Chico's FAS Inc (CHS) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to today's conference call. All sites are now on line in a listen-only mode. I would now like to turn your call over to Mr. Michael Smith, Vice President of Investor and Community Relations. Please go ahead, sir.

Welcome to the Chico's's fourth quarter and year-end earnings conference call. I'd like to start the call by reading the Safe Harbor statement. Certain statements contained herein including without limitation statements addressing the beliefs, plans, objectives, estimates or expectations of the Company or future results or events constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements involve known or unknown risks including but not limited to, general economic and business conditions. And conditions in the specialty retail industry.

There can be no assurance that the actual future results, performance, or achievements expressed or implied by such forward-looking statements will occur. Users of forward looking statements are encouraged to review the Company's latest annual report on form 10-K, filing on form 10-Q management discussion, analysis and the Company's latest report to stockholders, the Company's filing on form 8-K and other federal securities laws filings, for a description of other important factors that may affect the Company's business, results of operations and financial conditions.

The Company does not undertake to publicly update or revise its forward-looking statements, even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized. With that I'd like to introduce Scott Edmonds, President and CEO.

Thanks, Michael and thanks to everyone for attending our fourth quarter fiscal 2004 conference call. With me on the call today are Charlie Kleman, our Chief Financial Officer and Chief Operating Officer, Pat Murphy Kerstein, our Executive VP and Chief Merchandising Officer, Jim Frain, our Executive VP and Chief Marketing Officer, who is calling in from a photo shoot in California, and Mike Kincaid, Our Chief Accounting Officer.

Fiscal year 2004 was an exciting year for Chico's and we are extremely proud of our performance. Our customer centric philosophy and unique merchandise fueled our success and helped us succeed the 1 billion mark in sales for the first time this past January. We also delivered our eighth consecutive year of double digit comparable store sales increases. Even with the $0.02 reduction in earnings due to the controversial lease accounting changes, which Charlie will expand on further, we still set a record $0.78 per diluted share and as you just saw in the press release, the first month of our current fiscal year came in strong with a 9.2 comp increase. Now, this is on top of a 28 percent February last year indeed, a good start to our first quarter for fiscal '05.

Our financial position has never been stronger. Our balance sheet is solid and we have no debt. We increased our cash and marketable securities balance from 120 million to 266 million, and our net book value increased by over 186 million to end the year at over 560 million. Fiscal 2004 saw many significant accomplishments for Chico's. We opened 100 net new stores, expanded or relocated 31 stores and increased our net square footage by 23 percent.

We completed the White House/Black Market integration and converted their back office and cash register systems into Chico's systems. We also implemented Black Book, a new customer loyalty program for White House/Black Market that emulates the extremely successful Chico's Passport Club, and finally and probably most noteworthy, we successfully completed the launch of our new intimate apparel line Soma by Chico's with the opening of 10 stores across the United States.

As many of you know, corporate governance has always been extremely important to Chico's even before the enactment of more stringent requirements. Chico's is pleased to report that based on our assessment, management believes that the Company's internal controls over financial reporting is effective, and we are in full compliance with section 404 of Sarbanes-Oxley.

Our goals for fiscal 2005 are strong. We plan to open between 110 and 120 net new stores, and expand or relocate another 20 to 30. Of these 110 to 120 new stores, we anticipate 40 to 45 will be White House/Black Market stores, and 65 to 70 will be under the Chico's brand. As for Soma, we are pleased with the initial results as we continue to evaluate and develop our merchandise mix and customer acceptance.

Therefore we plan to open up to 6 new Soma stores during fiscal 2005. Soma provides a unique and exciting intimate apparel shopping experience for our customer, and we remain excited about its potential and growth possibilities. Great merchandise, excellent customer service, and a marketing program that ties it all together with our customer centric philosophy are what drive our success.

Our brand is stronger than ever, our momentum is tremendous, and everyone has a clear vision of what the Chico's brands stand for. My sincerest thanks to every Chico's, White House/Black Market and Soma associate, for the dedication and commitment to making our Company what we believe the best place in America to work and shop. We believe our future is bright, and we are all committed to Chico's success in 2005 and beyond. And now over to our Chief Merchandising Officer, Pat Murphy Kerstein.

As impressive as the numbers were for fiscal 2004, we continue to see opportunity for the Chico's brand, as we move into 2005 and beyond. Gross margin, IMU and the average unit retail are all opportunities for improvement in the future. We also see an upside to certain categories such as denim, novelty Ts, shirtings, novelty sweaters, casual pants, and accessories. The good results for fiscal 2004 can be attributed to a great team effort.

The Chico's product development, merchandising, planning and allocation and production teams have demonstrated just how positive the results can be, when everyone works together and keeps their eye on the customer. In addition, their partnership with the marketing and stores group throughout the year has greatly impacted our momentum. We see opportunities for continued success in 2005, as we plan to take a modern approach to the business and to the brand.

We have recently hired Shelly [Wechsler] as our creative director. Her role will be to provide style and trend direction up in front of the team. Shelly will report to Linda Costello, Vice President of Product Development.

One aspect of our business that does remain constant is our dedication to, and our focus on the Chico's customer. The product has evolved a great deal since Chico's began some 20 years ago and we expect that the product will continue to evolve to meet the demands of the Chico's customers' ever changing lifestyle.

In 2004, we executed our key item programs very well. We became better at projecting unit sales, as well as planning the flow of goods to the stores. We also anticipated the need for having yarn and fabric in place with key vendors, in order to reduce critical lead times, and respond quickly to the customers' changing preferences. Denim sales were outstanding in 2004. We introduced our new platinum label denim in the second half of the year, and we have seen no slowdown.

We plan to continue our basic denim program. However, we believe there is tremendous opportunity for increased sales in Platinum Denim and Platinum extension products, such as T-shirts, sweaters, accessories and jackets. In fact, a platinum presentation is planned to be in stores for the third quarter of this year. Our Spa label sales grew significantly in 2004, and we see no slowdown in this category for 2005. We plan strong business in Spa for both the first and the second half of this year. The Travelers Collection continues to yield outstanding results. Month after month, we met or exceeded sales plan in this core product category.

So far, we have seen no reduction in sales in Travelers in either novelty or black in the early weeks of 2005. As you all know, our founders, Marvin and Helaine, have retired from the business. I had the privilege and the pleasure of working closely with them for many years. It is my passion to continue their vision and the special touch that they provided to the Chico's brand. Even though my role has changed since their retirement, from a less tactical to a more strategic one, my love affair with the Chico's product continues to be as strong as ever. Having Lece Lohr on board in her role as Senior Vice President GMM of the Chico's brand, Linda Costello, the President of Product Development and apparel, and Janette Siders, as Director of Product Development and Accessories, has allowed me to play a more strategic role in the business.

Our first Soma store opened on August 17th at Bell Tower, right here in Fort Myers. And the tenth store opened in St. Armond Circle in Sarasota. In spite of four hurricanes during that time period, the stores performed well. The Chico's customer is not happy with her intimate apparel shopping experience in department stores. She is intimidated by Victoria Secret, and does not feel it's the store for her. We want her to feel sexy and feminine, and we feel the Soma experience is all about her. The feedback to date from customers has been positive and encouraging. We have learned a lot, we have hit some home runs, and we've made some mistakes. But as we believe -- but we believe we are doing the right thing at the right time.

As Scott said, we are planning to open another six Soma stores by the end of 2005 or early 2006. And we are currently searching for Senior Vice President GMM for the Soma brand. Our vendor partners are also committed to the success of Soma. And no one under-estimates its potential. Remember, keep your eye on Chico's, and keep your eye on Soma.

And now, to Jim Frain for a marketing update.

Thank you, Pat. I was just telling Pat before the call, that the product looks terrific for me, and it's just matching up perfectly with our location here in California. As you've already heard, the fourth quarter was a time of growth in both sales and profits for Chico's, so -- and YS, and it's not surprising that that story is mirrored in our key indicators for marketing in the fourth quarter. Most of you know that the core of our marketing efforts for Chico's is the data base. It stands at approximately 5.4 million. That's at the end of the fourth quarter. That's against almost 4 million last year at the same time, or a 35 percent gain over last year.

The passport segment of the data base is approximately 1.3 million versus 935,000 the prior year. That's a 38 percent increase for our full benefit, loyalty program customer. They represented almost 75 percent of Chico's sales in 2004, or over $700 million. In order to keep up our growth, we simply have to do two things. Keep the present loyal customers coming back, and keep enough new customers coming in and signing up for our Passport program. We've been able to exceed our forecasts in both areas for Chico's in the fourth quarter. And for the year, by the way.

Our inquiry response for TV was almost double in the September, October, November period versus the prior year. For the same advertising spend. We achieved this by reallocating our media spend, based on strict analysis of response in the spring of '03. This increase or growth in increase, is also based on the accumulated effect of coordinating -- coordinated magazine ads, prospect mailings of our catalogs, and PR efforts. That is, that they're all happening at the same time. Every marketing indicator for Chico's says the enthusiasm for our products is undiminished. We've just finished a complete year of marketing for White House/Black Market with over 10 catalogs and grand opening mailings and magazine advertising. Our inquiry response has been excellent and the launch of our new loyalty program, the Black Book has been a hit.

We already have over 70,000 full members, and a data base of over 1 million shoppers. Over 162,000 shoppers signed up for the Black Book in the fourth quarter alone.

Our third age and income analysis was quite interesting, and really confirmed what we learned from the first two. And that is, a very broad range of appeal in age. Women from their 20s to their 50s find White House/Black Market product appealing. So we feel we've just begun to tap the potential of White House/Black Market. We also have a few wild cards to play in the near future for both brands. We plan to do secondary mailings to large segments of Chico's customers, and that's based on our response to our Travelers mailing that we did last July.

Our response to the first few days of the new creative that some of the analysts saw at our meeting a couple of weeks ago, the response from customers has been very good too. We're also very excited about testing TV for White House/Black Market next month. We've moved up the test program based on the very positive results from our magazine advertisement. So with the growth of the data bases for both brands, and the forecast response to key inquiry indicators from TV, magazine, web and catalog efforts in the fourth quarter, we're very optimistic about our growth for spring of fiscal '05. And now I'd like to turn it over to my favorite CFO, Charlie Kleman.

Thanks, Jim.

Okay.

And good afternoon, everyone. And welcome to another great quarter, as we wrap another year where we improved both our gross margin and our operating margin. Today we'll review the quarter and year in some detail, share some interesting year end numbers. Spend a little time on the controversial lease accounting area, and look a little bit about where we see the possible future. All earnings per share numbers that I will refer to, are of course, split adjusted to take into account our split that was effective last week.

First let's start with the area that seems to be getting the most attention even though it is immaterial in our case, and even though virtually every retailer and restaurant in America believed they were accounting for the substance of the leases properly for the last 20 years or so. As you all know, a letter was issued by the Chief Accountant of the SEC, indicating they wanted strict compliance to the FASB statements issued many years ago. Although this letter covered several areas of lease accounting, only two areas required revision of any accounting practices at Chico's, and these revisions, which have been made, were immaterial to the balance sheet, income statement, and cash flow statement. Although these revisions were immaterial I will review them for you to avoid any confusion.

First, as with most other retailers, we were previously netting reimbursements for tenant improvements or TI against the associated asset, rather than classifying the reimbursement as a deferred liability, and showing the current year's receipt as a separate cash flow item in the cash flow statement. The cumulative amount of all tenant improvement monies that we moved to the liability side amounted to $26 million, out of an asset base of over $700 million and the current year's receipts which are now shown on a separate line of the cash flow statement are approximately $9 million, out of $224 million in cash flows from operations. We have made this adjustment although it had no impact on the net income or net cash flow for this year, any past year, or any future year.

The second item I referred to, relates to the amortization of construction period rents. We were amortizing the rent from the time the store opened, rather than from when you are given the keys to the store to begin construction, as the FASB has now been reinterpreted. This change in view, which to me appears to place the form of the transaction more important than the -- than the substance of the transaction, caused a $4.2 million non-cash charge or a $0.02 reduction in our reported net income per share. This $0.02 reduction in the reported fourth quarter and year end earnings consists of, approximately one quarter cent reduction in earnings for the current year, and just under 1.25 quarter cents for all the previous 20 years combined.

We expect this change will result in a future charge of under $.25 million each quarter, thus it will be largely unnoticeable. Cash flows were unaffected by this immaterial adjustment this year, in any past year, and will not be in any future years. As you can see, neither of these adjustments had a material impact on any of the financial statements, nor are they expected to have a material impact in the future, but we have made the adjustments, and we are committed to complying with all mandates, regardless of whether we agree with such pronouncements.

Now to the more important earnings and operations associated with our exciting brands. First let's look at an overview of the fourth quarter, a quarter in which we saw a 33 percent increase in sales, and a 39 percent increase in earnings, before the change of view on lease accounting. I will be giving you the impact of the one-time lease change in each area to help you with your models as well. As we discussed in our second quarter's conference call, we expected that our gross margin would be flat to down, due to the increasing percentage of White House/Black Market stores being included in our sales base, and our initial investment in building a product development and merchandising technical staff at White House/Black Market.

Further, we expected that at a comp somewhere north of 5 percent, we should begin to show leverage of our SG&A costs. The quarter ended up pretty much in line with that, as we saw a 60 basis point decrease in gross margin, and a 90 basis point leverage of SG&A costs, on our 12.9 percent quarterly comp, before considering the 1.5 percent increase in the reported fourth quarter SG&A, associated with a lease accounting change. The net effect of these changes improved our quarterly operating margin from 19.1 percent last year, to 19.4 percent for the current quarter, again before the lease change described earlier.

At the gross margin level, both the Chico's and White House/Black Market merchandise margins saw improvement. The Chico's merchandise margins received an overall small increase as the Chico's IMU, or the initial markup on goods, again improved nicely, but this increase in IMU was partially offset by a small increase in the overall markdowns and promotions rate on a year-over-year basis, thus the overall small increase at Chico's.

On the White House/Black Market front we saw a nice improvement in merchandise margins of slightly under 50 basis points. Other factors that affected the consolidated gross margins include our continued investment in the product development area for both brands, although the bulk of this investment is in the White House/Black Market product development areas. We will continue this investment in the product development arena although we should start seeing a lessening of such investment by late 2005.

On the SG&A or selling general and administrative front, most of the 90 basis point leverage I've referred to earlier is related to fixed costs included in the Company's stores which leveraged as we planned. Beyond that we reduced marketing expenses by about 20 basis points in the fourth quarter, without appreciably affecting the traffic levels in our stores. Next, let's look a little deeper into the fourth quarter sales.

The fourth quarter, same store sales increase of 12.9 percent, which was on top of last year's 20.5 percent fourth quarter increase, was as you should be aware by now, influenced mostly by increased traffic and new Passport members, as well as the launch of the Black Book that Jim discussed. For the most part, these increases were not caused by increased marketing activities, but rather, we believe, by brand building as we become more of a gift destination.

Regarding sales for the White House/Black Market brand, we saw solid year over year sales and same store sales increases in every month of the quarter. For the quarter, the White House/Black Market brand accounted for approximately 13 percent of the same store sales base, and the same store sales were not materially different than the reported amounts. I hope you noticed in the press release, that we have decided to become a little more transparent on this front, as we will on a quarterly basis. We will publish the total sales for both the White House/Black Market brand and the Chico's/Soma brand as well.

We will continue to update you monthly if White House/Black Market same store sales are materially different than the reported same store sales, but we will not begin -- we will not begin publishing same store sales numbers by brand at this time. On the Passport front, Jim filled you in on the overall data base numbers, and I'll remind you of the Passport numbers available on our website. Chico's added about 90,000 new permanent members and another 180,000 preliminary members in the fourth quarter, to bring the permanent membership to 1.3 million, and the preliminary membership to 4.1 million. The new Black Book club launched for the White House/Black Market customers exceeded our expectations and ended the short year with 60,000 permanent members, and 616,000 preliminary members. Well ahead of the relaunch of the Passport Club at Chico's in fiscal 1999.

The average price per unit at Chico's front line stores was up over a little over 1 percent for the fourth quarter, and because we did not have White House/Black Market on our cash register system for the prior year's quarter, we are not prepared to comment on their price versus traffic increases.

We expect to continue to see flat to small improvements in the Chico's average unit retail for each of the fiscal 2005 quarters. Lastly, for the quarter, under the new Sarbanes-Oxley strict requirements, we must adjust our tax rate each year to a more exact number than in the past. Thus the fourth quarter tax rate came in at 36.8 percent, while the year to date tax rate came in at 37.7 percent, versus our standard tax rate of 38 percent. I would continue to use 38 percent for planning purposes as using historical actuals is rarely a good predictor of the future.

Overall, we are very pleased with the quarter as it came in right where we expected before the noncash charge associated with the lease change and we look forward to the first quarter of fiscal 2005, after a very nice 9.2 percent comp for February to open fiscal 2005. That comp was of course up against last year's 28 percent same store sales increase.

Next let's spend a few minutes on the yearly results, the balance sheet and some interesting store facts. The year at $0.78 per share on a split adjusted basis, represents our 8th year in a row with an annual increase to net income of at least 40 percent. The split which became effective last week is our fifth during that time frame, and our sixth since going public in 1993.

The year that just ended was our first to exceed the $1 billion mark as you heard from Scott, and we closed the year at 1.067 billion. The overall gross margin saw slight improvement for the full year as we concentrated on improving the initial markups at both brands, which effectively offset the dilution caused by the lower White House/Black Market gross margins. We saw improvements in both Chico's and White House/Black Market brand gross margins, as we improved the initial markets in both brands throughout the year.

Inventories at the end of the year came in right on our planned range at $59 per square foot, and we ended the spring selling season with very little carryover to deal with. Cleaner at the White House/Black Market, and about the same at Chico's. For the year, we saw our third year in a row of SG&A expenditures at -- at the 40.4 percent level in spite of the dilutive effects of the White House/Black Market acquisition, in spite of a 40 basis point increase associated with a lease change, and in spite of a 10 basis point increase in marketing expenditures.

Our catalog, TV and magazine marketing expenditures ended the year at 3.7 percent of sales versus 3.6 percent the previous year. These improvements in gross margin and the maintenance of flat SG&A, combined to result in our strongest operating margin in history at 21.0 percent versus last year's 20.9 percent operating margin, and versus a 21.4 percent without the lease change.

Regarding future guidance, we continue to guide to an overall gross margin that is likely to be slightly down compared to fiscal 2004. The ongoing investment in the product development area in White House/Black Market, the increasing percentage of White House/Black Market stores in the mix, and the initially lower margins at the Soma by Chico's stores, all indicate there will be pressure on the gross margin, offset by the small IMU gains we expect at both Chico's and White House/Black Market. With that said, we are pursuing direct sourcing for the White House/Black Market brand, and we expect a small first shipment from China in late of the first quarter of this year.

On the marketing front for all of fiscal 2005, we are still planning that our catalog, television, and magazine marketing costs should range near 4 percent of sales. Regarding overall SG&A guidance, we should be seeing some small leverage at north of a mid-single digit comps in the first and second quarters of this year, and will likely see leverage at slightly lower comp levels in the future quarters.

Wrapping up the financial review of overall 39 percent annual increase in sales, combined with an industry leading 21.0 percent annual operating margin, resulted in a 41 percent increase in net income, and a 38 percent increase in earnings per share for the year, as we moved from $0.57 per share last year, to $0.78 per share this year, our highest quarterly EPS ever.

Next a note on the balance sheet and cash flow and then we'll look at some operational areas. We'll be filing our 10-K as we usually do in late March or early April so until then I'd like to give you a few of the important cash flow numbers you may need for your models, as well as a comment on the balance sheet. First, our balance sheet remains very strong, as we ended the quarter with $266 million in cash and marketable securities. Cash flow from operations for the year generated over $223 million, of which $28 million was related to tax savings associated with stock option exercises, and 195 million was related to on-going operations. This $195 million of cash flow from on-going operations compares to 130 million from on-going operations last year, a solid, 50 percent increase year-over-year. For cash flow planning purposes, the annual depreciation expense was 36 million while the fourth quarter was 13 million. Remember this number was increased on a one-time basis by about $4 million due to the lease accounting changes.

For the future I would plan depreciation to be in $11 million range in the first quarter, and grow by about a 0.5 million to 1 million per quarter. Our Capital expenditures for the year were $84 million, net of the new tenant improvement line item of 9 million that we are now required to break out separately. That's versus $52 million as reported last year net of tenant improvements.

Lastly on the cash flow, we reacquired 137,500 shares in the third quarter under a stock repurchase plan at a cost of roughly $5 million. Although we did not reacquire any additional stock during the fourth quarter, we intend to use this plan to acquire shares opportunistically with our stock prices under pressure, during valid window periods. We are careful to fully evaluate the cost of capital and the growth environment, and we will continue to evaluate the most opportune times when our shareholders would benefit, if we were to reacquire stock during valid buying windows. We will not reacquire stock when the accretive value to the earnings or the market cap are less than the cost of capital, as this would not be in the shareholders' best interest.

Next let's summarize the store openings for fiscal 2004. For the year, we opened a net of 53 new Chico's stores, 46 White House/Black Market stores, and 10 Soma by Chico's stores, while we closed the remaining 9 Pazo stores to end the year with 100 net new stores. Within the Chico's brand we opened 56 new Chico's front line stores, 2 new Chico's outlets, and we closed 5 front line Chico's stores during the year. In addition we expanded or relocated 23 Chico's stores, we acquired 1 franchisee back as a front line company store, and the Minnesota franchisee opened 1 new franchise store during the year. Thus we end the year with 450 Chico's front line stores, 25 Chico's outlet stores, 12 Chico's franchise stores, and 10 Soma by Chico's stores.

On the White House/Black Market side, we opened 48 new front line stores during the year, 2 new White House/Black Market outlets, while we closed 4 White House/Black Market stores. In addition we expanded 8 White House/Black Market stores. We end the year at White House/Black Market with 156 front line stores, and 4 outlet stores. All of the store activity resulted in a net increase of 23 percent selling square footage growth for the year, as we moved from roughly 1 million selling square feet to approximately 1.227 million selling square feet.

Finally on the store opening front for this year. Fiscal 2005 we are currently planning for approximately a 20 to 22 percent square footage growth as we currently plan to open as Scott said between 110 and 120 net new stores. Now a couple of year end statistics that are always of interest each year. The average Chico's front line store is now about 2,030 net selling feet. While the average front line store that was open for the whole year, averaged over just $2 million in sales, and thus we ended the year at just over $1,000 sales per net selling square foot.

Also interesting is that the front line stores we opened in fiscal 2003 averaged over 1.900 million in fiscal 2004, to come in at 95 percent of the existing average Chico's store volume in their very first full year of operation. We are also forecasting that the stores opened last year should come in at about the same range as this year, fiscal 2005.

Onto some top stores for the year, The Keirland store located in Scottsdale, Arizona finished the year with a sales figure north of $6 million. The Mohegan Sun store in Connecticut, and the Preston Royal store in Dallas ended up north of $5 million, and 10 other stores ended up north of $4 million in sales. Lastly for Chico's, 6 Chico's stores exceeded $2000 per net selling square foot for the year, while 38 others pushed north of $1500 per selling square foot.

On the White House/Black Market side the average front line store is now 1350 net selling square feet, while the average front line store that was open for the whole year averaged just over $1 million in sales, and just over $800 per selling square foot. The average sized front line store we opened last year was almost 1600 net selling feet, and we believe these stores will exceed the chain wide average in their first full year this year, fiscal 2005. White House/Black Market closed the year with a Plaza Las Americas store in Puerto Rico and the Kierland store in Arizona exceeding $2 million and 13 other stores exceeding $1.5 million.

Lastly on the sales per square foot front 2 White House/Black market stores exceeded 1500 per net selling square feet, and 25 others exceeded 1000 per selling square foot. These are numbers we're very proud of, and we intend to work on improving.

To wrap up, we've got a powerful Chico's brand that is continuing to gain name recognition with a 35 and up woman. We've got an emerging White House/Black Market brand that is only now beginning to build a nationwide presence, in preparation for a stronger rollout, and we've got the Soma brand that we are continuing to refine, but is operating in a wide open market with huge potential, and a huge barrier to entry that would, we believe, we have solidly cracked.

We look forward to fiscal 2005 as we continue building a world class management team, as we focus on providing the highest level of service to both our customers and our employees, as we continue to provide unique products to some of the biggest segments of the women's apparel market. Every sales associate represents the management team to our customers every day, and I'm proud to be with an organization that treats every employee as if they were a customer, and that also puts the customer ahead of everything. As Pat said, and as Marvin used to say, keep your eye on Chico's. Now we'll take some questions, operator.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to the site of Margaret Whitfield. Go ahead your line is open.

Good afternoon, everyone. A few questions. First, for Pat, I wondered if you could comment on what in particular is driving sales early in this new year with those February comps.

Oh, gosh. A lot of different things. Menswear shirting is terrific. Our novelty T-shirt business continues to be very strong. As I mentioned some of our core business, our Travelers Collection, key items that are performing up to, or above plan. And denim is doing extremely well, and also we see a real resurgence in our novelty jacket business.

Okay. And for Jim, I wondered if you could give us some idea of what might be in those secondary mailers and when we might expect them for Chico's.

I just don't want to give our competition too much ammunition, but I can tell you that it will be in our major months; that won't be any surprise. It will be coming up soon, and you'll see we were quite successful with Travelers and we're going to do a repeat of that, and as you've heard from Pat, we've been very successful with denim, and we want to take advantage of that success.

Okay. Charlie, I wondered if you could tell us the contribution of White House to the fourth quarter in terms of per share?

We don't track that anymore. We've got way too many mixed operations. It isn't a concept that exists anymore.

Okay. Thank you.

We'll go next to the site of Mark Friedman. Go ahead your line is open.

Thank you. Good afternoon, guys.

Hey, Mark.

Charlie, I was wondering, one, if you could comment a little bit more about, in the fourth quarter, the mix on Chico's and the promotional, a little bit of decline in the margin on the promotional side. Secondly, on White House/Black Market, just a little bit more color about the business in February. Thank you.

What was that second question again, Mark?

Oh, the second question, just a little bit more color about February sales, performance, best sellers and just a -- you know, relative to Chico's, how White House did in February.

Why don't you let Pat take --

Why don't you take the mark-down increase. There was a slight increase of mark downs increase year over year, Pat.

Well, some of it was just styles that were in, which weren't appropriate and the others as you know of course, all of our markdown units fall into the same kind of compartment, and we had a lot of coupons that were redeemed, so the coupon activity is strong and you know, the whole thing contributed to a slightly higher increase, but nothing significant that we feel will affect us on a total percentage basis as we, you know, get to the first quarter or even the first six months.

And we will have the Rod Olson, the Vice President of Operations from White House answer the question toward White House, as it regards to what was best sellers in the month of February. Spring sellers.

February was driven basically by our tops business, in both knits and sweaters. Knits, we saw an emergence of tunics, and our basic cami business continued to be very strong for us. As far as sweaters the emergence of shrugs and cocoons really drove the business, and are continuing to dominate the business as we go forward. Of course, the White House is known for its woven bottom business, it has been a core and stable business for us and of course, our core fabrication drove the bulk of that through the month of February, along with the emergence of denim, not quite what Chico's numbers are, but certainly holding its own in the White House forum.

Thank you. And just Charlie, I don't know if I heard her right. What were the expected expansions for 2005?

We'll be in the 20 to 30 range. We'd like to have more but we think we'll probably end up in the 20 to 30 range.

Thank you, guys.

Thank you, Mark.

Thank you, and we'll go next to the site of Dana Telsey.

Good afternoon, everyonr. Can you talk a little bit about the China opportunity? It seems to be coming up a little bit more frequently in your conversations lately. What do you see there? Is there opportunity for IMU and what percentage of the mix do you estimate coming from there, and then last year I believe Charlotte, North Carolina, in May was updated with a new store format. How's that going and will you do any more stores in that format and lastly, inventory plans for first quarter, how are you building it? Thank you.

Okay. Pat you want to start with China?

Dana, we don't really see -- we're doing about 50 percent of our business right now out of China, whether we work directly with people in New York or whether we go there ourselves and work directly with the vendors, but there's opportunity in some existing fabrications, our denim business is very, very strong, they're doing a lot more with different finishings, like we have a new denim in that has a different finish, so we just see opportunity on the margin and -- and actually just in sheer dollar volume doing more business there. We've just hired a -- a senior product manager there for China.

We've divided the region into two separate regions, so that we can get more leverage and really pay attention to a number of product categories that come out of there. So we feel very optimistic about going forward. And -- the inventory levels for first quarter are basically right on plan. I don't really see any difference to the cadence from last year.

They should be right in that range let let's say between 57 and 62 that we always like to follow. Regarding the Charlotte store, yes we did open that last summer, with some fanfare because it was our new look for Chico's. It has since that time been running substantially ahead of the chain in terms of what its comp has been, and about two months later we rolled every single store out under that.

We are now in the middle of actually tweaking that look because there are things that we think we can do to even make it look better, but that look will essentially be what all the new Chico's stores are going to look like, and the White House/Black Market, as you know, we just rolled out our new store in the Bell Tower as well, and that look we're very excited with. So far, that's been very, very successful.

Thank you.

Thank you and we'll go next to the site of Kimberly Greenberger. Go ahead. Your line is open.

Great. Thank you. Good evening. Charlie, I was wondering if you could do me a favor, and just go back through the gross margin change year-over-year excluding the rent charge. I'm not sure that I understood all the moving parts if -- after you back out --.

Is that for the quarter or the year?

Just for the fourth quarter.

Okay. There was no lease charge, because we have our lease accounting down in SG&A so that did not affect at all. We saw about a 50 basis improvement in the White House/Black Market gross margins. We saw a small improvement in the Chico's IMU with a small increase that offset that from slightly increased markdowns, and we had -- we had our continued investment in the product development areas that did drag down the margins somewhat, and that we said is going to continue for the future.

And then in the 90 basis points adjustment to SG&A, was that -- that's excluding that $4.1 million lease charge in the SG&A line?

Yes, that was excluding the SG&A charge.

Okay. Great.

Which was about 1.2 percent.

Okay. Great. And then lastly, Charlie, I think you said the average unit retail price in the fourth quarter for the core Chico's business was up 1 percent.

Yep.

Total comp up 12.9, so does that imply that the number of transactions at an average store were up approximately 12 percent in the quarter?

Yes, in the average comp store, yes.

Okay. Great. Thank you.

Thank you. And we'll go next to the site of Adrienne Tennant.

Good afternoon and congratulations.

Thank you.

I just had a couple of questions. Pat, can you talk about -- we're hearing a lot about kind of an emerging scene with kind of this bohemian, and how the core Chico's brand can play that trend, as well as at the White House/Black Market, if somebody can address that.

And secondarily, to Charlie, can you just talk about -- I mean, when I look at the $800 a square foot that White House/Black Market is doing, I go back at history and look at what stage in life Chico's was at. I mean this is pretty rapid growth to get to that. I'm just wondering are there any structural or competitive differences between the White House/Black Market concept and Chico's that would prevent White House/Black Market from doing similar sales productivity and similar margins? Thank you.

Hi, Adrienne. It's very interesting you should ask that question, because we just finished our concept meeting and core concepts for the upcoming fall season and we talked a lot about bohemian. I think that knowing our knowledge and our product development team, I mean we are -- we could just do fabulous with this trend, lots of interest in vintage and velvets and trims, and we just got a lot of development that is so us, and so Chico's.

As of right now we have some tunics started hitting (ph). We've had great response to those. We're doing embellishment on tunics. We are even kind of bohemian influence on T-shirts, so we believe that in the trend we think it's right up our alley but as far as, you know we talked about how we can Chico-fy it, but we're very excited by this trend.

For the White House/Black Market, yes, they are running about $800 a square foot and if you compare that to the numbers for Chico's when they were running about 1 million the average White House store does about 1 million per year right now. I believe Chico's was running about 550 a foot at that time. But those stores were much larger than the White House stores.

The White House stores now need more space and need it right now, and we're going to be looking aggressively to get more space for the White House stores, because we think they're volume constrained in some cases by their space, so we will improve that just like we've done at Chico's so far.

On the margin side it's going to take them, as I said, fairly consistently, it's going to take them several years to get used to the direct sourcing. How much direct sourcing they want to do is going to be their call, and over the course of several years we see no reason -- no structural reason why they can't get to the same margin level as Chico's, with larger stores and with improved sourcing.

And we're going to ask Rod Olson to answer Adrienne's question about the bohemian influence at the White House.

We've already begun to interpret in black and white, and shades of the bohemian look. Needless to say I already mentioned that tunics have emerged in the month of February. They continue to do very well for us and we are interpreting them with embellishment. Last week our best sellers included several tunics, and several calftains all with a bohemian feel. Bohemian interpreted skirts too in black and white skirts going into the second quarter are going to continue to be strong for us, and we certainly have already tapped into a trend in jewelry.

Okay. Great. Thanks so much. I've seen it in stores and it looks fantastic. Just one follow up. How long lived do you think this current trend is?

Oh, gosh. Well, you know, that -- those are always – (multiple speakers) that's always hard to predict. I would say honestly that the flavor of Chico's has always had a certain element of bohemian in the flavor of our garments, and you know, some of our unique finishes, and we've always believed in embellishments and stuff like that, so certainly I don't imagine we will ever really lose that look. We've never been very cleaned, and very paired down, so I mean, it -- the timing is right right now. I certainly feel it's going to continues right to the fall, certainly into holiday. As to whether it will emerge into spring of 2006, I think that's something we would -- I wouldn't -- I wouldn't want to go that far.

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

Thank you.

Thank you and we'll go next to the site of Tracy Kogan. Go ahead, your line is open.

Good afternoon. Could you give the store openings by quarter, and also are you anticipating any closures and would those be White House or Chico's? And thirdly, I'm not sure I heard you give CapEx guidance for '05? Thank you.

Regarding the store openings by quarter, you can get that right off the Internet. All that activity is right under financial highlights in the investor relation area.

For '05 Charlie?

Oh, for '05 we're going to be slightly leaning more frontward this year, than we have in the past. There should be quite a few White Houses opening up in the first and second quarters. More than half of them are going to open up, substantially more than half. For Chico's it should be slightly more than half in the first two quarters, so you could use 50/50 would be a good conservative way to go for the first half and last half, and your second question was?

CapEx.

For the CapEx it's the same kind of guidance I've given all along. I'm going to redo my store economics model here as soon as we get all the numbers out of the way, and we think we are going to be somewhere near the 450 per store CapEx type thing, like the store economics models are right now, and you can just multiply that by the number of stores, and you can add in 5 or $10 million miscellaneous. That type of stuff. I can go over that with you.

And then on the closures, Charlie, how many --

There should be some closures. We've got 3 or 4 or 5 planned, like we always do.

Okay. Thank you.

We'll go next to the site of Laura Levitan. Go ahead, please.

Thanks. Good afternoon. A couple of questions and I guess this one is really addressed to a variety of people, Scott and Jim and Pat. You've talked about how the brand is getting to the point where you feel you've got an unmet gifting opportunity. Can you talk about what the -- where you see those opportunities, what the marketing message and medium might be to better capitalize on that, and what corresponding merchandise opportunities, whether it's in terms of categories or -- or deepening your -- your presence in any particular categories, how you might chase after that gifting opportunity going forward?

And then I had a second question related to markdown strategy. I know that during 2004 you experimented with how deep to go on the first markdown, and were trying some different strategies throughout the year. Can you give us a sense of what the conclusions, if any, there were from those tests, and what kind of markdown strategy we should be looking for during 2005?

Let me try to recap your questions there. First off, with the strength of the brand, what items might be used as gifts, second, how might we market them, and then what have we learned from testing various markdown strategies. Does that sort of encapsulate it?

Sounds good.

All right. Great. As far as the gifting, you know, as the brand has gained momentum and strength over the last several years, we believe that customers are a lot more comfortable gifting just about any item from Chico's. We don't think that there's anything specific. We think it's more, seriously it's more about, you know, they're more comfortable wrapping something in a Chico's box and bag and gifting it to -- to a friend, a mother, a sister or something like that. So it -- I don't know that Jim needs to speak to any specific marketing approach about the gifting. And then relevant to -- to the various markdown strategies, I know last spring, you know, we tested, you know taking the first mark all the way down to 50, and you know, we certainly learned some things about that. And I mean, there's nothing -- there's nothing to say that we might not try that again at some time.

Back to the gifting for a second, Scott, do you think there's an opportunity to get men actually in there shopping for women to a greater degree, and would that require marketing the brand in any different way, or is the expectation that it's really speaking to that core Chico's customer, and just having her think of Chico's as not just as a place for herself, but also for gifting.

Jim, you want that one or do you want me to take it?

No, I'll take it. No, as Scott said, I think it's more the growth of the brand as being more of an acceptable brand, but one that's sought after. And also, the broadening of income and broadening of age targets. I was in a Gap the other day, and the young lady that was helping me must have been 22 or 23. She loved Chico's for accessories. It was really interesting. And for buying them for gifts, but also for herself. I think it's more the product that we emphasize and feature, rather than marketing to males, for instance. I -- I don't think we have much intention of doing that.

Okay. I have one other question if I could related to White House direct sourcing. You mentioned that the first delivery would be coming from Asia this -- the end of this quarter. Can you give us a sense of is this a test, is this the beginning of a big pipeline that you've got planned, and how should we think about where White House is on their -- on their time line to get into direct sourcing more substantially?

Yes, that is a test as our first delivery of that and we're going to see how well it works, how well -- like how the customer reacts, how well the fit is on that, so it is truly a test. We're going to go about this very slowly like I've said all along, and you might not see another shipment for quite a while.

Thank you.

Thank you and we'll go next to the site of Stacy Pak. Go ahead. Your line is open.

Thanks. I had three questions. First of all, I was wondering whether you would comment if there was any narrowing of the gap in the operating margin between White House and Chico's in '04?

Second of all, if you could comment on the impact of the product development costs to the gross margin in the fourth quarter, and what pressure we should expect there for the year and then third, with regard to the platinum product, the extensions, would you expect sort of the same differential in pricing to the extensions that we see in denim from the core?

Were the first two questions addressed specifically to the White House?

No, the --

Or just the first one the product development cost is for the core brand?

Well, you had said there was -- there was an impact, a negative impact to the gross margin from two pieces. Right, White House and core and I want to get a sense of how much that was.

Okay.

And what it looks like going forward and so that's really more on the corporate level. I mean, if you want to give us the detail that's great.

Why don't we get Pat to talk about the platinum extension and Charlie, you can talk about – (multiple speakers).

Hi, Stacy. Exactly. We asked ourselves the question, the same way that the platinum jean represents a price increase, but still at a good value to the core denim product. We would pick the same approach, for instance, let's say a great white shirt, but the shirt would be of a finer count fabric, and she would recognize the difference. And yes, it would be at a different price point. So we would -- we would want the -- all the products to be platinum compatible, if you will.

So we would want to take the approach that they all made sense and all worked together. And then it was a wardrobing concept within itself, within the concept of platinum.

Just to follow up there, Pat, do you have any number in your mind as to where platinum goes to, as a percent of the mix? How big does this get?

I have a number in my mind of what it could be, but I think we ought to take the first step and get the other, you know, the comparable, the compatible products in the door first, and then see where it can build to. You know, I mean, it's all about how much space would we need for it, what other products would be involved, and really how much we'd want to expand it. I think we will -- we're certainly going to test the idea of a wardrobe in the fall, but as to where it goes from there, I would rather read that first.

Right. Thank you.

Okay. On the operating margins we don't track a real true operating margin for either brand but we do track what we call a brand margin and last year we made significant investments in the White House/Black Market. That is, we added over 200 assistants managers and we -- we really beefed up their field, the field support and training throughout the year, so that we could gear them up, and at the same time we doubled their merchandising staff, so we believe we've made most of the investments in the White House/Black Market.

It actually dropped their operating margin last year, so we'll be anniversarying most of these costs this year, so we expect to see improvements at the White House/Black Market as far as operating margins. They did gain some ground. They're not near Chico's yet. They lost ground last year but those were investments in the future. That huge increase in sales per average store that they experienced was due to a lot of things that we've done I think.

As far as product development costs, the bulk over 90 percent of the cost increase was at the White House/Black Market, and they had under a half a point impact on the margins, but it was up near that range somewhere.

And for the year, Charlie, what shall we think about in terms of a negative impact from the product development investment?

For this year it will be in the same range for the first half, and it will lessen substantially as we get toward the back half.

Thank you and we'll go next to the site of Jennifer Black.

Good afternoon and let me also add my congratulations.

Thank you, Jennifer.

I just had a few questions. I wondered first if you'd had any thought to lingerie or sleepwear at the White House?

Not at the current time. We have a lot on our plate right now. We are happy with the business the way it's rolling forward. Perhaps down the road, but definitely not within the near future.

Okay. And then did you say you'd hired an in-house design team at White House/Black Market?

We're actually building one. You know, we announced that we had hired Lisa Converse, some six or eight months ago, and we continue to add some staff there.

Is that to focus mostly on bottoms?

No, it's to more focused on direct sourcing.

Okay. Okay. And then lastly, I'm proud to have a $4 million store here for me.

You probably had something to do with that.

I wonder how successful the [Spanks] program has been with you, and will you offer any other Spanks products in the Chico's stores or the Soma stores?

We tested the products in a few stores and we rolled it out to several more, and we're now at the point where we're really putting it in all stores. It's a product, you know Spanks for Chico's, I don't see any expansion to it other than just as basic service items in two lengths for her, and she seems to love it.

Okay. All right. Good luck. Thanks very much.

Thank you.

Thank you and we'll go next to the site of Rob Wilson.

Yes. Thank you. Jim, last year in spring you had some success with prospecting. I'm wondering how that impacts your marketing in the first half of this yea, and Scott, could you talk about how you're doing in some of these smaller markets? I think you mentioned like Des Moines Iowa in the past, if I can get some insight there, I'd appreciate it.

Okay. Well, we -- we consider prospecting both -- some people don't, but we do both direct marketing and TV and magazines. So we're always shifting dollars between the three. As I indicated, we were extremely successful in the fall with TV prospecting that is new names, names and addresses that we got from our TV advertising, so we beefed up our -- our spin for the spring. In TV.

I would say on the direct marketing side, we're pretty much consistent with the circulation we're putting out there for prospecting, it's probably over a 20 percent increase in that element alone.

And magazine advertising as we showed on the -- in the analyst conference, we have well over 20 percent increase in circulation. And impressions and not quite that in expenditures, so we're more and more efficient in each channel for prospecting as we go along.

And Rob as far as some of the smaller markets as you indicated we've been pleasantly surprised at four wall contribution, even if the average sales is a little below the chain average they're still very profitable because of the rents Macon Georgia, Columbus Georgia, markets like that are sending a lot of money back to Fort Myers.

And then real quick, Pat, have you talked about what products you might take out of the store with the platinum products extensions in the fall?

We're looking to do this as -- as part of the general assortment, so we're really not talking about you know, any other kind of product reduction. I don't think we'll carry as many styles in denim that we normally do in our basic program, so there will be a slight compensation there, but we're really looking to engage it in the regular assortment. Some of the stores because of their larger square footage, will have a better presentation than some of the smaller stores. Very well aware of that, and we're actually in the process of planning that now , to the degree that some of the bigger stores will have it, and then of course, what the assortment would be for our smaller units.

Thank you. Appreciate you taking my call.

Uh-huh.

Thank you and we'll go next to the site of Liz Pierce. Go ahead. Your line is open.

Let me add my congratulations. Jim, I have a couple of questions for you. And in terms of the Passport, the age of the Passport, I think you touched on this or maybe Charlie touched on it just a bit, in terms of you continue to see them spend, if you go back to when you relaunched in terms of the aging, I mean, is there a falloff or did they pick up?

When you're talking about the age, do you mean as -- with their inaugural year and how much they spend year after year, that kind of thing?

Yes, correct, sorry.

Right. Right.

Yeah, I -- I think we talked about that a couple of times. That is one of my most interesting reports and that is we can look at our Passport shopper, virtually every week if we want to, and see how much she's spending relative to her inaugural year of signing up, and we can follow her right along and compare week to week, year to year, month to month and so forth. And what we find is by -- by doing that analysis, we make sure that she's continuing to spend with us.

Not only that, but we can also see if she shifts in her spend from -- for instance, if we're keeping up with her as a share of her wardrobe purchases in the spring, and are we doing as well in March and April relative to previous years and so on. With that information, what we've done is for instance, we beefed up our effort in the fall. That was a couple of years ago. And we continue to look at that.

There are certain months and certain weeks where she's spending as much as she did in her inaugural year in '99 and in 2000. So we're more than satisfied that -- that our -- our prime customers continue to spend. And that -- that is even our oldest customer.

Okay. Great. And then just a followup on your response to Rob's question on prospecting.

Uh-huh.

Because I believe you had a lot of signups correct in the first quarter of last year. Right?

Yes.

And you did a lot of prospecting so when you talk about that 20 percent, is that spread out through the year, is it -- in this quarter is it in Q3 again, or --

That's an average for the -- for the whole year. And I -- I really don't want to go into too much detail on -- on the amount of prospecting month by month or anything like that. Again, we have -- we have too many competitors who are watching what we're doing. But it -- in response to Rob's question, I indicated that we do shift money between the three different forms of prospecting, and that is mailing out catalogs, magazine advertising and TV.

You know, a lot of other companies, particularly retailers, don't even think about TV for prospecting, because they don't even ask for a response. Of course, we do. And -- and we get -- when we launch a -- a TV campaign, for instance, we can get thousands per day of increase, and that is with a name and address, so what we like to do, is do an analysis every week and depending on -- on how the increases are coming in, we can react pretty quickly and shift dollars to the -- to the hottest methods of prospecting.

Okay. All right. Thanks. That was helpful to clarify that. Thank you.

We'll take a couple more questions and then we'll have to leave.

Thank you and we'll go next to the site of Roxanne Meyer.

Great. Thanks. I just have some questions for Pat and Jim. First for Pat looking at the denim category, what percentage of the business was denim last spring? What percent do you think it can do this spring, and what percent of denim sales were platinum in February if you know that.

And then for Jim, obviously you've got a very sophisticated customer data base that allows you to segment in marketing different coupons to customers. I was just wondering if you've changed the way that you are segmenting at all for '05?

Go ahead and answer that real quick.

With the way that we're segmenting, no. We can slice and dice the segments in literally hundreds of different ways, so to say that it -- the way we're doing it we're segmenting it differently, no. We're in -- we're always in constant flux of what we're looking at and that can change every week.

So do you still send out the same number of catalogs each month with, you know, say like 4 different catalogs depending upon the type of customer that you are, or does that vary by month?

It actually the graphic look of the catalog, we don't send out different versions necessarily to different segments. It's offers that we send out that are different. Yeah, it's basically four different kinds, but that can change too. You know, we -- some months we do only two different offers, and sometimes we do more than four. We're -- you know, we're testing out other offers.

Okay.

That changes all the time.

Okay.

Roxanne, Pat has actually left for an international flight, but we wouldn't answer what percentage of business Platinum was, LY or this month either.

What about the entire denim category last year and spring?

We're not going to get in -- we're not going to start quoting percentages of business. We'll take one more question.

Thank you. We'll go to the site of Marie Driscoll.

Thanks. Just under the line. My question is about Soma. I'm wondering if you can tell us where the Chico's shopper, is she shopping now for intimate apparel? What kind of price point she's spending, how is she buying it, is she paying full price, is it on promotional pricing, and how do you think Soma pricing compares? Because I think the merchandise is beautiful, but it seems a little higher price point than -- than the Chico's merchandise. So that's my question. Thanks.

We're going to ask Chuck Nesbit who's sitting here as well to answer that Soma question.

Okay. First of all, our consumer -- yeah, the Chico's consumer today, like most American women, shop about any channel of distribution where intimate apparel is sold, although because she does have a more affluent income, she does tend to shop more at either Victoria Secrets or department stores. To the degree that she's shopping in Victoria Secret, she's probably paying slightly below Soma price points, to the degree that she's shopping in department stores, she is paying considerably less than department store price points, although of course we do accept in Soma the couponing, and we're running the similar type of Chico's promotional programs, so the effective out the door price isn't the -- the list prices which are considerably above department store prices.

Could you give me -- could you give me a sense of what the effective out the door price is?

I'd rather not do that. Given the fact that we're early in a test mode. We're testing different pricing scenarios, and I'd prefer not to give our -- tip our hand yet.

Okay. Well, good luck and thank you.

Okay. Thank you.

And I guess that's it for the conference call for today. I thank you, everyone for attending our fourth quarter conference call. We'll see you at the end of the first quarter. Thanks, everyone.

That concludes today's teleconference, you may now disconnect.