Chico's FAS Inc (CHS) 2005 Q1 法說會逐字稿

Good day. All sites are now on the conference line. At this time I'd like to turn it over to your moderator, Mr. Michael Smith, Vice President of Investor Relations. Go ahead.

Thank you. Welcome to the first quarter earnings conference call for the period ending Saturday, April 30, 2005. Before I begin, as a matter of formality, I'll read our 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 achievement expressed or implied by the statements are-- encouraged to review the Company's latest annual report, or Form 10-K, its filings, or Form 10-Q, the management's discussion and analysis in the Company's latest annual report, 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, the results of operation and financial condition.

The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized. Our first quarter release and related financial information as well as an audio replay of this webcast are available on our website, www.chicos.com. I will now turn the call over to Scott Edmonds, our President and CEO.

Thanks, Michael. And thanks to everyone for attending our first quarter fiscal 2005 conference call. With me on the call today are Charlie Kleman, our Chief Financial Officer and Chief Operating Officer, and Patricia Darrow-Smith, Chief Creative Officer for White House/Black Market. Pat Murphy Kernstein, Chico's Chief Merchandising Officer, and Jim Frain, our Chief Marketing Officer, are on vacation and are joining us today telephonically.

By now you should have seen our press release. We are extremely proud of the Company's first quarter performance. Our 31% increase in earnings on a 27% increase in sales and an improvement in our operating margins from 22.3% to 22.4% is the result of a well executed plan across every discipline in the Company. Clearly the brand momentum we have seen these past several years continues.

Let's begin with our power brand, Chico's. Spring 2005 is all about novelty. Pat's team recognized this early in the quarter. They reviewed every key item and category and were able to improve our assortment of novelty merchandise so that by April 1st we would have a better mix for the balance of the first quarter. Certainly, our May results through today are stronger due to Pat's action. Novelty jacket sales have been strong. Whether printed, embellished, ruffled, sheer, denim, slightly shaped or zipped; jackets contributed significantly to the bottom line in the first quarter. Printed T-shirts have also been strong. We should sell 50% more units than our plan in novelty tees for the first half of the year.

Denim was another strong category for Chico's. Our basic denim pant was on plan for the quarter. However, sales of our platinum denim were actually double what we planned. In fact, we had trouble keeping up with demand and were frequently out of stock. We intend on correcting this in the fall. Sales of denim crops were also double our original projections. Our travelers collection remains strong and exceeded plan in black, color and novelty. Spa business continues to be a growth category. Unit sales on Spa were 76% over plan in the first quarter.

Weak performers for Chico's in the first quarter were the basic T-shirt business and the basic knit layering category in both cotton and synthetic. We also saw knit ponchos and our key item linen shirt trending down. Fashion trends that performed well in the first quarter and continued to perform well into the second quarter are bohemian influenced embellished tunics, camis, printed sheer shirts, novelty linen, and sheer sweater dressy.

Looking ahead to our third quarter business, platinum denim will have a stronger penetration with additional platinum product extensions in a khaki plant, a black trouser with jacket, a white shirt, a silk cashmere hoodie, plus a platinum accessory presentation. We are planning a greater in-depth stock position on all of the denim pieces, including a platinum basic denim jacket. We will support the platinum presentation with our marketing efforts in August and September. A couple of areas that our merchants are focusing on are the average unit retail; maximizing of size sales, such as size 0; more effective testing in the depth of our purchases of hot categories.

Turning to our newest brand, soma by Chico's, we are pleased to welcome Ms. Terry Meichner to the soma team as its Senior Vice President, General Merchandise Manager. Terry joined us from Avenue Body, a division of United Retail Group where she was a senior vice president. Her background also includes time with the Cacique division of The Limited and she was a vice president with K-Mart and the Federated Merchandising Group. Together with Pat Murphy Kernstein and Chuck Nesbit, we believe we now have the executive talent to better drive this business for the long run.

The soma by Chico's business is improving every day. Although it had already met our initial plans. As we improve our merchandise offerings and refine our marketing approach, we're seeing a stronger response from the customer and we expect this to continue as Terry works on refining our offerings. As previously announced we are planning an additional six soma by Chico's stores for fiscal 2005 and/or early fiscal 2006.

Now let's move to our emerging premium brand, White House/Black Market. As you saw in the press release, the White House business is very strong. Patricia Darrow-Smith and her team look at their sister brand, Chico's, as a model of comparison. They will not be happy until their performance equals that of the Chico's brand. This is a very healthy expectation for any brand and we love their competitive spirit.

The White House first quarter business was driven by knits, sweaters, woven bottoms and dresses. These categories produced a significant portion of the total apparel business. The combinations of the knit tunic, the camisole and the shrug--excuse me, the shrug trends, drove customers to the stores. Although these items were trend driven we, made them more wearable by pairing them back to White House/Black Market classic key item styles and denim. Our performance in denim was very strong as it exceeded both sales and gross margin projections. Best performances were in crop styles, especially the cuff silhouettes. Also in bottoms, we experimented with new light weight core fabrications, new shorter inseams and new silhouettes such as the gaucho. We had positive sellthroughs and plan to capitalize these for the second quarter and forward. In non-apparel, shoes and jewelry drove sales. Shoes exceeded our sales and gross margin goals.

Moving into the second quarter, we have strong positions on fast selling categories that we chased throughout the first quarter such as the shrug, tunic and camisole. We should see continued success in skirts including but not limited to full skirts, circle skirts and tiered skirts. Woven tops are strong with excellent sellthroughs on bustiers and halters, as well as tunics and capitans. Our casual dress business is strong, especially in strapless and halter silhouettes.

Looking at the third quarter, sweaters will be a main business driver, with the shrug continuing, the cocoon exploding with various lengths, and the cardigan making a comeback. Denim will be important for the White House/Black Market as we will launch two new labels; one with our classic fit and feel made for a woman with curves, the other will introduce a new fit for a woman with straighter figure. Our key trends are crochet, embroidering, lace, faux fur and shine; all important elements to making our product unique.

Next I'd like to turn to the projected embargo dates for safeguard quotas. Just as we did to prepare for the quota changes at the end of 2004, Chico's as a company has implemented a 2005 quota safeguard management solution. This is an action plan for managing solutions for all goods made in China that are under threat of safeguard embargo for Chico's, soma, and White House/Black Market. We have identified quota categories that are currently at risk and could directly impact our business for the third and fourth quarter. Our action plan is based on current announced and projected close dates by category. We're utilizing counsel from our international trade attorneys, Sandler Travis, et al., the United States Chamber of Commerce, and our vendors, including Mass Industries and Li & Fung. We will not give any specific detailed information on this conference call as we feel this is proprietary information that we do not want to broadcast to our competition. We have reviewed the potential impact on our projected merchandise margins for the third and fourth quarters and we currently do not expect any negative impact.

Moving on to marketing, let's review some key indicators for marketing in the first quarter. The driver for all of our marketing efforts for the Chico's brand is our database. It stands at approximately 5.5 million at the end of the first quarter. This number was 4.4 million at the same time last year; that's a 25% gain. The Passport segment of the database is approximately 1.4 million versus 1 million as of the first quarter last year; that's a 40% increase. Our White House/Black Market loyalty program, the Black Book, continues to attract new customers to the brand. At the end of the first quarter the Black Book's database has over 1,460,000 shoppers and 136,000 permanent members in the loyalty program.

Our TV advertising for the White House/Black Market has been a success, and we are considering allocating additional marking dollars to TV the balance of the year. With the continued growth of both databases and the response rate from key inquiry indicators from TV, magazine, web, and catalog efforts in the first quarter; we continue to be excited about the potential long-term growth of both our power brand, Chico's, and our emerging premium brand, White House/Black Market.

Lastly I would like to make some comments on our most important asset, human capital. We are pleased to have added Mr. Brett Avner to our executive team as the Company's Senior Vice President of Human Resources. Brett comes to us from Victoria's Secret stores where he enjoyed a great career that spanned 12-plus years of service. Brett will lead the Company's effort to recruit, retain, and develop the executive talent our business requires to sustain the levels of success we all have come to expect quarter after quarter and year after year. It is essential that we have the sharpest minds in the retail industry that will consistently challenge our thinking and decisions as a leadership team. All of us here at Chico's believe that it is our entrepreneurial spirit that makes us different in the world of retail. We must continue to add bench strength at each and every position in the business. This will afford us the ability to expand and grow our current business and explore opportunities in the future. Whether these opportunities are organic or external, it is going to require human capital.

And before I turn it over to Charlie I would like to thank the 9,529 associates across the country; in our stores, our distribution center, our satellite offices and our home office for their outstanding effort and contribution in the first quarter of fiscal 2005. It is their efforts that allow Charlie and me to report these outstanding results today. Now over to Charlie.

Thanks, Scott, and good afternoon, everyone. And welcome to our first quarter conference call and another quarter with solid sales and earnings growth, as we continue building our two established brands, that's Chico's and White House/Black Market, and we move forward with establishing the soma by Chico's brand. Today we'll review the quarter in some detail and look a little bit at guidance for the future. First, let's look at an overview of the first quarter of fiscal 2005.

Scott's already mentioned the overall increase in sales and earnings and the improvement in our operating margins to 22.4% this quarter. At the brand level we saw improvements in the brand operating margins at both Chico's and White House/Black Market, with White House/Black Market jumping ahead more than five points over last year's first quarter. Our investments in the White House/Black Market brand are slowing now and brand building and growth are moving forward nicely as we strive to bring the White House/Black Market brand operating margins to the same levels as the Chico's brand over the next several years. We believe we can increase the gross margin by a full point each year and leverage the SG&A at the White House/Black Market by another point each year, and we are running ahead of that goal at this time.

Beyond the brand and the company-wide operating margins, interest income was also quite strong for the quarter as both interest rates and cash balances improved over last year's first quarter. Our tax rate has also improved, resulting in a nice 31% earnings per share increase from $0.20 last year to $0.26 this year.

Within these earnings figures, the gross margin declined, as we had anticipated and as we had indicated to the market last quarter, by about 50 basis points; while the SG&A, which I include depreciation in that, leveraged nicely, or 60 basis points on our 10.8% first quarter comp. At the gross margin level, Chico's gross margin was off compared to the prior year's first quarter by about 80 basis points as we anniversaried last year's first quarter, which had one of our lowest markdown rates in recent history.

Last year -- this year, I mean. This year we ran a more normalized yet higher markdown rate than originally anticipated for the quarter, partially due to our linen offerings which experienced slower sellthroughs than originally planned and partially due to some delays in new store openings from the first quarter to the second quarter, which required some additional clearance activities as well. This higher markdown rate was partially offset by an improved-- an improved initial markup on new Chico's goods in this year's first quarter over last year. On the White House/Black Market front, we saw a nice improvement in merchandise margins of approximately 150 basis points due to better sourcing that resulted in higher initial markups, offset by a slightly higher year-over-year markdown rate.

Further, we saw improvements in store shrink and freight costs since the move in our second quarter last year to our distribution center, and in the third quarter last year to our Chico's-like cash register and store training systems. Other factors that affected the consolidated gross margin include our continued investment in the product development and merchandising areas for all brands. That amounted to 30 basis points. We expect this investment in the product development areas should be slowing as we enter the third and fourth quarters and as we anniversary last year's significant initial investments in the merchandising and product development areas of White House/Black Market.

The SG&A expenses for the first quarter as a whole, again including depreciation, came in lower than last year by 60 basis points related to leverage associated with the double-digit comps, as well as a small reduction in marketing costs as a percentage of sales. This reduction in overall SG&A expenses, which includes depreciation, came in about where we had been planning and we continue to guide to a mid-single-digit comp for breakeven in this area. Next let's look a little deeper into the first quarter sales.

The first quarter's same-store sales increase of 10.8%, which was on top of last year's 20.1% first quarter increase, was, as you should all be aware by now, influenced mostly by increase traffic, new Passport members at the Chico's brand, and a large relative first quarter increase of 80,000 members in the Black Book at the White House/Black Market brand. The new members of the Black Book for the fourth quarter last year and the first quarter this year are exceeding the numbers experienced in 1999 during the launch of the Passport Club by Chico's, and this bodes-- this bodes well for the future loyalty we will see in this brand. As I indicated earlier, we slightly reduced our marketing spend in the first quarter yet saw little change in traffic patterns as the brands continue building a loyal following. Regarding overall and same-store 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-- brand accounted for just under 15% of the total sales and just over 12% of the same-store sales base. The White House/Black Market same-store sales levels were generally ahead of Chico's by 5 to 6 percentage points every month of the quarter as we continue the initial marketing and brand awareness of this premium emerging brand that is still virtually unknown in America. The average price per unit sold at Chico's front-line stores, which is in the low $40 range, was down a little over 3.5% for the first quarter; while the average transaction, which is in the low $100 range, was only down about 2% due to a slight increase in the number of units sold in the average transaction. The decrease in the average unit retail is largely attributable to the increase in markdowns discussed earlier, as well as a change-- change in the mix of goods as the customer was buying more tees, tanks, camis, capri pants and-- and accessories.

At the White House/Black Market we experienced a 1.5% increase in average retail, which also averages in the low to mid $40 range; while the average transaction, which averages in the mid $80 range, was down just over 2.5% due to a small decrease in the average units sold per transaction. As to future guidance in this area, we expect to continue to see a small decline in the Chico's average unit retail for the second quarter with a likely improved average unit retail for the rest of the fiscal 2005 quarters. At White House/Black Market, we expect to see only small changes, whether up or down, in year-over-year average retailers; and we strive to get the units per transaction nearer to the Chico's level. Lastly for the quarter, we've focused on reducing our income tax rates over the last few years and that focus has resulted in a reduction in our overall tax rates to 37% this year, thus we have reduced our overall tax rate from 38% last year to 37% this year. I would use 37% for planning purposes for the rest of the quarters this year and in the future.

Overall, we are very pleased with the quarter as it came in right where we expected and we look forward to the second quarter of fiscal 2005 as we enter the quarter with some very strong comps and momentum for the month of May.

Regarding further future guidance, we continue to guide to a second quarter overall gross margin that is likely to be down in the same range as you saw in the first quarter. We expect-- we expect that the Chico's brand will see second quarter gross margins down in approximately the same range as we experienced in the first quarter results, while the White House/Black Market brand should again see a sizable gross margin increase in the second quarter. Future quarters of fiscal 2005 should not see as large a decline-- as large a decline in the Chico's margin, but are also not likely to see as strong of an improvement in the White House/Black Market brand as seen in the first two quarters. The ongoing investment in the product development area at White House-- 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 some pressure on the gross margin for the rest-- rest of fiscal 2005 offset by the small IMU gains we expect at Chico's and the larger IMU gains we expect at White House/Black Market.

On the marketing front, for the full year fiscal 2005 we are still planning that our catalog, television, and magazine marketing costs should range near 4% of sales. We are pleased with the results of the postcard drops that have effectively reduced other aspects of our marketing and you are likely to see more of these post card activities in the future. These post card drops, for the most part, clearly generate more gross dollars without appreciably affecting the gross margin percent, and are generating more customer interest than the cost of the mailings and are well received by our customers.

Regarding overall SG&A guidance, we-- we reiterate that you should be seeing some small leverage at north of a mid-single-digit comp in the second quarter of this year, and we'll likely see leverage at just a slightly lower comp level in future quarters. In fiscal 2006, we expect further improvement in this area. Next a note on the balance sheet and cash flow and then we'll look at some store openings. We filed our 10-Q about 15 minutes ago, so until you're able to access it, I'll give you a few of the important cash flow numbers you may need for your models.

First the balance sheet. Our balance sheet remains very strong, as we entered the quarter was $329 million in cash and marketable securities and improved product densities at both the Chico's and White House/Black Market stores. Our inventories, at $92 million and $72 per selling square foot, appear high but we have several initiatives that have caused this anomaly and we are quite comfortable with this level at this time.

First, we had an aggressive May store opening program of 16 stores plus a couple of store expansions. May is our largest store opening month since November last year when we ended the October quarter with $67 per square foot. Beyond that we have raised the densities in the White House/Black Market brand by over 65%, which certainly helped us achieve that great comp so far in the month of May and for which we've also seen continued improved merchandise margins as well.

Second, we significantly stepped our investment in the Travelers raw fabric, as we needed to change some components of the fabric and we wanted to assure a smooth transition in one of our most dominant lines.

Further, and probably the largest factor among these factors, we've elected this year to bring our Chico's summer offerings in earlier and deeper; as we believe our same-store sales were held back last year by late product delivery and shortages in these offerings early in the season. Consequently, the new goods in transit to our distribution center and the associated accounts payable on the balance sheet more than doubled in this year's first quarter over last year's first quarter. I would also like to point out that after the first three weeks of May, we've already reduced the inventory to $67 per square foot, which is a more normal overall level of inventory at this time of year. We expect our second quarter inventory to be in the 63 to $67 per-- per selling square foot range.

Cash flow from operations for the quarter generated almost $80 million, of which only $9 million was related to tax savings associated with stock option exercises and $71 million was related to ongoing operations. This $71 million of cash flow from ongoing operations compares to $42 million from ongoing operations last year, a solid 68% increase year-over-year.

For cash flow planning purposes, the quarterly depreciation expense was $10.4 million versus last year's first quarter depreciation of $7.5 million. Remember, the change in lease accounting for tenant improvement monies last year increased depreciation expense and at the same time reduced rent expense by the same amount, thus the apparent-- the apparent disproportionate increase in the depreciation year-over-year. For the future I would plan depreciation to be in the $11 million range in the second quarter and grow by about 0.5 million to $1 million each quarter.

Our capital expenditures for the quarter were 25.3 million. Again, remember that this figure is no longer net of tenant improvement monies of $3 million this quarter, as these monies are now included as a deferred rent liability. For comparative purposes, our net capital expenditures would have been 22.3 million compared to last year's 16.4 million.

Next let's summarize the store openings for the-- for the first quarter of fiscal 2005. For the quarter, we opened 13 new Chico's stores, 14 new White House/Black Market stores and closed one Chico's front-line store in Greenwich, Connecticut. These 27 new openings included one outlet each for Chico's and White House/Black Market. In addition, we expanded or relocated five Chico's and one White House/Black Market stores during this quarter. Thus, we end the quarter with 461Chico's front-line stores, 26 Chico's outlet stores, 12 franchised Chico's stores, 10 soma by chico's stores, 169 White House/Black Market front-line stores, and five White House/Black Market outlet stores. We are still planning to open between 110 and 120 net new stores composed, at this time, of approximately 60 to 65 net new Chico's stores, 45 to 50 net new White House/Black Market, four new soma by Chico's stores and our Minnesota franchisee is planning to open two more stores in Minnesota, one each in the third and fourth quarter.

To wrap up, we've closed the first quarter with strong earnings and growth trends and we've opened the second quarter with strong same-store sales in both the Chico's and White House/Black Market brands. We've got stronger inventory levels to support the stronger sales growth in the summer selling season and our Passport-- Passport and Black Book clubs are still going strong. Our test of TV ads for White House/Black Market indicates this could be a very powerful brand builder. The White House/Black Market brand continues to enjoy gross margin gains and we are beginning to see leverage on the White House/Black Market investments made last year that we expect to continue. We look forward to the balance of 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, and as we continue to provide unique products to some of the largest segments of the women's apparel market. Now I'll take questions.

[Operator Instructions]. Lauren Levitan.

Scott, I was hoping you could talk about, as the percent of your business that continues to grow from the Passport membership database; can you talk about how -- what percent of your transaction include a discount and are you doing anything in your pricing strategy to adjust for this? Separately, I was hoping you could give us some update on your thoughts for the growing and considerable cash balance? And lastly, I was hoping you could comment on timing for White House/Black Market to be commerce enabled for the catalog and for website.

Jim, I'm going to flip the Passport customer over to you. I don't think we're going to talk about any special pricing for that customer. As much as I hate to give out the data points that-- that the analysts require, go ahead and throw those numbers at them unless you want me to take them off my sheet.

Well, I think what the question is about is, is in some way the increase in-- increases in Passport sales, do you have to compensate for that because you're giving a 5% discount. Is that the nature of your question?

I don't want to overstate it, but obviously you've got a bigger captive audience purchasing at a discount, how do you preserve your margin rate-- to offset that? And obviously I know you've got IMU gains that might be a part of that.

We don't particularly have to have a plan to adjust for that, for one important and very positive reason; and that is that the Passport shopper buys so much more average in an average transaction that a non-Passport customer that it's all to the good when the Passport percentage increases. Right now actually we had-- we have over 75% of our sales are due to Passport shoppers and then another 20% or so are from preliminaries, that is working their way up.

And that's the same last year, too, Jim.

Yes.

Yes, that's the numbers.

So that's a very positive factor for us, not a-- not a negative in any regard, actually.

One of the other questions, I think, Lauren was when is White House/Black Market going-- going to go on the website and that's in the fall of this year. And I can't remember what the third question was.

As you know, Lauren, we've-- we announced a $100 million share repurchase program some months ago and we haven't moved on that as-- probably as fast as we should. And we are going to be meeting with our board in June and Charlie and I are going to probably be a little more firm that we really need to get some of this cash off our balance sheet. And it really makes sense, even at this high multiple, to spend the money on the share repurchase plan to help offset the dilutive affect of option exercise and that type of thing. So right now that's-- more than anything, that's the plan we have for the cash on our balance sheet.

Is there a level of cash that you'd like to keep on the balance sheet as a permanent level that we should think about to leave you room for acquisitions and other growth initiatives? I think at least 200 to 250 million.

Mark Friedman.

Scott, Pat, I was wondering if you could talk a little bit more about platinum. We're starting to hear about the step up beyond denim for fall. It's very exciting. Could you put a little bit more behind that as far as what we would expect in the stores? I mean, you hit some of the categories, but I guess I'd just like a little bit more color as to how transparent that will be, if there's any marketing are you going to be doing towards that? It seems like it's a real opportunity as you kind of move beyond denim.

We see it as terrific opportunity and the customer is responding. I think one edge that we have in the platinum product is our fit. I think our jeans fit our customers, which is what she's loving. So there is a lot of talk about the whole industry kind of getting into this superior denim branding, if you would. We see platinum extending beyond just denim. So we will have a classic -- not really classic but a great black pant, a great khaki pant, a wonderful white shirt. That kind of product that lives with-- along with the platinum denim presentation. So we've gone ahead and aggressively presented stores-- we're setting our sights on August 1st and also for September with supportive marketing in those two months. And you will see a presence in our stores. Depending on the size of the store will be the size of the presence.

And, yes, Mark, there will be some enhanced marketing that we're probably not going to roll that card on exactly what it's going to be, but we're certainly going to support the platinum presentation with some marketing effort.

Okay. Great. And I was just curious, Scott and Jim, the White House advertising for TV step up, is that just that the response has been tremendous on the current television advertising? What's-- what exactly is driving that? Maybe I didn't hear that in the initial presentation.

I think I characterized it in the last call as we were going to conduct a large test and, on a national basis, several hundred thousand dollars is a large test. What we were impressed with was the immediate response, I mean day one response, to the ad and that it continued right through the five-week test. So, we're very pleased with the results especially in the inquiries per dollar response; that is in store locaters and in catalog requests. So we will be doing more TV in the fall. I'm just not going to talk about when-- in the fall.

Stacy Pak.

Couple questions. One was, I was hoping could you specify by division how the inventories look on a per square foot basis? Two was, I missed if you said you bought back any stock in the quarter. Three, on prices, how much-- do you expect the AUR to be up going forward because of expansion of platinum in denim? And if you could sort of talk about that. And then lastly, Pat, can you talk about what you're seeing for fashion trends for fall.

Let me hit the-- we did not buy any stock back this quarter. We don't break out the inventory levels by division, we never have. And then, Pat, if you want to talk a little bit about average unit retail going forward in your fashion trends.

And if I could just jump in, Scott, then maybe you could talk about clearance by division or some sort of how you feel about it.

Well, all the divisions are in great shape right now. We don't have any major clearance activities that are going to go on. We're going to start June sale as we always do at the Chico's side about June 15th like we normally do. And we don't expect any more-- we don't expect any more clearance activities there than we do. And we don't at White House either. So we've got about the same clearance activities this summer as we had last year, we don't expect any more.

Stacy, as far as average unit retail, I can't really give you a percentage of what be expect it to be up. We think, of course, platinum is going to make a difference and we are actually looking at all categories, all key items, everything. The one thing we do not want to pull back on is the value that we present to the customer. So I think it's a matter of just looking at individual items. And then also really concentrating on the mix, the percentage of lower priced items to the overall mix, just to make sure that the average unit retail on average is in good shape.

As far as fashion trends, certainly denim we see, of course, platinum. Again it's all about novelty, we see embellishing continuing. We've got some great looks coming in for fall, embellished sweaters and tops. I think our outerwear and our sweater program looks really, really wonderful for the fall season. We do believe in fall key items but we feel a little more low key about them than we did a year ago; so we feel that the novelty will have a little more intensity over that. I don't know, Lece's sitting there. Lece, anything to add to the trend?

Lece Lohr , our Senior VP-GMM is sitting here with us, too, if you want to add anything about the trend.

I think Pat mainly covered them all. We still see novelty jackets continuing very strongly, especially fitted jackets. We're seeing that across all fabrications. A lot of talk about the sweater jacket and the sweater coat go-forward. Pat mentioned the embellishment. We still see Spa as a main contributor to our business go-forward with lots of new fabrications. And we have many exciting new ideas in Travelers.

Kimberly Greenberger.

My question's for Jim. Jim can you tell-- can you just remind us what incremental direct marketing pieces were sent in the first quarter? And if you can also give us some insight as to what you're planning for second quarter that would be great.

The incremental pieces-- well, we have all different kinds of pieces that go to different levels of our list and segments of our list, but I think the ones that you're talking about are in March and April-- with denim and Travelers. And that's the kind of thing that we highlighted at the beginning of the year, that we would try going after customers that we already know have a propensity to buy those categories and also expanding our presence and building up average unit-- average unit transactions-- for those particular categories. And we expect we'll continue with that because it worked really well in March and April, so we're going to continue along with that for fall.

Okay. So in the second quarter there won't be any incremental pieces but then it will come back in third quarter?

Probably, but don't-- don't necessarily think it'll be for those categories what. What we're looking at is we want to-- we want to keep our flexibility. We look at our -- we review our sales every month and decide with merchandising what we want to highlight in the fall. So -- and actually we're keeping our options open even now as we speak. We haven't finally decided what we'll do in the fall what product category we'll highlight. We don't have to decide, so we'll wait a little longer.

Chris Kim.

Many of my questions have been answered but I was wondering if you guys could give me a little more color in terms of the May comp, and if you're seeing the comp similarly being driven by traffic as opposed to AURs or units per transaction.

Yes, it's all traffic. As we said we expect that AUR down for Chico's again and flattish for White House and that's what we're seeing. So, yes it is traffic, and there's a lot of it out there.

Dana Telsey.

Just wanted to follow up on Black Book at White House/Black Market. How's it doing, how's it-- how's it progressing, what are you seeing? Anything regionally? And in terms of number of customers that it's adding? Can you give us any more color on soma and how you're doing in filling out the product assortment there? And lastly, I believe last year you upgraded many of the information systems and brought in Gary King. What benefits are being realized and over what time frame do you expect to generate the full functionality of these systems and benefits?

Jim why don't you take the Black Book questions beyond what we've already discussed, I guess.

We're extremely enthusiastic about Black Book, remembering that it was only initiated in October. We have almost a million and a half customers in our database. Of that about 136,000 are Black Book members and with the preliminary being at least another 1.3 million. That's just a huge gain in a very short time and I have to credit the stores with doing an incredible enthusiastic sign-up program; and also we've gotten an excellent response from our advertising.

So we're kind of firing on all cylinders. I think they signed up over 20,000 last week alone into the Black Book program. And they're showing the same propensity when they're in the program to buy quite a bit more than the non-loyalty program member and we're happy to see that that trend matches up nicely to Chico's experience. So they're already over 85% of our sales, that is the full Black Book member and the one working their way up to becoming a Black Book member; so it's very successful.

Pat, do you want to take the soma merchandise question or do you want me to take it?

Yes. First of all, let me just tell you that, as far as soma is concerned we're always working on the product. I mean, as you can imagine we're trying to edit as we go. But we've got some really, really great stories especially in the foundations area between Travelers and the SomaTouch product. As soon as we tell the stories with our marketing initiatives, we've had great response from the customers. So we definitely feel we have some good home runs there. We've already identified key fabrics in sleepwear, we've identified prints that the customer responds to, so we actually feel we have some great programs that we're rolling into the fall season with.

The marketing results have continued to show strength. And we also feel like we've got great leverage with some of our existing vendors that we work with with Chico's in terms of key fabrications that we're able to put into other loungewear or active wear.

Charlie you want to take--

Okay, and I'll take the last question about the MIS systems. Gary King has been with us about four months now I think-- almost six months I guess. And when he came on board he said one thing, that we've got great systems there, we just can't get at the numbers. And what he's been working on is just allowing us to-- to establish executive dashboards, to establish our ability to get at numbers. His group has written probably 200 reports that are new reports to help our merchants analyze data. I think the whole merchant environment is starting to believe we've got the numbers there and we know how to get them and we know how to evaluate them; and that's the main thing. Now, how you measure that and say what it is, in the long run it's going to help our buys, it's going to help our markdowns, it's going to help all of that.

Lastly he's been on a, what I'll call, a stabilization mission. We've got very complex software and we want to make sure that it grows with the Company and he's been working on that. He's been with much, much larger companies so he knows how to do that and he's very pleased with everything he sees. So I don't know that we can actually measure how much it's going to do, but it's going to help us buy and plan our business much, much better. We've got a new sourcing package we hope is going to come next year. That's a major sourcing and production package that will replace the one we have which is probably our weakest system we have right now. I hope that answers it.

Liz Pierce.

Actually I have a question for Pat, couple questions if she could just -- in terms of outerwear and sweaters, because I know that's a category that has continued to grow over the past couple years. Just how much-- even if you don't want to give us the absolute magnitude, how much has that increased? And is there anything that's coming out of the mix, particularly with the increase in the platinum group? And then finally, just if you could clarify the comments about more effective testing of hot categories and maximizing the size 0?

As far as the outerwear and the sweaters are concerned, it's not so much about how we're growing that business, Liz; but we're really positioning it so much better in the right stores. So our cold store offering is just so much better. So I don't see it really, either category, growing as a percentage to the overall business; I just think we're doing a better job in editing and offering her the right product.

As far as platinum is concerned, I think, of course there's going to be some downturn to our basic denim. There has to be. So we had planned that business down. But on an overall basis, I don't really see anything-- any other category that's really going to suffer. We've been chasing that business the whole first quarter of this year, so we're going to position it for a third quarter and see what happens to it.

As for as the size 0 I'm going to let Lece Lohr answer that question because she's certainly speer-headed our test on just seeing what kind of business we were losing from size 0's and how we plan to take it forward. Lece?

Yes, we actually actioned a test beginning in March for two-month time period, in a cross section of stores across the country, and increased the penetration of size 0s in those stores and we got some really great results and really learned what the penetration could be; and we're going to be implementing those results for our fall season.

And as far as buying deeper for the hot growth-- hot categories; go ahead on that.

Yes, we've also been really challenging ourselves in regard to the purchases of our hot categories, especially our mailer items and have been doing, as Charlie said, getting some great reports that are allowing us to see what the potential is there. And we'll be implementing those buys also go-forward.

Roxanne Meyer.

I have a few questions. One is in reference to the new Travelers, the raw Travelers fabric that you said you were bringing in. Is in that reference to Lece's comment that there's some kind of new surprise in terms of new Travelers assortment? Or is that there to sort of fill in within the existing Travelers collection? Second, just wondering what percentage of White House you expect to directly source at year end and how much you expect to source by the end of '06? And third, I was just wondering how much will the denim category increase this year over last year in the fall season overall?

Pat, I'll take the Travelers question.

As for as denim concerned, Scott, I don't really want to make a prediction how much it's going to increase.

That's fine, that's a very comfortable answer. As far as, Roxanne, we-- we were buying our fabric, as you know, from one vendor and then bringing it to the city and cutting and sewing it and redistributing it. Our rayon acetate flake was being procured from one vendor, Celanese, and we changed that over to another vendor, Veridian, which is one of the components of the yarn. And we wanted to be very careful that we didn't have any type of hiccup in the quality of the end product when we made that change from Celanese to Veridian. So that's the-- that's the change in the raw fabric that Charlie was talking about and that really has nothing to do with new exciting offerings in the Travelers collection. And what was your other question, Roxanne?

Sourcing of White House.

And the question-- how much direct sourcing we would-- where we would be by the end of '05?

Yes, and also '06.

Okay. I want to say at about 60-- 65% by the end of '05 and a little bit more by the end of '06. We don't want to get too heavy. We like the fact that we have a certain mix domestic-- of domestic sourcing.

Jennifer Black.

I was just curious if-- if you are happy with the compensation structure at both White House and at Chico's, and are they similar; can you just talk a little bit about that? You probably don't want to give details, but I just wondered if you're happy with it and if it's similar.

Are you talking about at the store level, Jennifer?

Yes.

Yes, we are happy with both. We did implement a very similar bonus back in the fall for the first time at the White House that we've been enjoying at the-- on the Chico's side of the equation for quite some-- quite a few years; which is really transactionally driven and really rewards the top sellers. We did not have that at the White House brand until last fall and we've seen -- we've seen marked improvements in the units per -- really in the entire effort at the store level because of that new bonus program; and they're very similar today.

Okay. That's kind of what I thought. And then on another note, I wondered-- one thing that seems to be missing at White House/Black Market it seems like would be an opportunity, are scarves and belts, and I -- and small leather goods and things like that. I wondered if you had any plans for those types of offerings?

Yes, actually we do really see opportunity for growth in that area. We just hired a new merchandise manager that is going to help us with the accessory area. Belts are really important, especially metallics, leathers, chains, and sashes. So you're absolutely right.

But we do have square footage challenge there too, Jennifer, as you know. As we're ramping up these sales with this Black Book program we've got to be a little bit careful of expanding any category just because-- I mean we see a tremendous amount of opportunity for the brand, but these stores are still quite small, especially the stores that we purchased in '93.

Right, I understand. But scarves and belts don't take up too much room.

Yes, but then there's shoes.

And they have nice margins.

Lyn Walther.

A couple more. Wondering about following up on the question on the size 0, just wondering if that-- the strength of that means you're attracting a younger customer? Just trying to get a little more of understanding there. Also, you will mentioned you had made some adjustments to the merchandise for Q2 that you're very pleased with. Trying to get a sense the gross margin for the core Chico's is-- you're guiding it down. Just wondering are you up against low markdown levels last year? Just a little behind that. And then finally, I know you're testing some soma product in the regular Chico's stores and wanted to know how that was going?

As far as size 0 is concerned I really want to be careful that we don't -- that we don't equate size 0 necessarily with a younger customer. If she happens to be younger that would be great. But we see a lot of our existing database that is a size 0, it's really not a function of age necessarily, it's a size, and that's how we're addressing it. On an overall basis, on the overall mix, we are looking at certain trends, like a lot of our jackets that are doing very, very well have a slight shape to them which would have been different than something that we would have carried in seasons past. As far as the mix is concerned, what we did-- what we recognized very, very early in the quarter was the fact that it was really becoming all about novelty. So what we did is pulled back on our basics and I would say for the month of March we did-- we did incur some markdown activity there. And certainly we were up against last year's which had a very low markdown percentage.

Okay. I was also hoping Charlie could talk to Q2 guidance for gross margin down.

Well, Q2 guidance, the last two consecutive years we've had very low markdown rates, if you look at our margins for the last two years for that. And about the three years previous, we were at a much higher markdown rate. So I'm just anticipating that we're going to run more like we did for the three years previous to the last two. That doesn't mean that we will, but that's what I'm anticipating.

Leah Vermillion.

At one point last year you mentioned that density at Chico's was 2.8 units per square foot, and then White House/Black Market density was two units per square foot. Can you update us on those metrics?

I don't think we've ever been-- we haven't been at a 2.8, Pat, have we-- in Chico's?

No, we definitely sit around three.

Yes, and White House is at two and a half.

Yes, they're at two and a half at White House.

And then also what kind of results are you seeing with the makeup launch in the stores today?

The makeup launch is a test. We tested it in ten stores and we have discontinued that, primarily because the vendor that we were partnering with had a strategic change. We think that we have discovered that there's an opportunity for a mix of beauty with fashion at Chico's, but unfortunately the strategic partner that we had partnered with on that test made a decision to get out of that business. And so we're pulling the fixtures out currently and we're just going to take a deep breath and understand that we learned an awful lot and that we do believe we learned enough that there is an opportunity to merge beauty with fashion at the specialty store level. Now what do we do with that's the question.

Christine Chen.

I just had a housekeeping question since most of my questions have been answered. Maybe I missed it, what was the ending square footage for the quarter?

That's on the web and I believe it's 1,280,000 square feet. You can always find it on the web, we keep all the quarters for about the last, I think, ten years on the web.

We'll take one more call, monitor, one more question.

Brian Tunick.

The inventory per square foot, with the total inventory up 52%, did you guys say what that was?

We talked about all the components of it on the conference call and why it's up and why we believe that that's not an issue.

I didn't think it was an issue. I was just curious, if you strip out raw materials, meaning just raw fabric, what is the inventory per square foot?

I didn't calculate that.

We don't break it down by component.

We have a very large in transit, brand-new goods on the way. It was twice as much as last year and the fabric's roughly twice as much as it was last year as well.

Can you ballpark it?

Actual store inventory is very much in line. In Chico's front-lines for sure, can't speak for White House but --

Well, year-over-year it is significantly higher at the White House, but it's exactly where we'd like it.

So if you took a guess at that, could you just give me a ballpark?

I wouldn't want to guess because I might give the wrong number.

Could I call you after the call, Charlie?

Yes, you can call me but I-- yes, you can call me.

Thank you all very much for joining us and we'll look forward to talking to you after the second quarter.

See you guys soon.