there have not been and we do not expect any disruption related to this change in leadership.

Next a note on the balance and cash flow, and then I'll wrap up. We're filing our 10-Q as we speak. So all these numbers will be available shortly. Our balance sheet remains very strong as we ended the quarter with $215 million in cash and marketable securities. Cash flow from operations for the six months generated over $110 million of which $25 million was related to tax savings associated with stock option exercises and over $85 million was related to ongoing operations.

This increase in cash flow from ongoing operations that compares to $63 million from ongoing operations last year. For cash flow planning our first six months depreciation expense was 15.3 million and I would expect that to grow by about three-quarters of a million to $1 million each quarter. Our inventories at $58 per square foot this year versus $63 per square foot last year were on the low end of our planned range as we cleared markdowns quicker than we originally planned in the Chico's division and we were slightly outside of planned as we discussed at the White House Black Market division, and quality of this inventory, though, is very strong as you heard from Pat and that allows us to enter the Fall season very cleanly. As you can see by same store and overall sales results for quarter and the start of August this inventory level allows us the ability to turn product quickly yet still produce healthy sales gains. To wrap up, the second quarter of fiscal 2004 continues a strong trend that is producing operating margins north of 22% with earnings north of 40%. The August same-store sales results and strong reactions to Fall offerings certainly suggests this trend is continuing into the Fall season at least so far. We look forward to the rest of fiscal 2004 as we continue to launch our exciting new Soma by Chico's test concept stores in the third quarter. We continue to improve, excuse me, I'm using our new software platforms and we welcome our new CIO, and we begin to roll out a significantly improved cash register system upgrade to all three chains in the first quarter of next year, and we complete the opening of the 85 to 90 new stores amongst other project that we've got, and now I'll take some questions.

Thank you. The floor is now open for questions. If you have a question please press star 1on your touch tone phone. If at any point your question has been answered you may remove yourself from the queue buy pressing the pound key. We do ask that while you pose your question that you pick up your handset to insure proper sound quality. Our first question is coming from Neely Tominga, Piper Jaffray. Your line is live.

Great, thank you. Scott, maybe you could give us an update on the White House Black Market potential. Clearly Jim is doing some great work in showing that the income demographic and the age demographic are bigger. But, I think, you guys still are looking for only about 500 White House Black Market stores. Could we be seeing that number go up?

We think so, yes, Neely.

Okay, I guess, could you give an order of magnitude? If you're a 75,000 income demographic is there some sort of rule of thumb in the real estate community of what that might potentially translate to be?

I'm not aware of a rule of thumb. Your first question was on White House and the 75,000 income, I think, flipped back to the Chico's side. I mean, we've been targeting Chico's customers at 100,000 household income and greater and Jim's research indicates that we're finding a lot of household incomes at 75,000 shopping in the Chico's core brand. That certainly opens up a lot of other market to us. And so, we've been excited about the growth of the Chico's core concept focused on the $100,000 household income. And we just think that with the data Jim the putting on the table that the potential for the Chico's core concept is substantially larger. Jim, I think you referred to appear certain percentage of customers that --.

Well, it's automatically even for the target market, and we're not talking about the whole market. It's 70% greater than it was when we had 100,000 plus household income it's about and I'm rounding up the numbers but its about a growth of from a 7 million household to 12 million households.

Sounds great. Quick follow up for Charley. In light of obviously the hurricane, maybe could you just give us a sense of how comps did regionally in August or how they're doing?

I don't, I don't have that right now. But certainly southwest Florida did very poorly but again I don't know off the top of my head how they did by region. But certainly southwest Florida is dragging it down a little. We're probably going to lose a point of comp because of the hurricane. It might be a point and a half, might be a point but it's in that range somewhere.

But by region he'll leave that on the sales line at the end of the month.

Leave that on the sales line.

Thanks y'all.

Thank you, our next question is coming from Dana Telsey of Bear Stearns.

Good afternoon everyone and congratulations.

Hi, Dana. Thanks.

Hi. Can you tell us a little bit more about the Black Book? How do you expect the launch of that to be different than Passport and any targeted goals for that as you move forward? Also on the inventory levels at White House Black Market when do you get them where you want them to be given the increased marketing that they're doing, and just lastly, you've had such nice AUR growth at the core Chico's concept, what do you see from that going forward and anything on mix changes that we should note there? Thank you.

I would make a quick comment on inventory discussion for White House data because it's such a great question. As soon as we load up inventory Jim drops the book and away it goes. So, we're chasing our tail. Jim, you need comment on the Black Book.

On the Black Book, because Mori MacKenzie is in charge of operations as well as operations for the White House as well as Chico's she more than knows the drill about how to sign up customers. And evidence of that even before we're introducing the Black Book concept and loyalty program to sign up 120,000 customers in three months is pretty terrific when you consider the size of White House. And as I mentioned it's already 65 -- that database that is newly signed up represents 65% of our sales already. We expect that we'll be able to grow it over time to over 90% of sales.

Okay.

What was your last question?

On the pricing, AUR growth has been so good at Chico's what are you expecting going forward, and any mix changes that will continue to drive that AUR growth?

Pat from Scottsdale.

Hi, Dana. You know, I always feel the potential is always there on average unit retail. And, again, we look at things as a question of value and not necessarily what price it is. So we see upside in the outerwear and jacks, any new fabrication that we introduce presents an upside to us. The customer responds very, very well to newness. She loves fabrics that are new and, you know, even slightly more expensive than something we may have used before. We still have our core basic, if you will, if you can call anything basic at Chico's, but, for instance, we've really not taken any price increase in our travelers group but even in denim we see as they come up with new weaves in denim and so forth that we see an up side to prices. But again we work value backwards and retail backwards and the value always has to be there in the price.

Thank you. I love the name Black Book.

So does Jim.

Thank you. Our next question is coming from Kimberly Greenberger of Smith Barney.

Great. Thank you. Good afternoon. I wanted to ask Jim a little bit about the catalog strategy at White House Black Market and how frequently are those catalogs dropping now when and do you anticipate a point in time where you'll be dropping a monthly book the way you do at Chico's, and secondarily for Charlie if I'm recalling properly the stores, the White House Black Market stores are rolling into the comp base in October. Do you expect to provide comps by division at that point? Thanks.

I'll start and I'll answer, yes, they're rolling into the comp base October 1st, first day of that fiscal month, and no we are not going to provide. They're going to be roughly 10% of the chain at that time on a comp basis, and we don't want the market to get too focused on just 10% of our market so to start we're not going to. At some point in the future we might but not starting in October, no. I'll let Jim answer on the rest.

Well, you may have noticed, Kim, that we've been almost on a monthly average for mailings for White House. But I actually don't want to state what we're going do going forward. I would say the only problem we've had I guess is a good problem to have is we're selling out a little too quickly on the catalog merchandise, so I'm going to stay pretty flexible about the frequency but probably more importantly the circulation of those catalogs. There will be something going out nearly every month. Especially as we develop this loyalty program.

Okay. Great. Thanks. And then, Scott, as you're looking at that time way inventory's being managed and planned for the White House Black Market business when do you expect to be able to have, you know, a sort of better in-stock position on those catalog items on a go-forward base?

The whole methodology of the timing of bringing in merchandise with the catalog drop is new to Patricia and Kelly and that group over there. It's not something that's easily done. I don't know how many merchants we have on the phone out there but we're -- we're a little bit, I think, behind where we would like to be relevant to building the inventory, Kimberly. We would hope and truly are really focused on having the inventory in position where we want it prior to holiday. That's a pretty aggressive stance to take right now. When you look at everything that company has been through in the last year, relocating the headquarters down here, all new software, you know, catalog drops for the first time, you know, now that Jim's drawing -- driving customers in through national television -- excuse me, national magazine ads and stuff, you know, there's an argument that we're driving too many customers into that business right now, and we have to be a little bit careful not to pour too much into the marketing effort until we get our inventory level up to where we really want it and we're really, really working hard to get it there by holiday.

Okay, great. I guess that's the better quality problem to have.

Yeah.

And then just lastly, Charlie on the SG&A, can you provide any sort of order of magnitude on the opportunity to leverage SG&A as we go forward relative to the comp? In other words, I think you indicated that you should be able to leverage even at a mid-single digit comp and, you know, if you can just provide -- or if you have it, some sensitivity as the comp increases, you know, how much leverage would you expect to get?

Well, we're going to start leveraging it around five while in the past it's been near seven to -- well, since the White House acquisition, it has been near about 12 or so because of the non comparable year-over-year comparisons. But just prior to the White House acquisition we were at a seven -- when would it start to leverage, now we're down at five or below. We might be below that, too, and we're likely to be below that even in the third quarter because we have last year's [inaudible] write-off that we're up against. So, I don't know the exact leverage points but it is going to start leveraging much lower and start leveraging much harder as we go up so we see a lot of opportunity there, and the White House, their cost structure is much more fixed than ours, and now that we've got them in year-over-year it's going to help us a lot.

Great, thank you.

Thank you. Our next question is coming from Elaine Reese of Dreyfuss.

Yes, could you explain, please, I may have misunderstood here. But, in the release you talked about a comp of 6.8% currently.

That was 6.28. That was 6.28, in the range of 6.8.

Correct. But then I thought you said in your comments that you were looking for high single-digit was that for the second quarter?

No, no, that's for this one.

Okay, so you think that sales will pick up in the last week? Is that what you're saying?

No, like an eight to high single digit, isn't it?

Yeah, eight is high single digit. Yes.

Yeah, okay. Well, that's in our range.

Okay. Thank you.

Our next question is coming from Richard Balm of Credit Suisse First Boston.

Hi, it's Tracy Cogan filling in for Richard. Can you guys talk about the non apparel categories at White House Black Market, such as accessories and footwear? How big are these categories compared to Chico's, and what kind of opportunities do you think there are to develop these categories? Thank you.

Historically, you know, they're all non-apparel merchandise we throw into the bucket as accessories, and when we made the acquisition the breakdown percentage was very similar to Chico's, running from 12 to 15%. We've seen that go up a little bit and we really expect it to settle back down to just about where Chico's is or very, very similar

Great thank you.

Our next question is Jennifer Black of Jennifer Black & Associates.

Good afternoon. Let me add my congratulations. I have a couple of questions. I wondered if you could, and Scott, if this is off limits I apologize in advance. I wondered if could you talk about the placement of your personal care lines in the Chico's stores which just came in, and do you plan to dovetail incremental sales with your gift cards for holiday?

Pat, you out there?

I'm here.

Hi, Pat.

Hi, Jennifer. How are you?

Great.

Good. As first personal care we really, it's a test to see how it does in our front-line stores. We also, we put some personal care, we have a select number of stores, I forget exactly how many but it's a limited number. And I think about 20 stores and also the fragrance we actually put it in all stores because we really think the Soma fragrance is terrific and we'll have a little insert in our catalog about that. But again it's a test. We'll see what happens with it and see how we take it forward.

I just have a few more questions. I wondered -- I noticed that in most of your fit specs at White House Black Market that they are pretty standard with the exception of a few different items. Are those vendors you'll get rid of. What do you do when you have something come in that the fit specs just are way out of whack?

Certainly we've refused to take delivery on some items, Jennifer, but you just hit on one of the biggest challenges we have over there right now with them and one of the things we have got to correct before we ramp up the growth. And it's very similar to where we were in 1997 and '98, and that is, you know, we don't have the technical expertise in place that we need to have. We don't have a consistent fit, we don't have, you know, there are a lot of things that we still need to bring to this young brand and again, you know, in the 51st week, we certainly haven't solved all those issues over there. Their vendor base, in qualifying a vendor base, and improving their vendor base is probably the biggest hurdle that we need overcome before we pour the coals to the marketing effort.

It seems like that's the biggest opportunity as well. And then lastly, since I have both stores about a mile from my house the inventory turns at White House versus Chico's I wondered which of the turns were faster.

They are an awful lot higher right now at White House because they don't have enough inventory.

That's what it looks like.

In the long run they are going to turn roughly, -- if you look back at their history, they turned a lot like Chico's when they have the proper amount of inventory.

Great. Go ahead.

The main thing is that we have a lot of high-class problems over there right now. We've had incredible consumer response yet at the same time we're chasing inventory and we have fit issues and quality issues and things that we experienced at Chico's that we're committed to getting straight before we continue to, you know, to poor the marketing dollars at them.

There are a lot of new stores. The new stores are opening in a very strong -- there are a lot of high quality problems over there.

Well, good luck. It's just an awesome concept. I love it. Thanks.

Thank you, Jennifer.

Thank you. Our next question is coming from Lauren Levitan of Cowen.

Thanks, good afternoon. I have a question for Charlie regarding the August comment. I know on the July sales call you guided to high-single to low double-digit comps for August I'm wondering if anything has changed since then to take you down to the six to eight level. Then, Scott, going further on that White House Black Market, quality issue, can you give us some update on timing as to where you are in laying the foundation to be able to do more direct sourcing and really control the White House Black Market destiny with respect to fit and quality? Thanks. One last one if I could. In terms of inventory levels where would you expect to be on a per square foot basis, Charlie, by Q3 and Q4 end. Would you expect to be closer to that north of $60 level or would you still assume you're going to be turning more quickly and able to manage at a lower level like you are currently? Thanks

We're likely to be at the lower end of that, probably near 60, maybe 59 at the end of the third quarter which is is a very healthy way -- a very healthy place for us to be, so we are likely to be on the lower end of that. Right now the August comps are in the lower end of our range. They're in our range, but they are in the lower end of our range and certainly we took a little hit from the the hurricane, not as much as other people took, I think. That is about where we are. I don't know if that relates to the consumer we don't get into all that stuff about the consumer, so we'll let other people decide that. But our Fall product is selling out. Those other questions --.

Lauren, regarding where are we in moving the White House model if you will, being more vertical, all at Chico's. We haven't taken that too fast we've got to be very careful. They're a profitable little company with their current sourcing model, if you will. We've introduced them to some vendors, they've tested a few programs, a pant program, I know, a sweater program right now, and we would like to see them -- certainly there's a lot of margin opportunity there in the long run but where we're spending most of our time right now, they never had a tech department, they never had a production department, and these are -- these are long-term strategies that take awhile to put into place. These guys have only lived here since January 1st and, you know, we've got, I think we have six people in the tech department now, when we moved them here first of the year we had nobody. So, it's going to take awhile.

Okay, that's helpful. Charlie one follow-up on inventory I know you comment that your light at White House as we know and then mark-down levels have certainly been low at Chico's. Can we assume that regular price inventories at Chico's are basically comparable to a year ago?

Yes, I think they are but I'd like Pat answer that.

Okay, thanks Pat.

Yes, very comparable to last year. We feel very, very happy about balance and the mix on the new. We also feel very excited about the customer's response to new Fall. So I think we're in good shape to go forward.

Thank you.

Thank you. Our next question is coming from Harry Ikenson of First Albany Capital.

Thank you. Good afternoon. I just wanted to follow up and see if we can get a little bit more quantified numbers on earlier question asking about stores. [Inaudible] White House Black Market are on goal, but also on Chico's if you have this new level where you have a wider customer base on Chico's what would your new goal be on Chico's be for number of stores goal, and the also, could you be more specific on White House Black Market, you said it could be about 500, could you give a little bit more of range, a little bit more of a tighter range than just above 500? Thank you.

We're is still happy with the six to 800 range for Chico's. We're more comfortable with the higher end now than we were in the past. But, we still think it's a 600 to 800 store range. Regardless of how many customers out there it's how many stores should you have. That's the key. We still think it's 600 to 800 stores. White House, we've been conservative on the 500, maybe it is 600 to 800, but we're going to stick to our 500 for now because we still don't know enough about their data base yet to say let's change a number yet, okay. We've learned that there much wider age than we thought but also very narrow high-income customer they're not a 75,000 plus they're 100,000 plus. So, as we learn more about the brand we'll learn how many stores it is. But, it's a long, long time of growth.

Okay, and then also, you've made it clear that you're still chasing inventory and you're not up to where you want to be at White House Black Market, I guess that is a high quality problem but have you made any catch-up at all on the density, could you give us any update on where the density preferred on the inventory is versus where it was, and where you need it to get it to be? Thanks.

We're still about the same level we were in the last conference call and that surprises us but every time Jim drops a catalog it just sucks the inventory out of their store. So, it is a high class problem, but we are not much better than we were before. We're evaluating how we're going to raise it and we think we've got some strategies to begin to raise it. Which, of course, will just increase sales.

I think part of the problem is you're doing such a good job in the catalog each one looks better than the last one.

That is true, these catalogs are doing it, and we have seen this week --

I agree. I thought that it was best catalog I've seen yet. Thank you very much.

It's doing very well this week at White House.

Thank you.

Thank you. Our next question is coming from Margaret Whitfield of Ryan Beck.

Good afternoon. Congratulations. Back to the 6 to 8% comp to date in August Charlie does that include results through the middle part of this week when the catalog dropped?

That includes right through yesterday. It's being dragged down somewhat by -- like it has for the last few month by the outlook division which is running huge negative comps as they have for quite some time now because of the 50% off policy but beyond that there's nothing abnormal there besides the hurricane effect.

I would also add the book is really just just hitting -- it's not like it was out Saturday, Sunday, Monday, I mean, we're just seeing the book hit.

I have my coupon with me, Scott, but with the later Labor Day will that affect the consumers interest in shopping this weekend?

This weekend is certainly going to affect it but that's about the only impact we're going to see, just this weekend, it is not a holiday weekend, it will affect next week, and well into next weekend.

How about the full line stores? What are their comps running month to date?

What do you mean the full line stores?

I mean, if the outlets are down huge, --

Comp lines are up more than six to eight I can tell you that.

Okay, and cash it could be a problem. It seems to be building nicely here. Where might you end the year and what might you do with it as it continues to pile up?

We're not at all worried about the cash. We'll find good uses for that and Weir not at all worried and it will be a big number by vend the year, yes you are right.

Like 300 million?

We're not going to comment on that because that tells you too much that we haven't talked about.

Pat, we've seen Fall, it looks great. What can you tell us that you have in store for us for holiday and perhaps a hint of Spring to come?

We're feeling great about holiday. We have so many new techniques and, you know, new finishes, new embroidery techniques. I think our holiday offering looks better than ever. And for Spring we're excited about a lot of new proportions in dressing. We saw a lot when we were in Europe, bought a lot of samples. We've already started on some of our prototypes for the new spring season. We've had our first meeting which involved a lot of samples and a lot of discussion about how we want to take this forward. You know really truly Margaret it's really, really exciting I have to say, it looks very new and fresh.

What do you mean by new proportions in dressing.

Pardon me?

What could you elaborate, new proportions in dressing?

Well, you know, there is a lot of interest in the tunic, we are seeing a lot of long over long pants, a lot of different proportions in pants, still the capri pant is very good, a lot of wonderful interest in sheer fabrics, a great deal of beading out there, fabulous direction on color our Spring floor test is coming up in October so I mean, I have to say the whole team feels really, really excited about how we're going to look come spring and we certainly feel great about holiday. I know that we've had some of our catalog meetings for holiday and I know that Jim and his group are feeling very good about the product so I think both those mailers are going to be terrific and, you know, I think there's going to be a lot of gift giving at Chico's for holiday.

Especially with the new personal care items and perfume.

Absolutely.

Thank you.

Thank you, our next question is coming from Janet Clopenberg of J J K Research.

Hi everybody. Congratulations on a great quarter. Pat, if you could maybe help us understand where your mark-down level, your inventory of summer clearance are in the month of August.

For clearance, summer clearance, you mean?

Yeah, summer clearance. What level is it -- what percent of it is your inventory versus last year at this time?

Minimal. Really minimal levels. In terms of summer.

So sales and mark-down product is lower than last year?

Well, sales are lower because we don't have the inventory that we had last year in markdowns.

Could that be constraining comps?

I'm sorry?

Could that be constraining comps this month?

I don't think so, because as I said the reaction to Fall merchandise has just been terrific. We're already seeing great sales on outer wear and sweaters and denim and even, you know, sleeveless turtle neck is performing above plan. Travelers continues to be great at regular price so I really don't see the difference. You know, by this time of year, by this time in the year last year, you know, our summer merchandise was priced pretty low.

Right.

We just got rid of it earlier this year so we feel very good about our position.

Okay. Going into the third quarter, will the markdown inventories continue to be light versus last year?

Well, I'm hoping so, but -- I don't think we can predict it, but --.

Well, given that --

Something we watch very carefully because as you know square footage is very valuable out there and if the merchandise isn't turning we take action very quickly.

Okay, but I guess what I'm trying to get at, Charlie could, we expect that the outlet store comps continue to be down significantly as we move through the third quarter?

They may be, yes. Yes, I would say at least the first two months they may be. They've been down for quite some months if you listen to my sales calls, in May, June, July, and now August, they are running huge negative numbers. With that said they're making more money because their gross margins are up substantially, almost double what they were last year, so they are making a lot more money for us, it's just the street is so focused on comps, I'm focused on earnings, I'm happy with where they are.

Just another comp question to make you crazy. You said in the release August comps to date are up 6 to 8%. If you're giving us that number from a specific date which I believe is yesterday, why would it be a range of 6 to 8%?

On the range issue we're not going to put out an exact number and then have the whole street look at us and why is it off by one point from that exact so we put a range out just to give you an idea. It's in this range, we think.

Okay, thanks very much.

Our next question is coming from Christine Demarble of Sidoti.

Good afternoon everybody.

Hi.

Hi. First wanted to tell you the new website that you redesigned look very nice.

That's good.

But, just one question on Chico's and the ultimate store potential. Is it really more the case that it could be at that time higher end of what you've talked about before because you're seeing success moving into smaller markets and that, in effect, is broadening the demographic in income terms and wondering on that front if -- what we should expect in the aggregate in terms of store size because it sounds like you have two different store opportunities looking at smaller marks and smaller stores versus expanding some of the existing stores that are the most productive locations and you've identified an ideal store size opportunity of 25 to 2800 square feet. If you could just kind of reconcile those two things I'd appreciate it.

I thought you just did.

Where should it shake out if we just --.

The average store size?

Right.

It's going to be near the 2500 because in the smaller market we can take a bigger store because it's much cheaper. We can take the bigger store, even though it won't do as much per square foot, they make just as much money. For example we just opened up in Tallahassee, Florida, which is a pretty small market, and it rocked and rolled the first day, $30,000. It was a great opening. We saw in that in Paducah, we saw it in Northtown Plaza in Albuquerque. We're seeing a great response in these small markets, and that's very encouraging toward, lets say the six to eight hundred to lean toward the higher one, like you said. Whether we'll get there or not still remains to be seen.

In the slide show you have on your site you have the economic for smaller kind of square footage store. Where would those be appropriate then if you can get lower rents in the smaller markets.

I aimed at the street so they can understand it. That's aimed at volume, not size. I tied it size because the street makes me. It's not tied to size, it's tied to volume we have some large stores that do low volume and some small stores that do high volume but it's meant to be an example of that. The average store should come in between 22 and 2500 square feet, that's net selling. We expect them to be somewhere 750 a foot, we have some that fall below whether they're large or not is immaterial and we'll have some. Whether they're large or not is immaterial, it's the volume they do. Northtown Plaza is not a big store in Albuquerque but it's going to do about 3.5 million its first year.

Okay. That's helpful. Thanks very much.

Thank you, our next question is coming from Robin Murchinson of Jefferies & Company.

Thank you. Just a few things. First of all the Southpark store does look great, a nice format and good update. This is for Jim. And the new catalog you've got a change on the front. There's not a person. Is this some sort of -- is this a test or is it sort of an image building thing for the Chico's brand or does it mean anything?

Jim likes bridges, I think. [ LAUGHTER ]

Actually, I don't like to operate with a creative formula that we present ourselves in a particular way every month. Actually, we like to do the opposite. We like to be as unique as possible without -- without -- we don't feel under pressure to be unique, but we like to, when we see the opportunity, and we were there on location and the beautiful photograph of the fog rolling in under the Golden Gate Bridge and over the Golden Gate Bridge and we said, that tells the story about that destination. There's the romance of San Francisco, and then, of course, when you open up the book, there's our merchandise and our product in that romantic situation. So we're kind of opportunistic about it. You won't see bridges in the next catalog, that I can assure you.

Okay. Then I've got one for Charlie and one for Pat. Charlie, I'm guessing, but I'm going to throw it out here anyway, any comment as to comp cadence during the month of August?

No, that's too early. At the end of the month. Once we get through the last week then we'll mark all four wakes and see where we go.

Pat, two things. Would you please comment on your assessment of denim for the Chico's customer and where she is with it and how important it is to her this season. Secondly, would you also please comment on the suited looks in the catalog and -- in the store, the sort of men's wear look and what's going on there what the reception is. Thanks very much.

Well, first of all, as far as denim is concerned, our customer is thrilled with our denim. We made an effort last year to really impact the denim and the units that we owned in each store. We also worked really, really hard on the fit. We changed our sizing to 0.5, 1, 1.5 and the customer responded wonderfully so we increased the number of SKUs per style and this year we introduced a boot-cut jean. We've already had terrific sell-throughs on it. We see opportunities in more expensive denim as we move forward. We already have plans in place to offer her something that, you know, will be almost like a designer denim look so we have lots of plans for denim. She's responding to everything we've done so far. We see lot of up side to that business. As far as men's we are looks are concerned, they're okay, they're better in certain stores than others. We feel it necessary to have a representation of clothes that women can wear to work because we get so many requests for them. But we keep it relaxed, we don't try to make it too suity, we certainly don't make too fitted and we pick fabrics that are pretty easy care and easy to wear throughout the day. So it's been pretty well accepted. So we just keep -- but we don't plan to span it or make it bigger than what it is.

Thank you very much.

You're welcome.

Thank you. Our next question is coming from Adrienne Tennant from Wedbush Morgan.

Good afternoon, and let me add my congratulations on a great quarter. Just two quick questions, actually. The first is, Jim, can you remind us when -- you were going to do three million, I think, extra prospect mailers for the fall. Can you just remind us what months those fall in and then secondly, Charlie, can you talk a little bit about the sourcing strategy? There's a slide on your investor website that suggested it's going from at least the sourcing from China, Hong Kong and Taiwan going from about 20% to 50% over the past couple of years and just, is that where you want to be and how much more margin do you think you can get by continuing to source from there? Thanks.

The three million plus is an average of at least a million more a month in prospecting in September, October, and November. By the way, we beefed up the size of the November two catalog and that was in response to the terrific preview we had of November merchandise that Pat and her team gave the other day. So we beefed that up as well.

Thank you.

Pat, you can answer the sourcing question because you know better where we're going in the future.

Well, you know, we see a great up side, terrific opportunity of being in China. We work with a lot of people actually in New York who do their production in China, and , you know, we're evaluating a lot of different factors, some of our domestic vendors have also gone into productions overseas so it's an area of the world that we see great opportunity. As you know, we're pretty I would guess mature if you would say in our production in India and China is really a good growth vehicle for any sourcing that we can --.

Are you doing anything with regard to bringing in inventory a little bit earlier through the back half of the year because of some of these quota issues?

We have some issues and we've worked with our suppliers on those issues, we've actually arranged for a certain category to come into New York and be held in New Jersey because we feel that that category might be embargoed so we're watching it extremely closely and we put a lot of things in place early using different blends of fabrics and so forth, tested them early, just in anticipation of the fact that, you know, this year we're not able to borrow against quota for the next year because there is no quota for 2005. So it's a little tricky year but I think we're handling it very well.

Okay. Do you think the 50% level is about where you want to be, or do you see yourself --.

I don't really want to put a percentage on it because I do think that there will be opportunities in other parts of the world as well, so I'm not sure if 50% really holds but I wouldn't be afraid of 50%, that's for sure.

Great, thanks, Pat, good luck you guys.

Our next question is a follow-up coming from Kimberly Greenberger of Smith Barney.

Thank you. I just had quick question for Jim. Did you increase prospecting catalogs here in the Fall? I'm just hearing from a number of people that they're getting your cat rog for first time.

Yes. We have for September, October, November.

Okay. Great. And that was similar to what you did in the spring?

What's that?

That was similar to the spring?

Yes.

You had increased prospecting?

Very good success with prospecting in March, April, May, and that's when we decided to jump it up in Fall.

Great. Thanks.

We'll take one more question here.

Thank you. Our next question is coming from Joel Locker of Benchmark.

My question's been already appeared but congratulations on the quarter.

Thank you.

We'll take one more.

Thank you. Our final question is coming from Roxanne Myer of CIBC World Markets.

Great. Thank you. Congratulations and we love the new Soma. Just a few questions. One is on the comp. I know that traffic is obviously the big driver of the comp, but do you think it was the traffic or the average transaction size that perhaps came at that time lower end your expectations for August? And then second, for Pat, do you plan to introduce any new sizes in the second half, you know, half sizes for any other categories other than denim? And also do you think that you are well inventoried in ponchos, since it is such a key item, and last, can you discuss any potential operating margin expansion over the next few years from all the various systems initiatives you have in place?

Okay, I can answer the question on sizes. As far as the introduction of any new sizes, no, we're going to keep that sizes range. Really where we have a structured pin, it's not limited to denim but anything that has a tailored waistband without elastic we would opt to put in the half sizes. It just performs that much better. Customer gets a much better fit on the pant. As far as poncho's are concerned, I think we've got pretty good am mun in addition as we get through the end of the year. So look for lots of new ones to be hitting our stores.

Great.

Roxanne, Scott. First, thanks very much for the nice comment on Soma. I hope you were you a buyer.

I was.

As far as the comp, Charlie had indicated outlet comps are down. I want to make sure everybody on this call understands we're very pleased with our comp. If you look back over the last seven years we've had seven years of double-digit comps in August and we think that our comp performance is very, very strong.

Okay. Great.

Okay. Thank you everyone for a second quarter conference call. We'll see you for the next one, for the third quarter. Thank you. And good-bye.

Thank you. This does conclude this afternoon's teleconference. You may disconnect your lines and enjoy your day.