Chico's FAS Inc (CHS) 2005 Q2 法說會逐字稿

[OPERATOR INSTRUCTIONS] I'll turn the program over to your moderator, Mr. Michael Smith. Go ahead, sir.

Good afternoon, welcome to Chico's second-quarter conference call. My name is Michael Smith, I'm Vice President of Investor and Community Relations. I'm here with Scott Edmonds, our President and CEO, and Charlie Kleman, our CFO, along with members of our managements team. Before we get started I would like to read 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 reports on form 10-K, its filings on form 10-Q, management's discussions, and analysis in the Company's latest annual report to stockholders. The Company's filing on form 8-K and other federal securities law filings for a description of other important factors that may effect the Company's business, results of operation, 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. I'd like to now pass the call to Scott Edmonds.

Thanks, Michael, and thanks to everyone for attending our second quarter fiscal 2005 conference call. With me on the call today is Charlie Kleman, our Chief Financial Officer. Pat Kerstein, Chief Merchandising Officer; Chuck Nesbit, Chief Operating Officer; Jim Frain, Chief Marketing Officer; and Patricia Darrow Smith, the Chief Creative Officer for White House/Black Market are on the phone with us and available for questions during the Q&A period.

The second quarter results came in strong as we generated an operating margin in excess of 22%, a sales increase of 35%, and a net income increase of over 38%. Second-quarter gross margins for the core Chico's brand were somewhat off from last year's gross margins while White House/Black Market's merchandise margins were up 270 basis points on a quarter-over-quarter basis. Looking at our potential third-quarter results, we are pleased with our same-sales trends thus far in August. Overall we are experiencing same-store sales in a low double digit range with the Chico's brand in the high single-digits range and the White House/Black Market brand, again experiencing much stronger same-store sales, up in the mid 40% range.

We're seeing initial strong, front-line merchandise margins from our fall line, and we anticipate that Chico's front-line stores will generate third-quarter gross margins in the range of last year's record setting gross margins. And that White House/Black Market's gross margins will continue to make significant improvements. Despite these expectations, we are anticipating an overall gross margin decline in the third quarter similar to that experienced in the second quarter. The lower gross margin is expected to be principally due to lower gross margins in the outlet division. As it anniversaries, it's highest gross margins in history from last year and returns to more normalized outlet gross margins.

Beginning with our core brand Chico's, the second quarter continued strong with novelty across all categories. Initial markups improved over the same period last year, while higher than expected markdowns contributed to a lower gross margin for the brand especially in the month of July. The decline in gross margins is attributed to weak performance in a few of our collections areas, specifically linen collection and silk linen. Linen as a whole did not perform in either collections or separates. Our shorts sleeve linen, long sleeve linen, novelty linen, and linen pants also had declining margins.

We reacted early on in the season by canceling orders and instituting early promotions, but promotional activity continued into the July sale event. We've identified the reason for the unplanned markdowns in collections in linen and determined that we did not take sufficient steps to modernize the product and provide enough newness. We still believe in linen as a fabrication and have developed an exciting fashion right assortment which we will be testing this fall for delivery in spring 2006. We believe we've modernized our fall collections and we've added enough newness to this merchandise and our collection business is off to a nice start for fall with more fashion forward details that appear to appeal to our customer. During the second quarter, sweaters including basic sweaters and sweaters tanks also contributed to decreased margin. Again, we did not move forward enough in this category from a newness perspective.

For August, this category is working with metallics, open weaves, crochet, and sweater coats trending well. We identified the trend away from basics before placing our fall orders and we planned our basic merchandise down for fall. Lastly, for the second quarter, we remained too long in the poncho and pin trend which had an impact on the accessories margin. The exciting news is our customers really responded to fashion in our new modernized product which we now see as a tremendous opportunity for the future. We believe we have a great fall assortment with the newest fashion, differentiated for our brand ad in a way the Chico's customer will understand. We have a high level emphasis and focus on the financial metrics, including our average unit retail. During the summer, we instituted a new recording hierarchy for the Chico's merchandising department, which is new allowing us to monitor the financial components of the business more closely.

For August sales, the platinum collection is a standout. Remember, this is now more than just denim. And the platinum collections added a new alternative for our loyal Passport members, all items in both accessories and apparel are performing well and have exceeded our expectations. Our September mailer features a nine page spread on platinum, and we expect that platinum will increase in penetration to our assortment going forward. Travelers continues to be a key piece of our business as it continues to represent slightly more than 15% of our apparel business. Our relatively new spa line also continues to be a strong performer. As mentioned before, sweaters so far in the third quarter are strong with metallics, crochet, open weave, novelty yarns, and sweater coats working. Skirts of all kinds, velvet, broomstick, crochet, and lace are outstanding.

We are planning to capitalize on the velvet trend by adding to our basic program. This is a very high margin category, and we have planned substantial increases for later on in the fall season. Both denim and novelty jackets as well as outerwear are also performing well. We have gotten many early reads and are able to react to trending items for the balance of the fall season and holiday.

With respect to Soma, our newest brand, it hardly seems like it has been 12 months since we opened our first store. The 10 test stores opened in the fall of 2004 have provided a productive laboratory, allowing us to learn about our Chico's customers, intimate apparel preferences, and the most effective marketing vehicles to stimulate interest in our products. Under Pat Kerstein's capable leadership, the Soma test program has confirmed our original projections as to the size of intimate apparel opportunity in the appetite our loyal Chico's customers have for high quality, stylish, and great-fitting intimate apparel with a Chico's flair.

Based on very positive test results today, the Board of Directors and I are committed to intensifying our commitment to Soma. To that end I'm pleased to announce the following actions which will allow us to maximize the opportunity at hand. One, our business plan for Soma in 2006 will include the addition of 20 stores. To the 10 stores currently in operation and the five new stores planned prior to February, 2006. The real estate team is currently working with management to identify premier locations supporting the dual objectives of extending the brands in new markets and intensifying our penetration in selected existing markets. For obvious competitive reasons, I'm not prepared to reveal specific locations targeted for expansion at this time.

Two, Chuck Nesbit, Executive Vice President and Chief Operating Officer is assuming full P&L responsibility for the Soma business in addition to his other responsibilities. This move will allow Pat Kerstein to focus her considerable creative talent and energy to the continued rapid growth of the Chico's brand as it passes the $1 billion sales milestone. At the same time it allows us to fully exploit the knowledge and experience Chuck brings to the Company after leading Sara Lee's intimate apparel business through a rapid growth phase to achieve a leading market position in North America. Terri Meichner, Senior Vice President and GMM for Soma will report directly to Chuck and continue to oversee the product and brand direction on a daily basis.

Three, the capabilities of the Soma management team are being further enhanced with the hiring of a Director of Planning and Replenishment and a Director of Production and Sourcing that will solely focus on the Soma by Chico's brand. Our Creative Director with intimates experience had also been hired to support the specialized marketing programs required in this specialized arena. As our intimates knowledge has grown during the test market, it has become clear that additional dedicated and industry-savvy management resources are needed to maximize the sales potential and profitability of the business. These hires will provide focused oversight to critical functions, as well as the knowledge and leadership skills needed to support the store expansion plan in 2006 and beyond. During the coming year, the Soma team will continue to fine-tune the product offering, store design, and marketing programs, while executing the store expansion plan. We are all extremely excited by the consumer response to our offerings to date, and anxiously await the arrival of the spring season, 2006, product, incorporating the customer feedback we received during the early month of the test market.

And now, onto our merging brand, White House/Black Market. We are very pleased to report that our second-quarter business exceeded our projections for both sales and gross margin. We believe that our continued focus on our customer, our merchandising teams, and the products as well as our increased densities have created a winning formula. Sales for the second quarter were consistently driven by knits, sweaters, woven bottoms, denim, and dresses. The key silhouettes and trends within each department are as follows, knits continued their success story with tunics and camisoles. Both styles worked into the trends of either layering or a play on proportions. Cardigans, cocoons, and shrugs drove the sweater business month after month. Texture, crochets, and novelties such as embroidery and shine really made our product unique.

Our customer loved how these fashion items updated her wardrobe. In both woven bottoms and denim, shorter silhouettes proved to be a hit. The gaucho and cropped bodies felt new and trend right. Our customer also loved the newness in skirts with great prints in silhouettes such as the tiered skirt. She continued to come to us for clean, sophisticated bottoms in our core fabrications. They provide the versatility that she requires to go from work to play. For dresses, we've become more focused on the casual style in fabrications that our customer needs. She responded to casual fabrications such as matte jersey and sateen. She continues to love halters and strapless silhouettes and our enhanced fits. To complement our apparel sales, we saw growth in bags and belts that were novel and had shine. Jewelry continued to be strong, especially in jet, clean silver, and gold. In shoes, wedges drove the sales and helped our customer complete her outfit. Overall for the second quarter, full-priced product pushed the business forward while markdowns faded a manageable weeks of supply.

In the third quarter, the White House/Black Market sweater category should see continued success in cocoons and shrugs and we will freshen it with more texture, new stitches and yarns, metallic and shine, embroidery and embellishment. Knits won't slow down as camisoles are a year-around essential for layering. The tunic is still important but is evolving into a longer, cleaner silhouette, still ideal for layering. Denim should take off as we provide her with great options for noncolor indigo denim to ivory and black. We will offer her our contemporary five pocket in both blanc and noir to work back to our novelty tops as well as embellished, embroidered silhouettes that she will register as this season's must haves.

Dresses will be a balance of casual in matte jersey, in cocktail, in chiffon, and satin. We'll meet all her needs for third and fourth quarter parties and all her special occasions. Outerwear will be driven by shearling and nylon at great prices and will be an easy add-on to her wardrobe. Overall, we continue to offer key trends paired with classic options so that our customer can find the best looks and most versatile styles to take her through fall and holiday.

On the marketing front, the positive demand for both Chico's and White House/Black Market products is evident in all of our relevant marketing statistics through the second quarter. Our television and magazine ads drew more total inquiries than ever. There's significant interest from new customers for both the White House/Black Market and Chico's concepts. As I indicated, the marketing highlights for White House/Black Market are equally impressive. Our White House/Black Market TV test in April, May, and June was very effective, and we expect to expand on this channel going forward. 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 and second quarter, we continue to be excited about the potential long-term growth of all of our brands.

Moving on, as previously announced, we are under contract to purchase approximately 105 acres of land to build a new headquarters facility to accommodate the long-term growth plans of the business. The terms of the contract do not allow us to disclose the purchase price, but the closing date is currently scheduled for November, 2005. At this time, we do not foresee any material CapEx event beyond the land acquisition until late 2006 or early 2007. Charlie will be in a position to work through your financial models regarding CapEx plans for the planned headquarters facility after we close later in the year.

Since I mentioned our long-term growth plans, we've been analyzing the potential number of doors for each of our brands, as well as the square footage potential. We've concluded that the Chico's brand is likely to be at least 700 doors, with a potential of up to 850 doors. Remember, the last time we looked at this, we concluded that this was 600 to 800 doors. But maybe even more importantly, we believe there's a stronger demand for additional square footage in most of our existing Chico's and White House/Black Market stores. Regarding White House/Black Market, we continue to see expanding opportunities in this brand, and we're now confident that the market can support at least 600 doors for this brand. We will continue to monitor this as the brand develops over the next several years.

Before I turn it over to Charlie, I would like to welcome Michael Weiss to our Board of Directors. Michael is the former CEO of Express and brings considerable experience in the specialty apparel business to our Board. I expect Michael along with our other Directors to challenge the entire management team and help drive the business towards the $2 billion mark in coming years. Now I'll turn it over to Charlie for the financial review.

Thanks, Scott. Good afternoon, everyone. And welcome to our second-quarter conference call for fiscal, 2005, and our 50th conference call since going public in 1993. We've got another quarter with earnings growth in excess of 30%. In fact, this is our 39th quarter of those 50 quarters with earnings growth that has exceeded 30%. We're now in the middle of our ninth consecutive year of growth that is in excess of 30%. And today we'll review the quarter in some detail, look at some guidance for the future, and review our store opening and square footage growth strategies.

First let's look at an overview of the second quarter of fiscal 2005. Scott's already mentioned the overall increase in sales and earnings and our solid operating margin of 22.2% this quarter. This is only the fourth quarter in our history we've been able to post an industry-leading operating margin in excess of 22%, and we are very proud to be able to generate these kinds of returns to our shareholders. During the quarter, we experienced solid sales increases in every month, and we did this with a 50 basis-point decrease in marketing cost year-over-year for the quarter. Although we saw a decrease in the gross margin larger than we initially expected, we offset that with SG&A improvements beyond the reduction in marketing costs, and we ran an operating margin within 0.1% of last year's all-time high. Interest income was also quite strong for the quarter as both interest rates and cash balances improved over last year's second quarter, and our interest income came in at a strong $2 million versus just under $0.5 million last year. Our tax rate also improved to 37% this year, from last year's 38%, resulting in a nice 37% earnings-per-share increase as we moved from $0.20 last year to $0.27 this year.

Looking more deeply into these earnings figures, let's start with the gross margin. As Scott mentioned we experienced higher than originally anticipated markdowns within the Chico's brand, and that combined with the fact that we were up against one of our highest second-quarter merchandise margins in history led to a deterioration of 80 basis points on a year-over-year basis at the Chico's brand. This higher markdown rate was again -- was again partially offset by an improved IMU on the new Chico's merchandise. As Scott indicated in the press release, we do not anticipate this increased markdown rate at the Chico's brand will continue into the third quarter as the initial reaction to our product is quite strong thus far.

On the White House/Black Market front, we saw another quarter with huge strides and improvements in the merchandise margins. During the second quarter we saw an increase as Scott said of approximately 270 basis you points in the merchandise margin, principally due to much stronger teams in the merchandising, planning and allocation, and product development areas. Last year, we were in the process of building and strengthening the merchandising group. We were assessing the needs in the technical design and product development areas, and the teams were still adapting to the move from Baltimore and the new environment involving Chico's and the transition. White House/Black Market's second-quarter merchandise offerings resulted in higher initial markups, higher average unit retail prices, and a stronger density of sizes in stores that was only offset by a slightly higher year-over-year markdown rate.

The increase in gross margin at the White House/Black Market brand was so strong it essentially offset the impact of the increasing size of the White House/Black Market sales as a percentage of the whole. In fact, after carefully assessing the overall impact at the White House/Black Market brand on a year-over-year basis, we now believe that White House/Black Market probably added 50 basis points to the overall gross margins due to the solid gains at the gross margin level that more than offset the increase in sales as a percentage. We had previously thought that the increase in sales might reduce the gross margins due to the lower margins at White House/Black Market compared the Chico's brand, but the year-over-year increases in gross margins are more than offsetting the sales gain. And we believe the combination of these improvements with the White House/Black Market sales growth should provide little drag on year-over-year gross margins in the future.

Turning to our outlet division. We saw a sharp decline in the outlet gross margins this year over last year's record setting margins, as we anniversaried our prior year's 50%-off, first markdown policy which last year resulted in very few markdowns in the outlets in the second through fourth quarters. This year the outlets -- this year the outlets also are clearing the initial merchandise remaining from the launch of Soma, and this has also put short-term pressure on the outlet's merchandise margin. We believe the decline in outlet gross margins probably impacted the chain's gross margins by about 40 basis points. Thus, although the division indeed ran extremely strong gross margins when compared to any year but last year, they were up against their highest second-quarter gross margins ever, and in this year's second quarter, they normalized much closer to their more historical gross margin levels.

Other factors that affected the consolidated gross margins include our continued investment in the Soma brand which likely reduced the current year's overall gross margin by about 40 basis points beyond the small impact on the outlets. And this impact in Soma likely reduced the second-quarter operating margin by about 60 to 70 basis points. With that said, we regard Soma as a solid and relatively low-cost investment in the future, and the impact on operating margins of this order is acceptable considering the long-term growth potential. We continue to improve the product offerings. We continue to better understand the nature of the intimate apparel industry, both as it relates to merchandise and customers. And we continue to believe the Soma opportunity is as big and potentially as profitable as we originally assessed. Further, even with the additional 25 new stores we expect to have by the end of next year, we do not expect any further drag on the operating margin.

Lastly, on the gross margin front, we continue to invest in the product development and merchandising areas for all brands. And this quarter, that additional investment amounted to approximately 10 basis points of additional expense. This investment is not unlike the Soma investment, as we are -- as we are committed to producing unique styles of novelty products with frequent deliveries that will continue to differentiate the Chico's family of products from our competitors.

Let's move now to from gross margin to SG&A expenses for the second quarter which I define as including the depreciation. On an overall basis these expenses came in lower than last year by about 120 basis points principally related to leverage associated with our double digit comps and our decision to slightly reduce marketing expenses as a percent of sales. This reduction in overall SG&A expenses inclusive of depreciation came in about where we had been planning and we continued to guide to a mid single-digit comp for an approximate break even in leverage.

A note on the individual line items of the press release. When looking at what appears to be a large increase in depreciation year-over-year, be careful to understand that the change mandated by the SEC last year regarding TI or tenant improvement amortization had the effect of increasing depreciation and at the same time decreasing rent which is included in general and administrative expenses as the same amount. Overall though this change had no effect on the combined SG&A expense level.

Next, let's go back to the second-quarter's sales for a minute. The second quarter's same-store sales increase of 15.7%, which was on top of back-to-back 14% second-quarter increases in the last two years was, as you should be aware of by now, influenced mostly by increased traffic as we entered approximately 300,000 new Passport members at the Chico's brand and an even larger relative increase of 300,000 new Black Book members at the White House/Black Market brand. Even better, over 50,000 of those new Black Book members became new permanent members that have met the $300 spending threshold required to become a permanent member. Remember that the average White House/Black Market permanent member spends 90% more on each transaction than does a preliminary member. The new member sign ups for the Black Book I just mentioned are exceeding the numbers experienced during the launch of the Passport Club by Chico's in 1999, and this is very encouraging regarding the future loyalty we'll likely see in this young brand. We haven't had enough data yet since the launch of the Black Book to evaluate whether permanent members shot more often. But if the Chico's Passport Club is any indicator, we'll see these members shopping six to seven times more often than do the preliminary members.

During the quarter, the White House/Black Market brand saw same-store sales increases generally in the low 30s, and very much like the comps in the early years of marking at the Chico's brand. Speaking of the Chico's brand, it continued its double-digit comps last quarter as it generally experienced low to mid teens, same-store sales. Also, during the first and second quarter, as Scott mentioned, we started TV advertising for the White House/Black Market brand for the first time and are very pleased with the results. We will again be launching a television advertising campaign very shortly for both brands, and on Monday of this week, we launched WhiteHouse/BlackMarket.com to allow us to start selling this brand over the Internet and telephone. Although we have only seen three days of results, we are well ahead of plan and we're very pleased with the successful launch that involved essentially no advance marketing spend. For the quarter, the White House/Black Market brand, accounted for approximately 18% of the total sales, versus 13% in last year's second quarter. And White House/Black Market represented just over 15% of the same-store sales space in this second quarter.

Moving to unit retails. The average price per unit sold at Chico's frontline stores which is in the 39 to $40 range, was down about 3% for the second quarter, while the average transaction, which is in the mid $90 range, was only down about -- oh, 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 we discussed earlier. At the White House/Black Market frontline stores we experienced a 10% increase in average retail, which also averages in the 39 to $44 range, while the average transaction, which averages in the high $70 range, was only up just over 2.5% due to a slight decrease in the average units sold per transaction.

As to future guidance in this area, we expect to see improved average unit retails for the Chico's brand for the rest of the fiscal 2005 quarters, while at the White House/Black Market brands, we expect to see only small changes, whether up or down, in year-over-year average retailers. We continue to strive long term to get the units per transaction at the White House/Black Market brand nearer to the Chico's level. Overall, we are very pleased with the second quarter as it came in right where we expected, and we look forward to the third quarter of fiscal 2005 as we, again ended the quarter with double-digit comps on stronger than anticipated gross margins for the first month of the third quarter.

Regarding future guidance, we expect the third quarter's overall gross margin will likely be down in the same range on a quarter over quarter basis as we saw in the second quarter. Looking at each of the brands -- each of the brands individually, we expect the Chico's brand in the third quarter will likely experience gross margins that should be very close to its record setting third-quarter gross margins of last year. In fact, early indications of Chico's gross margins for our fall product indicate we could have another record setting gross margin for the Chico's brand in the third quarter. At the White House/Black Market brand we should see a more modest gain in the gross margin increase in the third quarter. As last year's third quarter, was the first quarter with strong increases year-over-year, and principally due to the moving past some of the transitional issues that were associated with the acquisitions. The outlet division, which we expect will again have a more normalized level of markdowns this year is up against their highest ever quarterly gross margin in last year's third quarter, and we anticipate this year's third quarter gross margins in the outlet division will be sharply down again and come in more like two years ago. We expect that the impact of the outlets could reduce the Company-wide gross margin by between 50 and 70 basis points.

Lastly, in the gross margin area, we continue to invest in the product development areas for all three brands, and we see some small drag on the margins in the third quarter in this area, as well. We anticipate an easing of this pressure on the gross margins as we enter the fourth quarter, and we anticipate flat to slightly up gross margins in fiscal 2006. 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. Although we were pleased with the sales results of the postcard drops in the first two quarters, we're still evaluating their impacts on the gross margin and the gross margin dollars, and we have not made the decision as to whether we will use postcard mailings this fall. Regarding overall SG&A guidance, we reiterate that you should be seeing some small leverage at north of a mid single-digit comp in the third and fourth quarters of this year, and will likely see leverage at just a slightly lower comp level in the future quarters.

Next, a note on the balance sheet and cash flow, then we'll look at some store openings. We're filing our 10-Q now or shortly, 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 ended the quarter with $351 million in cash and marketable securities, with solid inventories at both the Chico's and White House/Black Market stores. Our inventories at $79 million and $59 per selling square foot were up on a quarter over quarter basis 28% and were flattish on a square-foot basis. We expect our third-quarter inventory to be in the mid to high $60 per-selling square-foot range as we usually are when we enter the holiday season. Cash flow from operations for the quarter generated just over $128 million of which only $12 million was related to tax savings associated with stock option exercises, and $116 million of that was related to ongoing operations. This $116 million of cash flow from ongoing operations compares to 86 million from ongoing operations last year, a solid 36% increase year-over-year.

For cash flow planning purposes, the quarterly depreciation expense was $11.6 million, and the six month -- that's for the quarter. And the six-month depreciation expense amounted to $22.1 million. That compares to last year's second quarter depreciation of 7.8 million and the six-month expense of 15.3 million. Don't forget the change in lease accounting I described earlier that has inflated depreciation expense and reduced rent expense.

For the future I would plan depreciation to be in the $13 million range in the third quarter and grow by about $1 million each quarter. Our capital expenses used for the quarter were $20.2 million and $45.5 million for the six-month period. Again, remember that this figure is no longer net of tenant improvement monies, as these monies are now included as a deferred rent liability in the cash-flow statement. As a matter of comparability, our tenant improvement monies received in the second quarter were 3.5 million and were 6.5 million for the six-month period. For comparative purposes, our CapEx is net of TI this year would have been approximately $39 million compared to last year's $34 million.

Next, let's summarize the store openings and square footage growth for the first six months of fiscal 2005. During the first six months, we opened an additional 107,000 selling square foot to bring our total to 1,334,000 selling square feet overall. That's about a 9% increase towards our 20% stated goal for selling square footage. We believe with the number of stores we have lined up in the third and fourth quarters that we are likely to exceed this goal by at least 1% or so.

While we're on the square footage growth I'd like to review our thoughts in this area. First we are learning more and more that the number of new stores is not as important as the increase in square footage. When you are doing essentially $1,000 per selling square foot in most of your stores, it is important to look at the real estate opportunities right in your back yard as opposed to new, untested locations. With that said, we are going to become even more aggressive next year in expansions and relocations which we believe grow faster with less risks than do new stores. We also believe that even with our step-up in store size that began in 1998, we are still likely undersizing our new stores, and we intend on stepping up the size of our new stores to more like 3,000 net selling feet for Chico's and 2,500 net selling feet for White House/Black Market. Although I don't think we'll reach these size goals in fiscal 2006 due to many leases already in place, we will be aggressively looking for larger stores that would likely involve less doors in the future.

Regarding the number of new stores we've opened at quarter end, we're at 27 new Chico's stores, 26 new White House/Black Market stores, and we closed 1 Chico's frontline store and 1 White House/Black Market outlet store so far this year. The 50 fewer openings I just mentioned included two outlet stores each for Chico's and White House/Black Market and one new Chico's franchise store in Minnesota. As you probably recall, the Minnesota franchisee has the right to open stores in the state of Minnesota and they also intend on opening another store this year in the fourth quarter to bring their total franchised stores to 12. Lastly in this area, during the six-month period, we expanded or relocated 9 Chico's stores and 2 White House/Black Market stores. Although we would like to expand or relocate more stores, it is all about opportunity and availability, and we are aggressively looking for such opportunities.

It would appear that we will likely have 16 more Chico's expansions and relocations for the rest of year and 6 more White House/Black Market expansions or relocations including the expansion in November of the number-one volume White House/Black Market store in Puerto Rico, which is currently doing almost $3,000 per selling square foot prior to this expansion. With all of these openings, we end the quarter with 473 Chico's frontline stores, 27 Chico's outlet stores, 13 franchised Chico's stores, 10 Soma by Chico's stores, 180 White House/Black Market frontline stores, and 5 White House/Black Market outlet stores for a total of 708 stores at quarter end. We are still planning to open net square footage in the 20 to 21% range this year. And because we've been able to get larger footprints, that is we think we'll be over 2,300 net selling for Chico's and over 1600 net selling for White House. We are -- we now expect to open between 105 and 110 net new stores and they are composed at this time of approximately 55 net new Chico's company stores, 45 to 50 net new White House/Black Market stores, 5 new Soma by Chico's stores, and 2 new Chico's franchise stores. Our press release reviews our store opening plans for fiscal 2006, which essentially calls for 20% square footage growth in the combined Chico's White House/Black Market brands, plus an additional 20 new Soma stores on top of that.

To wrap up, we closed the second quarter with strong earnings and growth trends, including a 22.2% operating margin in spite of significant investments in the future, and we've opened the third quarter with strong same-store sales and margins. We are pleased with -- we are pleased with Chico's and White House/Black Market same-store sales increases thus far in August, and we ended the third quarter with leaner inventory levels than when we entered the second quarter. We believe this leaner inventory should support stronger gross margins in our frontline stores.

Our 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 as I indicated last quarter. The White House/Black Market brand also continues to enjoy gross margin gains and we're now beginning to see year-over-year leverage in the White House/Black Market investments we made last year. 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 and exciting merchandise to some of the largest segments of the women's apparel market and now we'll take some questions. We'll take questions operator.

[OPERATOR INSTRUCTIONS] We'll take our first question from the site of Kim Greenberger of Citigroup.

Congratulations on a nice quarter. I was wondering Scott or Pat, if you could talk about the initiative you have in your merchandising organization to monitor I guess you're calling it the category profitability, just if you could help us understand what is happening there a little bit better. That would be great. And if you think that that will yield opportunities in the future for some merchandise margin improvement. Then secondarily, Charlie, if you could give us an update on your Passport membership and in terms of permanent, temporary, and total members, that would be great. Thanks.

Pat, you want to take the first one?

Sure. Kim, as you know, behind the scenes, we've been really working steadily on some IT initiatives. This is definitely helping us, especially in the planning and allocation area in the merchandising area. And what it is doing for us is just helping us take a really good look by category, by subcategories. We're able to spot emerging trends sooner, and it's all a plus for the business. I definitely see it as a possibility for margin gains. And just our ability to get in and out of certain categories of business more quickly.

Pat, does this new IT system allow you to get earlier information on the profitability of items so you can make markdown decisions earlier or decide about reorders, is that how it's helping you?

Well, reorder capability we've always had. But certainly in terms of how categories -- how profitable it is initially in terms of looking at -- it's not just initial markup but how it's trending in terms of maintain margin. It's just really fabulous information that the merchant team and the planning and allocation team are using. I have to say we're all delighted by the technology.

Okay. And i can get you to -- on the website, you can find we just posted our new -- our new slide show which we always post at this time. So you can find all the Passport numbers will be on I believe page 17. And -- let's see if Jim has got any other thoughts. Jim?

Only that we've grown 33% since last year. The Passport growth. So that indicates a lot of -- a lot of sales for the future.

We'll take our next question from the site of Dana Telsey.

Can you please talk a little bit about the -- on the gross margin on the SG&A side, the SG&A going forward, the improvement you saw in the second quarter, is it sustainable in Q3 and Q4? What is the leverage going forward for that? And when you look at the IMU, how much more IMU is there to get in each business, and what are the drivers? Thank you.

For the SG&A side of that we still at the north of 5% it will start leveraging on that, and that's about the same driver it always is. We have some unusual expenses come through in the second quarter that I think are one timish that we don't expect for the future. But they're not that important to it. So we still have about the same guidance on the SG&A. regarding the IMU comp--.

On the IMU line Dana, we see opportunity for improved IMU across both brands. But we have to be very careful when it comes to the value equation. Because a key part of our strategy is that we always want our customer to feel that she's getting a value for her dollar. So it's not just about how high can we drive the IMU. There's a fine line there. But there is opportunity.

And as you look at Travelers and platinum, is there a difference in the IMU there? How far do you think platinum goes in the product's extensions?

I don't want to comment on any individual categories' IMUs. But let's just say that we introduced platinum in the denim jeans area only. In spring, we had fabulous reaction. We talked about the platinum wardrobe. We've had very, very strong response to the other items in the collection. We don't want to overdo platinum. Platinum has to have a reason to be. And again, as to what Scott said, even though our jeans are priced at $78, we feel they represent a real value in the marketplace for premium denim. And then also the other items really have to fit the bill of platinum. So it's not just a matter of doing platinum across the board. But the IMU potential in both Travelers continues. I don't believe that -- I haven't -- I don't see an upside to the IMU in the Travelers collection. But certainly in platinum. Again, we want to watch where we're coming out of retail, what the value is for the customer.

Just lastly, the increase in the number of Soma store openings, are you more comfortable with the product assortment? How do you see the economic model for Soma playing out? Thank you.

Chuck, you want to -- you want to talk about the assortment? We're not going to talk about the financial model of the Soma brand right now. But Chuck, you may want to talk about the assortment.

The assortment -- the assortment improves every season. I mean, we're continuing to fine-tune the assortment. Recognize that we just really have had one full year of selling. So we've seen two seasons worth. So the product that reflects the knowledge that we gained in fall of last year is really hitting the stores now. And the same will hold true in spring. We're very pleased with what we have coming forward.

We're not going to get granular on the financial models.

We've said all along on like the Soma economic model, it will take to about 100 stores before we'll start realizing the economic advantages of buying in bulk.

Thank you very much.

Thank you, Dana.

We'll take our next question from the site of Roxanne Meyer.

Thanks. Obviously you have a very attractive store associate bonus program at Chico's that's done such a good job at driving units per transaction. I know that you're going to be implementing that at White House. When do you think it can begin to have a favorable impact there?

At the White House brand?

Yes.

I think we're seeing that, Roxanne.

That's already in effect?

Yes, we just put the plan in place. We're still in the training mode right now on that. We're still learning exactly how to sell under that. We haven't seen the change in units yet. And we're not putting a lot of pressure on the stores to see the change in units yet. But that will come over time. They haven't even been on that program for a year yet.

Okay. And at Soma, can you talk about any learnings in terms of store placements and where we could expect them next year.

I think Scott mentioned that we don't want to get specific about our locations, obviously, to tip off competition. We certainly have learned from the test in terms of proximity to Chico's, proximity to competition, and the type of traffic that we get within the area of the store is all important. And our site selections for next year reflect those learning.

Great. Last, I received a Soma mailer. And was wondering if that's something that you are going to be doing more regularly?

Actually, nearly every month for the past year, we've done either a freestanding Soma catalog or an insert in the Chico's catalog. So you're probably on our prospect list or our Passport file in a local area. Actually probably most of the analysts get that anyway. But that's -- that's probably an insert. Which month are you talking about?

I just got it yesterday.

Yes, the September catalog. Yes.

Yes. Well, I'm glad I've got the upgrade. Thanks.

We'll take our next question from the site of Marni Shapiro. Go ahead, please.

Could you talk a little bit, firstly, about the square footage growth, you talked about expansion as a good opportunity. What percentage square footage growth do you see coming out of expansion this year and next year? And can you also talk about WhiteHouse/BlackMarket.com. I was actually on the website today, I thought it looked really good. Can you just give a little bit more color as to how many SKUs or what percent of the product you want is on the website, and how much it will roll out as we get closer to holiday?

Okay. I'll start with the square footage. We've been very consistent over the past five, six years. We've expanded anywhere from 30 to about 40 stores a year. And they've run 800 to 8 -- almost 900 square feet each. You can multiply out and see what the percent of that is. This year we're going to be right in that same range, 35 to 40, in the 800 to 900-square-foot range. I don't know we'll be able to change next year, but we are going to put a lot of pressure on expanding stores. I hope by 2007 we stumble across, if you want to call it, that more opportunity--.

As we look at the models for '06, you're still going to stay within that range in '07 where you see more of the opportunity coming?

Well, wee'd like to find more opportunities. And Mike Elleman, our new Senior VP of Real Estate is out there looking very hard for any expansions we can get like that Puerto Rico expansion for White House/Black Market that's going to be huge. We'd like to find more and more of those. We would like to expand the White House store in several areas where they're far undersized. But it's all about opportunity, like I said. I'd like to be here at this time next year saying we've got 60 of them. I don't know if we'll get to that.

Right.

I'll let Jim answer about the White House/Black Market site that just launched on Monday.

As Charlie mentioned, it's only a few days. But we are really excited. Because in the first few days of Chico's, which was in May of 2000, we're close to triple the sales of those first few days. So we're having a faster -- we're having a faster launch and have planned a faster launch in terms of sales. And that will be reflected in the amount of SKUs that we expose. We started off pretty slowly, very carefully, with Chico's. But we're already well beyond the SKUs that we had in Chico's when we went live. And now at Chico's, oh, we have around 600 items up on the Chico's site. We probably have a couple of hundred items already on the White House site. That will -- that will grow as the months go on.

Great. Thanks, guys. Congratulations.

Thank you.

We'll take our next question from the site of Margaret Mager. Go ahead, please.

Hi, I wanted to ask about the expansions, but it doesn't really sound like it's that big of a deal for 2006 if it's -- if I got it right. Only 35 to 40 stores. And just in terms of the process that you go through when you do expansions, is there any risk of any disruption that could be material to Chico's, Inc.? But it doesn't sound like the answer-- .

No, the expansion -- for the expansion, we generally don't even close down the store for a relocation. For a relocation we don't generally close down the store. For an expansion we have to. We leave all those stores in that comp and they're closed for a couple of weeks generally and they've been on comp based for all these years. So we don't expect disruptions. I'd love to get a lot more of them, we have a lot of pressure on our real estate department to find us more expansions. Because they have paid off very, very well. We just did a real hard, hard-core historical analysis of these. They run way ahead of the change.

If I could ask about the Passport program quickly with the 33% increase in -- in folks who are now part of that program. How is the customer profile changing, if at all, with the addition of such pretty large numbers of folks?

Good question. And a fairly complex one actually. But probably the most important thing that we keep a close eye on is making sure, A, that the different segments are spending as much as they have, that is, the older customer. And I mean that not in terms of age but how long they've been on the file. And we're happy to say that by and large in nearly every month this spring/summer, they have spent nearly as much or more than they did even in their first year of entry into the program. That's awfully darn good.

In addition, the other thing we look at is how the new customers who are signing up into full Passport status, how are they different or are they the same. We've actually just finished an analysis of their age and income versus the age and income of the existing Passport shopper. And this spring we found that they're on average about seven years younger. In the different age buckets that we looked at. And that's also a very good sign for our future.

Yes, I would say so. One last question. Just wondering if -- what's the weather forecast for hurricanes this year.

We've got one off the East Coast now. But by the time it gets here it will be a nonevent. We're hopeful we keep it like that for a while.

Yes, I hope so. Good luck, we'll see you soon.

Thank you.

We'll take our next question from the site of Robin Murchison. Go ahead, please.

Thank you. Got a few questions here. This is probably for Pat. Pat, are you finding -- is your customer's adoption rate or -- behind a younger customer in terms of denim and appetite for -- is it -- meaning, are you just beginning to see the pick-up, or where are you with the denim adoption?

She's definitely not behind the rest of the segments in terms of her appetite for denim. I think part of our success is that we worked hard and got the fit right for her. And our sizing is such that she really responds to the fact that they definitely fit her. So we're just seeing tremendous appetite for the product both in bottoms, and in jackets, and in -- all product denim. And so we're delighted with her response. Even at the higher price points.

Are you finding in -- if you look at the catalog that just came in the mail yesterday, vis-a-vis say, last year, or even going back two years, are you finding any special challenges? It's certainly very different. I mean, you open it up, it's practically all wovens, contrast to, historically I think it's really been more weighted with knits. Any special challenges in that regard?

Woven versus knits? Well, knits, especially sweater knits, have always been a challenge for the Chico's customer. She hasn't in the past typically responded to, say, a bulky pullover sweater. So we've had to really edit the assortment and focused on her and her lifestyle. But we're having great response now to knitwear going into the fall season. Keeping it light. Some metallics. And really concentrating on some of the fashion themes, the little shrug sweaters doing well for us, as well as for White House. And so, she is really -- she responds in a fashion way much quicker than what we might have thought of her in the past.

As long as you snap it up, she's fine in that versus basic?

Yes, like in our basic denim program, for example, is actually -- we planned it down. And we planned platinum to be the major segment of our denim offering. So -- and that has worked very, very well for us. So I think she's into what's going on in the fashion world, and I think we can use that. Certainly in our assortment going forward to a much better degree.

And then lastly, I just -- regarding Lucy active wear. It seems to me that somewhere in there -- forgive me if you've addressed this already. But seems to me that somewhere in there there's a likely marriage or some synergies in place for Soma. I know you're evolving Soma. But, looks like there's some stuff that could happen there. Am I on the right track?

Robin, I've only been to one Board meeting. It's a small investment. And what the opportunities that may come down the road might be, we don't really know yet.

Thank you, Scott.

We'll take our next question from the site of Lauren Levitan. Go ahead, please.

Thanks, good afternoon. Scott, I was hoping you could talk about what's driving your increased store target, particularly on the Chico's side. I know in the past you talked about successes in some smaller markets and markets with lower average household incomes. Is that what's driving this? And then secondly, I'm hoping you could comment on cash used, your thoughts about the cash balance. It sounds like the Lucy investment is quite small. So maybe put that in context of what other kinds of acquisitions or investments we should be expecting over the coming years and how you would balance that with a repurchase or dividend or any other use of the cash. Thank you.

As far as the use of the cash, we did announce the share repurchase program, our Board put up certain ceiling on the -- on price. And we never -- floor on the price, excuse me. And we never got back to it. So unfortunately, we didn't execute that plan. As far as utilizing the cash for any future acquisitions, it's not that we would turn a deaf ear to any acquisitions right now. If something were to come over the stern that was just, very attractive, we certainly would take a look at it. We're not out there soliciting acquisitions if you will, Lauren.

We are a pretty conservative management team and Board. While we are concerned with the accumulation of the cash. We do have a pretty significant CapEx event coming down the road with our headquarters purchase. And we'll certainly have to take a look at a new share repurchase program at the time this one expires. So while we're cognizant of the cash we're not overly concerned about it. What was your first question, Lauren?

About what's driving the increased store--?

That's right, the additional store opportunities. All the statistics that we see -- we did hire some statistical analysis of -- people over the last couple of years. One in the marketing department. One in the real estate department. They're drilling down our customer base. We're looking at the amount of Passport customers that are driving our overall business versus the potential Passport base out there as well as the Black Book base. And it's just become quite apparent to us that we've been -- I guess very conservative with our store count. And we just don't want to -- we just don't want to throw a number out there that we're not comfortable we can hit.

We are comfortable with the revised numbers that we've announced today. And it's really a combination of our Passport database, the statistical analysis that we're doing both on the marketing side, the real estate side. All it lends itself to increasing the number of stores out there for both brands.

Is that it?

Thank you, we'll take our next question from the site of Neely Tamminga.

The volume is a bit low by the way. Operator, can you turn that volume up.

Maybe I'll just speak up. How about that Scott?

You're on it.

I just have one question related to White House and a follow-up on marketing. Obviously White House has been a phenom success right now. And I'm just kind of curious what changes you're making. Maybe it's for Patricia more or you, Scott. What changes have you been making to the stores to help deal with the flow of inventory to help deal with these sell throughs? Are you staffing the in-store payroll up a little bit more? Are you flowing the goods to the stores a little bit differently? Can you just give me a sense of that?

Absolutely. I do know that we've been working with visual on the stores really to train them so they understand how to build it up or break it down so that they can handle the influx of products. And we have been flowing differently. We hold a little bit more in the warehouse and then flow it out to them. We've changed that slightly. So that it just makes it a little easier on the stores. And once we got to a density where we felt really comfortable, I think it's now an easy pattern for them, and it's working really well.

Great. And just a follow-up, a clarification here on marketing. I'm just trying to get a sense, in the first half, have you swapped postcards for catalog, or have postcards been incremental for the catalog drops? And I guess in view of that, how should we be thinking about the second half? And I guess separately, I guess there's a proposed rate increase here coming up for 1/1/06. And just Charlie, from a P&L standpoint, how should we be thinking about the impact for that? I mean will it triggers (Multiple Speakers)--.

I'm only giving Jim 4% so what exactly did -- he's only getting three months. So there's going to be no P&L impact on that into the first half.

Actually, it's an interesting debate as to the return of postcards which are a bit less in cost versus taking the same amount of money and putting them into mailing more of your catalogs, your full-sized catalogs. And we're right on the border line of that debate. What we've decided for the next couple of months is we've boosted up the circulation of our major catalogs rather dramatically for a couple of months. And we figure that we'll get an even better return than doing the postcards in the middle of the month. With that being said, we always keep a bit of reserve so that we can be flexible. If we want to do an extra postcard in the last couple of months of the year, we can.

And the postcards were not incremental in the first half. They really replaced some catalogs, didn't they, Jim?

Well, they didn't replace any particular catalog. They replaced some circulation.

And with respect to the rate increase. I mean, are there triggers you can pull to help meet your 4% budget?

Yes.

Great. Thanks.

Okay.

We'll take a couple more.

We'll take our next question from the site of Tracy Kogan. Go ahead, please.

Good afternoon, it's Tracy Kogan at Credit Suisse. Can you guys give us an update, first on the sourcing environment? I think you've mentioned on your previous calls that you didn't expect any disruptions. Wonder if there are any changes to those views? Secondly, Charlie, can you clarify the gross margin guidance for 3Q? I guess you said you expect margins to be down similar to the second quarter. But I can't reconcile it since you don't expect the same 80 basis point drag from Chico's. Is there something additional in the third quarter that's going to be down? Thank you.

Yes, I'll start with the margins then I'll let Scott answer the sourcing side question. We expect the outlets are going to get hit harder on the gross margins, the Chico's will not. The outlets are effectively going to replace it. We expect to be down about the same amount as you saw in the second quarter. Quarter over quarter. But the outlets ran by far the highest margin in their history for the third quarter. And we're going to -- that's going to affect the chain as a whole. And we're also very conservative in our projections, as well.

Thank you.

And we have not experienced any products disruption due to the quota safeguard, none.

Thank you.

Next question comes from the site of Stacy Pak. Go ahead, please.

Can you hear me?

Yes, we hear you, Stacy.

A few questions, believe it or not. One is I was hoping that both Pat and Patricia could just pick the one or two trends that they think are going to be the drivers of their business for fall. Charlie, I was hoping you could tell us how much marketing was down year to year. And I want to clarify what you said about the White House gross margin because I think you were saying quarter to quarter, and I just want to confirm you meant year-over-year.

Year-over-year, quarter over quarter. Saying quarter over quarter which is the same.

Right. Just wanted to clarify that. And then on the White House units per transaction being down, I guess I'm a little surprised. I can understand why they weren't up if Black Book didn't kick in really on the learning. But what drove it to be down? And then finally, I also thought we were going to lever expenses at below 5 in the back half. And I just want a refresher why that is we're not.

I don't know what we can really pinpoint whether it's below 5, above 5, whether it's 3, 4, or 5--.

I thought it was the back half that we're anniversarying the White House investment so I just want to understand what changed.

I don't think anything really changed there. I think we're somewhere near a mid single digit comp is where we're going to start leveraging. I don't think anything has changed there for that whole thing. It might in the fourth quarter because of that charge last year for the leasing thing that we had to go through. But beyond that, I don't think it's changed. The same thing. I think for next year it's going to change. But I don't think it's going to change this year. Now on the marketing spend, we dropped it, as I said, I think, in my thing, between 0.04 and 0.05% for the first half of the year.

Right. Can you say how what it was in Q2 though, how much it was down in Q2.

It was 0.04 or 0.05 in both quarters.

Pat, do you want to talk about -- do you want to take Stacy's question on one big trend for Chico's and then Patricia can kick in on White House.

Well, Stacy, I don't have any one big trend. But I can tell you we continue to feel good about Travelers. I don't know if you missed Scott's opening remarks about the fact that we are introducing -- we are going to keep the color fudge in play consistently. Because of her response. We're very excited about velvet, and novelty velvet going forward. Also our basic velvet program. Denim, especially platinum denim. And also our platinum offering including accessories, which has been very, very strong. Again, novelty, especially in sweaters and in jackets. And we feel really, really good about the customer's continued response to spa or casual wear. So I can't really say it's one--.

Everything in other words.

Got a few things going here, I think.

Okay and Patricia?

For the White House, our fashion trends really are about the feminine looks with touches of luxury such as shine, and metallics, embellishments, lace, and fur. I'd say that that is our biggest focus. Then on the UPTs being down, we discontinued lower priced items in the gift category. And we've really focused on wardrobing and focusing on apparel. So that's why it's down.

Okay, fair enough. Thanks.

Thank you.

One more question, then we're going to have to get back to work.

We'll take our last question from the site of Jennifer Black, go ahead, please.

Oh, just under the gun. I have a couple of questions. I was curious on the Chico's side. If you can chase the denim with the rhinestones. I notice that the platinum denim, the gold series, that zeros and small sizes, it still seems like there's still -- there aren't very many. And I wondered if you -- because I know you've been doing the zero test. Can you talk a little bit about that.

Lece, I know you're there. Do you want to respond to Jennifer. Lece has been following this very closely.

Actually in regards to -- you're asking specifically about the rhinestone denim, we are actually chasing that and have reordered a substantial amount. And in regard to zeros and ones, we're actually finding a leveling out there with our initiatives. And have not really received too many complaints that we're out of size zeros and ones.

Are you looking at different areas in the country? Because I know at one point Victoria's Secret did. And it seemed like different states had different numbers of zeros. And I was curious because where I live, we seem to have more zeros.

We actually monitor very closely by country. Our allocation team monitors that.

Okay, okay, great.

We definitely see a bigger demand in certain parts of the country than others, Jennifer. So our allocation team's really able to respond to that. So I know Lece has been very, very diligent on this subject. And with the whole merchant team. So hopefully we're improving as we keep going.

Okay, great.

And as we get -- on platinum, too, it was getting reorders in on the door. You should see the size corrections in the stores.

Okay. And then moving to the next question. I wondered if you -- I noticed that you have some fitted leather suedes, like the wheat-colored skirt with the grommets do you have more -- I think it was around 198. Do you have more of those same types of items coming in?

Yes. We do well, very well with novelty leather. We don't make it a huge part of the assortment. And there are some stores that do better with it than others because it is a higher ticket item. But yes, we do have more coming. And actually I believe we've considered -- we've actually made it run all the way through December. In terms of receipts.

Okay, so that was a great skirt.

It will be novel, it won't be basic.

Right. No, I know that.

Yes, yes.

Then I had a question for Patricia. I wondered if there was any thought to offering long-sleeve dresses to customers. Personally, I mean, I like the bare dresses. But there are a lot of women out there that don't want to show their arms. And most of the dresses, I think -- they're cut -- you can buy sweaters, but -- any comments?

Yes, we've actually tested long sleeves, and it has not worked. Our customer consistently tells us that she likes the bare dresses, both the strapless and the halter predominantly. We just want to make sure that we always offer her a wrap, or a sweater, or a shrug that she can use to cover up her arms.

Okay. I agree. And then Jim, are you going back to St. Thomas? Where are you going?

Well, once in a while, you'll find me down in -- in the Caribbean, St. Thomas, St. Croix. Maybe I'll be doing that a little more. Let's say that.

Okay. All right. Well, good luck, you guys, great job.

Thank you. We thank you very much for the conference call. We'll be looking forward to seeing you at the third conference call sometime late in November. Thank you very much, everyone, for attending.