Chico's FAS Inc (CHS) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Chico's first-quarter earnings call. I will now turn the program over to your speaker for today, Mr. Michael Smith. Go ahead, sir.

Welcome to the Chico's first-quarter earnings conference call for the period ending Saturday, May 9, 2006. 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.

Before we begin, as a matter of formality, I would like to read our Safe Harbor statement. Certain statements contained here 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 the conditions in the specialty retail industry. There can be no assurance that the actual future results performance or achievements expressed or implied by such forward-looking statements will occur. Users of forward-looking statements are encouraged to review the Company's latest annual report on Form 10-K, its filing on Form 10-Q, management discussion and analysis in the Company's latest annual report to stockholders, the Company's filing on Form 8-K and other federal securities laws filings for a description of other important factors that may affect the Company's business, results of operations and financial conditions. The Company does not undertake to publicly update or revise its forward-looking statements, even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized.

I will now turn the call over to our President and CEO, Scott Edmonds.

Thanks, Michael, and thanks to everyone for attending our first-quarter fiscal 2006 conference call. With me on the call today is Charlie Kleman, our Chief Financial Officer; Chuck Nesbit, Chief Operating Officer; Mike Leedy, our new Chief Marketing Officer; Pat Murphy Kerstein, Chief Merchandising Officer for Chico's, and Patricia Smith, Chief Creative Officer for White House/Black Market, are also on the call and available for questions during the Q&A period.

Chico's FAS Inc. continues to be one of the most productive and profitable apparel retailers in the industry. For the first quarter of fiscal 2006, even after implementing the new stock-based compensation accounting requirements, Chico's produced an overall operating margin in excess of 20%. Both the Chico's and White House/Black Market brands are on pace to produce over $1000 per net selling square foot this fiscal year, just as they did last year.

Beginning with our core brand, Chico's, the key to great results is high expectations. We have always had high expectations for the Chico's brand, and we continue to expect great things from the Chico's brand. While the first-quarter results were below our expectations, the fundamentals of our business that have driven our success for the past nine years have not changed. Our first-quarter performance was not the result of new competition or our customers' lack of interest in the Chico's brand.

Simply put, we did not take advantage of our opportunities. But the love affair between Chico's and our customers continues. We have identified and corrected several merchandise masses. However, we will no longer be providing detail regarding specific merchandise performance. We strongly believe that this is proprietary information and have seen our comments in this area being mirrored in the marketplace very quickly.

Here at Chico's we spend a tremendous amount of time and money traveling the world in search of new and exciting products. New fabrics, prints, silhouettes and color are the key to maintaining our position as the market leader in the specialty apparel sector and our competitive advantage. We are confident that all of you on the call understand our need to be protective of our current best-selling items and trends, as well as our future deliveries and style direction. We realize this is a departure from the type of information you have received on these calls in the past and at the many conferences our Investor Relations attends throughout the year, and we thank you for your understanding.

I will tell you that we feel more positive about our business in May than we did in the first quarter. I believe that Chico's May same-store sales improvement is a good indication that we have already taken some corrective action on our merchandise misses in the first quarter.

We are delighted to welcome two talented individuals to our executive management team. Ms. Toni Robinson join us on May 18 at our Senior Vice President of Planning and Allocation. We identified a need for a stronger and more advanced planning and allocation process as our frontline stores -- excuse me, as our frontline Chico's store count went from approximately 145 stores in 1998 to 507 stores currently. Ms. Robinson possesses the talent and leadership capabilities necessary to enhance and improve what has become a very complex area of our business and an area we view as having the most opportunity for improvements in the future. We expect Toni to play a major role in improving our overall assortment planning, particularly with the merchandise offerings for the stores that we classify as our colder climate stores as these stores have been underperforming the chain over the last two quarters.

Michael Leedy, our new Chief Marketing Officer, is on the call with us today. Michael has only been with us approximately eight weeks. However, he has had the opportunity to review the marketing initiatives we have in place and the initiatives we have planned for the balance of 2006. It has been refreshing to have a new viewpoint on our business and the opportunities that we all see in the future. Just as new innovative product is key to growing our business and maintaining our competitive advantage, so is newness in marketing. Michael is a brand strategist. He is working across all disciplines in the business that involve all four of our brands. We are excited about the ideas and leadership Michael has provided to the business, and we look forward to a long-term relationship that will benefit all of our shareholders.

Since acquiring the White House/Black Market brand in 2003, we have seen consistent improvement in the performance of this exciting brand. Our vision upon acquisition was to build this into a $1 billion business with an operating margin at or near the Chico's brand. We have every reason to believe we are well on our way.

Currently there are only 206 White House/Black Market frontline stores. We have patiently waited to significantly ramp up the new store opening plans while we worked on building the infrastructure and improving the brand operating margin. The improvement in the brand operating margin of 500 basis points in the first quarter is a result of the effort put into this business over the last two plus years. Our real estate team is wrapping up their week in Las Vegas at the International Council of Shopping Centers Convention, and they have reported to me that the landlord community considers White House/Black Market along with Chico's as one of the "must have" premier tenants in their centers across the country. The strategy we put into place in 2003 is paying off, and we have very aggressive plans for this red hot brand.

The Soma by Chico's intimates business is improving every quarter. For the first quarter of 2006, we saw our foundation penetration increase to 51%, up from 44% in the first quarter of 2005. Despite out of stocks on selective styles due to stronger than anticipated sales, the foundation's dollar sales have doubled over last year. Even more importantly, we're seeing strong repeat bra purchases, which is a must in this industry. Our strategy of cementing customer loyalty by building strong annuity foundation styles is working.

Other key measures of performance, UPT, our units per transaction, and ADS, average dollar sales, showed continuing improvement in this quarter. Inventory turn is increasing as the product assortment has become more focused and sales volumes grow. By the end of the first quarter, Soma inventory supply had been reduced by 22 weeks. In a number of categories, sales now exceed minimum order quantities, allowing us to manage order flow and inventory levels much more efficiently. Our store count at the end of the first quarter was 18. We plan to open three stores in the second quarter and are still tracking in fiscal '06 with between 50 to 55 locations.

As I have previously stated, this is a difficult business to enter, and we knew this going into the launch. The barriers to entry in this business are the reason there is currently only one national chain of intimate apparel stores. With our Chico's database of over 6 million loyal customers, we continue to be extremely confident that we will be very successful in our endeavors in the intimate apparel business.

We are rapidly learning how to manage this model for strong future profits. As a company and as shareholders, we have to be disciplined and patient during the early investment years. In the end, we expect to be the dominant player in the intimates business for the Victoria's Secret graduate. Again, the strategy we put into place in early 2004 is on plan.

And now a few comments about Fitigues. We closed on the Fitigues acquisition approximately four months ago, and since that time we have been focused on people, infrastructure and systems. We do not expect to have this brand positioned for any significant type of rollout until late '07 or early '08. In the meantime the founder, Steve and Andi Rosenstein, are intensely focused on the merchandise. Again, this is a long-term investment in the future of our Company. By early indications from the customers and the landlord community, we expect to have the opportunity to build Fitigues into a meaningful business for our shareholders in the fiscal '08 timeframe.

I would like to share one final thought before I turn it over to Charlie. We fully understand the importance of our current performance. The decisions we make are based upon a clear vision of our strategic business plan and the steps we must take to ensure we have a rock solid platform for long-term sustainable growth in both top and bottom line, while maintaining our industry-leading operating margins for the foreseeable future.

Now over to Charlie for his comments.

Thanks, Scott, and good afternoon, everyone, and now I would like to welcome you to our first-quarter conference call for fiscal 2006. We've had another quarter with solid sales and earnings growth again as we continue the infrastructure building required to become a world-class multibranded retailer with our exciting yet newer brands. We strongly strongly believe this is the proper way to lay groundwork for a sustained multiyear multibranded growth vehicle under the Chico's umbrella that is capable of maintaining operating margins at the top of the industry.

Enough of that though now, and let's get to some numbers. I hope you all notice and appreciate the new format of our earnings release as we have elected to publish most of the metrics that I usually have to rush through on this call. This new approach should allow us to comment more on the numbers instead of just relaying them to you, and it should allow you to better understand what we think of the metrics.

First, let's look at the overview of the first quarter of fiscal 2006 according to which we saw a solid 20% increase in sales and an 18% increase in earnings, excluding the change in options accounting that reduced this year's earnings by $3.4 million or $0.02 per share. We are filing our 10-Q as we speak, so you can read more about these thoughts on that document at your leisure.

Within that 20% sales increase, we saw a 62% sales increase in the White House/Black Market frontline store sales as this brand now encompasses over 20% of the total sales and just under 19% of the comparable store base. We also saw a 55% increase in our direct to consumer sales as we saw strong improvements in both the Soma and Chico's sales year-over-year, and White House/Black Market has continued its strong sales since the launch of the White House/Black Market website last August.

During the quarter we also saw improvements in the average unit retail of all brands, excluding Fitigues, which we did not own last year. Regarding transaction counts, we saw improved average store transaction counts in both White House/Black Market and Soma while we saw a decline in the Chico's average store transactions largely due to the reasons we indicated on our April sales release.

It is interesting to note, though, that although we saw a decline in the average transactions at the Chico's brand, we saw roughly the same number of new passport customers crossover into permanent as in the last four quarters in which we have seen approximately 100,000 new permanent passport members added each quarter. To find out more details on the passport or Black Book clubs, go to our website at Chicos.com and download the management slide presentation. It is always up-to-date with our current strategies and results.

Turning to gross margins now, on last quarter's conference call, we indicated that we expected the overall gross margin, and that is before any adjustments for stock option expense, to be flat to down and possibly down up to 40 basis points. The quarter came in much better than we originally forecast as we managed to post much stronger numbers from both the Chico's and Soma brands such that without the 40 basis points stock option reduction to gross margin, we actually saw an increase of 30 basis points.

Looking more deeply at the gross margins, the Chico's brand posted a solid 110 basis point improvement in merchandise margins, while the Soma brand also posted a more than solid increase in its merchandise margins with an increase of 460 basis points. The Chico's improvement was due to significantly improved IMUs for the initial markups, offset by a slightly higher markdown rate. The Soma increase was largely due to a significant reduction in markdowns as we continue to improve the product assortments of this new brand. The White House/Black Market brand on the other hand began the quarter with unusually heavy markdowns to accommodate a sweater program that essentially missed the mark this spring. After clearing these items out, White House/Black Market then posted year-over-year better merchandise margins in March by 40 basis points and in April by 190 basis points resulting in an overall 20 basis point decline for the first quarter. The improving merchandise margin trend we experienced in March and April has continued into May so far as the May gross margins are up over last year's May gross margins but even more as they are now up over 300 basis points with three days left in our fiscal May.

Let's move now from gross margins to the combined SG&A and depreciation expense for the first quarter. As we indicated earlier, we planned an increase in our marketing spend in the first two quarters, and this additional spend in the first quarter amounted to 30 basis points over last year's first quarter. Beyond that, we saw a 30 basis point increase in our store payroll costs due to the change of our store managers from salary to hourly that we talked at length on the last quarter's call. This 30 basis point deleverage was a significant improvement over the fourth quarter's 80 basis point deleverage and is in line with the estimates we provided last quarter in this area.

Beyond that, during the first quarter we had a onetime write-off of approximately 20 basis points for costs associated with the original plan for a new headquarters campus. We had a somewhat unusual 20 basis point deleverage from increased recruiting and relocation expenses that we do not expect will continue, and we experienced a 30 basis point deleverage from the initial startup expenses associated with the planned conversion to SAP for the Soma brand this fall. Again, we do not expect this year-over-year deleverage in this area to continue beyond the first quarter.

Going to interest income, that was quite strong for the quarter as we had both interest rates and cash balances improving over last year's first quarter, and our interest income came in as a strong $3.1 million versus just over 1.5 million last year. Our tax rate improved slightly from 37% -- excuse me -- even last year to 36.6% this year. As indicated in our press release, brand operating margins generally improved across the board, and we are pleased with our progress in moving the White House/Black Market brand to profit levels that will be similar to Chico's. We are pleased with our progress in moving Soma to a profitable and unique baby boomer intimate apparel retailer. We are pleased with the improvement in the Chico's brand operating margin, and we are pleased with the status of our infrastructure efforts on our newest brand, and that is Fitigues.

Lastly for the quarter, I would like to summarize the impact of some of the key overall metrics from our two newer brands, Soma and Fitigues. During the quarter these brands had the impact of reducing the overall gross margin by approximately 40 basis points. These brands also increased the SG&A component by approximately 70 basis points, and thus they reduce the overall operating margins by about 110 basis points. Further, the impact of these brand investments reduced earnings per share by about $0.015.

Whether establishing a new organic growth vehicle or growing through external acquisitions, there are certainly costs involved. We believe the investment I just described is a very minimal cost to establish what we think will be exciting, profitable and unique offerings in the apparel industry, and we intend to continue building these brands as long as the investments stays in that reasonable cost range. We are confident in all four of our brands.

Now let's move onto some future guidance. Regarding future guidance, we expect mid single digit comps growth for the Chico's brand for the rest of the year, and we expect a somewhat moderating double-digit comp growth for the White House/Black Market brand, which we pegged as generally mid-teen growth. This combines with our planned 30% square footage growth for fiscal 2006 to result in solid outlying growth for both fiscal 2006 and fiscal 2007.

Now because this square footage growth is really concentrated in the third and fourth quarters for the most part, the bulk of these benefits of the square footage growth will actually help the fiscal 2007 sales results more than the fiscal 2006 results.

Turning to the May comps we disclosed in our press release, these comps are ahead of this forecast for White House/Black Market with comps in the low 20% range versus our midteen guidance, and the Chico's comps are only slightly behind this guidance with comps currently in the high 3% to low 4% range.

Regarding future gross margins, our guidance remains the same as last quarter. We expect all three of our brands to show improved merchandise margins in the second quarter of fiscal 2006, and we expect the second-quarter's overall gross margin on a pre-option basis will likely be flat to down up to 40 basis points. For the last two quarters of fiscal 2006, we continue to expect that gross margins, again preoption expense, should be down in the 40 and possibly up to 80 basis point range as we anniversary the best margins ever for all three brands in both of the last two quarters of last year.

On the marketing front, we are still forecasting an annual marketing spend plan of between 3.6% to 4.0% similar to our plan last year. This, of course, is subject to any adjustments that our new marketing leader, Michael Leedy, may have after he has studied our approach and methodologies more thoroughly. Broken down by quarter at this point, the second-quarter spend is likely to look much like the first-quarter spend. That is it should exceed last year's second-quarter spend by about 10 to 30 basis points. The marketing spend for the third quarter looks like it should be flattish year-over-year, and the marketing spend is likely to be slightly down in the fourth quarter.

Regarding overall SG&A guidance for the combined depreciation and SG&A expenses, we believe that based on the anticipated same-store sales from each brand that we have disclosed -- on a preoption basis we expect up to a 50 basis point deleverage in the second and third quarters, while we expect to see up to 50 basis points leverage in the fourth quarter, and that is principally due to the extra week in this quarter as all retail will experience a 53rd week during fiscal 2006.

Regarding taxes, you should plan the tax-free relatively flattish on a quarter-over-quarter basis, and regarding interest income, we should see a flattish second quarter with a small to moderate decline in interest income for the last two quarters due to the repurchase of $100 million of our stock to date and the authorization of another $100 million for future repurchases. We expect the first $100 million repurchase plan that has now been essentially completed will benefit earnings in the last three quarters combined by about a $0.015, and the second $100 million will have less of a benefit in fiscal 2006. These combined purchases though should benefit fiscal 2007 by nearly a $0.01 a share even after the reduction in interest income due to these expenditures.

Now after considering our first-quarter earnings results and our May sales results, we are now anticipating that our annual earnings, excluding the onetime impact of the FASB 120 option expensing, will grow in the neighborhood of the 20% range. As you can see in our press release, this translates to between $1.20 and $1.24, and that is effectively the current First Call consensus for the annual earnings.

Lastly in this area, the second-quarter First Call consensus appears in line with our estimates, while the consensus earnings for the third quarter of $0.34 appears $0.01 to $0.02 too high. That is probably due to the number of large -- the large number of stores we plan to open in that quarter. This third-quarter shortfall, though, is likely to be more than offset by the fourth-quarter consensus of $0.29, which appears at least $0.01 to $0.02 too low. That is probably due to that extra week in the fourth quarter and the ramp-up in sales resulting from our huge third-quarter store opening plans.

Now we will move to the balance sheet and cash flow. First, the balance sheet. Our balance sheet remains very strong as we ended the first quarter with $407 million in cash and marketable securities after buying back $32 million of stock during the quarter and acquiring the 22 acres adjacent to our property for approximately 26 million.

A word on that. We are very pleased to see that the buildings on this property, which are leased now, will free up on almost exactly the same schedule that matches our building needs. That means essentially that this property is actually funding itself until we have a need for more space. That is just the opposite of building a new headquarters that must accommodate your needs for years and years and years to come. We are very pleased to have solved our growing space requirements at such a lucrative and reasonable cost.

We end the quarter with a solid and fresh inventory level of $74 per square foot, only slightly up from last year's $72 per square foot. The raw [Dows] at 115 million were up on a year-over-year basis by 21%, almost equal to our overall sales increase of 20%. Most of the dollars increase was, of course, in new stores, while the small incremental increase was directly tied to our increased investment in direct to consumer sales for all four brands. It is also due to our acquisition of the Fitigues brand that tends to run higher average inventories per square foot at this time, and lastly it is partially due to our increasing price point and its related cost per unit. On a units per store basis, we are not much different than last year in either full-price or markdown goods. Our total assets booked $1 billion mark for the first time with tangible net assets also approaching $1 billion as well, and our book value ended the quarter at approximately $840 million.

Turning to cash flow, our cash flow from operations generated just under $90 million this year versus just under $80 million last year, a solid 12% increase. Now to fully understand this, though, the change in stock-based accounting mandated this year moved the cash flow that was related to the options to a nonoperating cash flow for this year, but sort of interestingly enough, the accounting regulations do not allow us to restate the last year to be comparable. That is kind of amazing to me, but if you were to do this correction, you would see the cash flow from operating activities actually increased an even more solid 27% on a true comparable year-over-year basis.

Now regarding CapEx or capital expenditures, we ended the first quarter of fiscal 2006 at $60 million versus roughly $25 million last year. The increase over last year is almost entirely attributable to the 26 million we spent on the 22 adjacent acres I discussed earlier. We anticipate CapEx expenses for the year will come in at the low end of our last forecast, likely between 180 and $200 million excluding the tenant improvement monies. We have laid out our estimated store opening plans for fiscal 2006 (technical difficulty) -- 255 to the new range of 140 to 150. These openings and expansions still result in roughly a 30% selling square footage growth rate, excluding the 11 Fitigues stores that we acquired earlier.

For 2007, as I indicated, we have established our initial ideas on our square footages goals, and we are confident in our ability to roll new doors and expansions in the 25% selling square footage range. The openings by brand for fiscal 2007 are very similar to fiscal 2006, and we plan to begin rolling out our newest brand Fitigues with at least five new stores next year. Beyond that, we are looking to relocate a few of the Fitigues stores as well. For fiscal 2006 and 2007, we are targeting the average new Chico's store to be in the 3200 to 3400 selling square foot range, the new White House/Black Market stores to be in the 2300 to 2500 selling square foot range, and the Sonoma full line stores in the 2000 to 2300 selling square foot range with the Soma boutiques in the 1100 square foot range. We're still evaluating the proper size for the Fitigues brand, although we believe they will be nearer the smaller sizes we opened in the early White House/Black Market and Chico's days.

To wrap up, we opened fiscal 2006 with an operating margin for the first quarter north of 20%. We opened the year with a solid 6.6% first-quarter overall same-store sales increase on top of our $1000 per square foot store historical trend of sales, and we generated over $55 million of free cash flow. The month of May also represents our 111th consecutive month of positive same-store sales with 90 of those months being in double digits. Our Passport and Black Book clubs are still going strong. Our marketing efforts for White House/Black Market and Soma continue to be very powerful brand builders. Our investments in the White House/Black Market brand are continuing to show leverage with strong topline growth, and we have made significant strides in solidifying our management team as we look to $2 billion of sales and beyond.

We're pleased with the status of all of our brands. To that end, I will repeat that we clearly have Fitigues in the infrastructure building stage with the beginning of a rollout now in sight. We've got Soma in the early rollout stage and accelerating. We have got the powerful White House/Black Market brand charging ahead with improvements in almost every key metric, and Chico's is still showing its capability to improve its brand operating margin, draw new Passport customers, and be the destination store of choice for the number one sought-after customer in America, the affluent baby boomer female. We believe we are laying the building blocks for a sustained multiyear performance that has the capability not only for strong topline growth, but also for industry-leading gross and operating margins for years and years and years.

Thank you for being with us on our first fiscal 2006 conference call, and now we will take some questions.

(OPERATOR INSTRUCTIONS). Kimberly Greenberger, Citigroup.

I wanted to know if you could share with us some of Tony's initial thoughts on ways to close the gap between the Northern tier stores' performance and the Southern tier stores' performance, which obviously seems like a great opportunity?

Kimberly, she started a week ago today. So there is not much to share as far as what her thoughts are. We certainly think that we have an opportunity for some regional planning. We have spoken over the last couple of conference calls about how our colder climate stores now -- that is just how we classify them -- have been underperforming the chain average. It really has become a very complex area of our business. Because of our merchandising strategy of bringing it to you in breadth not in-depth, you will find something new everyday at Chico's. It is a very difficult model, and we really did not have the horsepower in that area that we needed. I think we have that now. But it's a little early to be sharing what Toni's viewpoint might be.

Okay. And I know you said Michael Leedy is on the call. Are there any initial observations about the marketing strategy and any sort of opportunities you see to fortify I think what has been one of the pinnacles of success in the organization? Anything that you think you could find to add or any initial observations would be helpful. Thanks.

Kimberly, you know just having been here for eight weeks, just a little bit longer than Toni, you know when you join a company that has had positive comps sales for 111 months, you don't want to jump in and make any immediate moves/changes. And what I would tell you is that when I decided to join the Company, what was so appealing to me about the Company was a), the team, and b), the fact that there are four brands at different points in their lifecycles that all have a lot of room to grow. So I don't have any specific recommendations or changes that I have made yet. I'm really just soaking it in. So more to come.

Tracy Kogan, Credit Suisse.

A question I guess for Scott or Chuck. Can you talk about the tweaks you have been making to Soma both in terms of product and the new store designs? What are the things that are coming in better than you expected, and maybe what are the things that may not be up to your expectations yet? Thank you.

You know we continue to refine the product line and infuse a number of different styles. Sizing, we have been playing with. All of it is -- we have a good sense of the direction of our customer. And just like with Chico's with fashion, we will continue to update and modernize the assortment. But I don't want to get into too much detail in terms of specifics again for some of the competitive reasons that Scott referred to earlier. (technical difficulty) -- about some of the things you're looking at on store design?

Yes, on store design we have been looking at how she shops the store. One of the things that we will be adjusting is the flexibility of the store. The store was set up with originally where it was one half foundations, one half sleep and activewear. The store is not very flexible in terms of being able to make lifestyle statements. So if you wanted to do an on the floor, an assortment that had both sleepwear and coordinating foundations. It is not easy to do.

So we are going to -- we will be making some modifications in the fall, and we will have a new prototype that gives us a little more flexibility in terms of the floor assortment.

Yes, and the other thing is obviously if you have been to our Sunflower stores, you know that the Sunflower look is very different than the current Soma look, and the new design or the improved design will be more compatible with Sunflower.

Stacy Pak, Prudential Equity.

I was curious if you could tell us the marketing (technical difficulty). And finally, you said something about a hit to operating margin in the back half this year and into the first half of '07? Maybe you could expand upon that?

Let me hit the comp guidance. Our current press release is 3 to 4% range, and we are forecasting mid single digit comps because that is what we truly believe we can achieve as a brand. Charlie, do you want to talk to -- (multiple speakers)

Was there something -- Scott, was there something in May that caused 3 to 4 that -- is there a product change or something that gets better? I'm just trying to understand.

The floor is mid single (multiple speakers)

Mid single (multiple speakers) in the low end. But, as I said in my speech, it is a high 3 to a low 4 right now. That is why we published it. So if we end up with a 4 for the month, we're essentially mid single. Yes, we would like to be a 5 or 6 in mid single, but a 4 is still mid single. So we are not that far off, and we are just coming off a first quarter where we admit we had some misses. So we're still getting over that. We expect this thing is going to be improving all the time. And I forgot the rest of the question.

(multiple speakers) -- leverage point. I'm no longer going to talk about. I don't think it is relevant anymore because I'm now giving you guidance on all we expect from our same-store sales. I'm giving guidance on gross margin very down to the -- down to a very detailed level. We have given guidance on SG&A, and we have given earnings guidance for the first time. So I am not sure that's a meaningful number anymore, and it changes all the time. So I'm not sure the way I did it in the past saying it was a 7%. It is not 7% every quarter, and I don't want to get involved -- this month it is this, this month it is that. I will give you a lot more guidance, and that will help you guys figure out where we think we're going to end up. (technical difficulty) earnings guidance, which we have never done before as you know.

And the other question was the marketing dollars spent (multiple speakers) Chico's and how much the transactions were down? And sort of how -- have you seen that before, and how should we interpret that?

We have seen that periodically before for Chico's generally for a month not for a whole quarter like we saw this time, and that was related to the merchandise that we talked about. The marketing dollars we don't break down by brand, but they were not significantly different by brand year-over-year. (multiple speakers)

Right. You said in your press release that the operating margin would be down in the back half this year and into the first half of '07 just on the investments, and I was wondering if you could clarify a little bit like how much?

Well, I gave how much I think we're going to deleverage for our SG&A and what I think (multiple speakers)

In '07.

Well, '07 the first half of '07 is going to look just like the back half of '06. It is not going to look any different I don't think until we anniversary this huge store opening plan we've got in the third quarter. Then in the third and fourth quarters, you should see it start flattening out the operating margin. Then in '08 it should start improving.

Jeff Black, Lehman Brothers.

I guess I wanted to see if we could get any color on the White House operating margins relative to Chico's. It sounds like there's a lot of optimism around that business. It sounds like we're doing very well there. Is there a chance that we see the operating margin converge by a little more than the 1 to 2% a year that you had outlined for that?

Well, on an overall basis, we're a very conservative management team. We certainly I would say beat that very handily in the first quarter. I'm not sure we can do that every quarter, but our goal is to gain 1 and 2% a year, and in three to four years, we are going to hit the Chico's and they will converge. That is still our goal. If we stay ahead of it, that is fine with us, of course, but we are not going to forecast more than that.

And on the Soma, the profitability target of 100 stores at least, are you still comfortable with that, or do more stores next year indicate we're thinking that happens prior to a 100 store base.

Well, more stores next year really indicates our optimism about the brand, but we still need to get to that 100 store mark before we're starting to enjoy some substantial improvement in the markets.

I mean, we are focused on improving margins everyday, and margin improvement comes in multiple ways. It comes from the initial markup, as well as how we manage inventories and markdowns. So as we build volume, we get leverage in all of those areas. But with different products, the break points are at different places. And then at the same time, if our direct business continues to improve in that brand, it may not take the 100 store level.

Chris Kim, JPMorgan.

With respect to your larger store format at the core Chico's, what level of sales productivity are you seeing from a per foot or per store basis, say, versus the historical smaller formats? Do you think that the stores are large enough?

Well, first I will answer the back half first. No, they are not large enough. We have a lot of our large stores that need more space already. The Kierland store is a good example. It is 3300 feet. It is 3300 feet. It is going to do almost $8 million this year. So that store obviously could use a couple of thousand more feet. But the top roughly 25 to 30 stores are over 3000 feet for the Chico's brand, and they average well north of 1000 a foot. Well north of that. But you have to understand our largest stores are the ones we have the most confidence in and we expand the most. Those are our best stores in the chain, and they are doing the best in the chain. But that tells us when we know a store is good, we can have a very big store there, and they can run tremendous profits. That Kierland store as an example. It runs roughly a 40th% operating margin off its $8 million. That is a $0.01 per share in one store.

So are you looking at some of these maybe like 4000 or 5000 square foot store opportunities at all?

Yes, we are. We're absolutely looking at that. We actually have a couple of locations right now. Alamo Quarry in San Antonio is going to be in the area of like 7500 gross.

Now that store is doing well north of I think 1200 a foot right now.

We've got a future real estate on the upper West side in Manhattan that is going to be 4000 plus square feet. So we are -- we are reaching out there and starting to open some bigger stores in some markets that we have a very high level of confidence in.

And, Charlie, could you go into a little bit about the dynamics of the fixed versus variable occupancy expense? Is there some level of sales productivity where rent becomes variable, and does that (multiple speakers)

Well, rent right now roughly 75% of our stores have a percentage rent clause as almost all retailers have to face. Roughly 75% of those we are paying percentage right on. So roughly 60% of our stores are variable no matter what we do, they are variable. So about 40% is fixed, and about 60% is variable even in occupancy, which is very odd for a retailer to have that. But it is a high-class problem that we sort of like.

Okay. And with respect to White House, it looks like they are opening stores that are 35, even 80% larger than the current average. How should we be looking at the sales productivity and its effect on the chain average.

Well, I would like to think for both the Chico's and White House brands and those that have been talking with me for the last five years, I have been committing to them. I'm going to reduce the sales per square foot and make more money doing it, and I have not been successful. Our comps have outrun me every year. But I would hope we're going to drive it down. If you look at my store economics models on the Chicos.com site, you'll see that we're forecasting for our stores this year. They should open up in the 650 to $700 a foot range. I would love if we could open up with that. Because there are five to seven years of growth beyond that before they will need an expansion. That is what we would ideally like to do.

And do good chunk of those stores, are they sort of tied to the variable rent as well? Are they more of a fixed model?

The largest stores will be more -- they will be more fixed in rent until they get up to their break points. The break points are tied to how much rent you pay, so the larger the store, the higher the break point. So yes, they will be fixed in nature.

Most of your mall-based stores and your specialty center stores have a percentage rent clause. It is your standalone street front locations, and some of the strip center locations are just a pure rent deal. So the 75% that have that in their lease clause are the stores that are in the malls and specialty centers.

On previous calls you talked about the enterprises resource planning. It is priority for Soma in '06 and then eventually turning that into multi-year effort for I guess the end of '07 and early '08. So this recently signed deal with SAP is exactly that initiative I'm assuming?

That is it, yes.

And will you be touching Soma first and then moving onto the other --

Yes, we are still shooting for Soma later this year, and then we are going to move to White House beyond that and then behind that Chico's.

Okay. And are you still projecting '06 expense related to SAP to be about 10 million?

That will be a capitalizable (multiple speakers). It should be between, let's say, if we get started on a White House area, it could get as high as 13 to 14 million. But it will be at least 10.

And 100% of that is capitalized?

Well, that is the capitalized part. (multiple speakers). Like I said, expenses that we had this quarter because all the expenses of training are not capitalized. We have got that built into our P&L estimates, though.

Meredith Kent, UBS.

Can you talk a little bit about testing and market research at all the brands and whether or not this has changed? I guessed there were a few more merchandise misses than we had seen and how we're just kind of wondering how you can avoid this going forward? Thanks.

Well, you know you never really know, but we do testing all the time when we are in-store testing. Actually some of our misses came out of what we call our spring fling test, which we do every October and the we had excellent response to those programs. But some of them just did not pan out to expectations when we actually got into the first quarter. But we had actually done the testing.

And then the other thing about Chico's is that we have just this enormous flexibility and agility, even though we are a large company and I think well ahead of some other retailers that might not be able to turn things around as quickly. But we continue testing. We test in-season. We test in advance of this season, so we really don't go into a program full force until we have completed a test.

Patricia, do you want to talk about how you test the White House?

We basically follow the same pattern. Some of the misses that we had recently were due to hanging onto a trend a little too long, and some of the other misses were based on running out of product that we thought was absolutely fabulous. So it sold a little better than we anticipated. Also we tried to do White a little bit earlier this year, and we felt that it was a little too soon. But we follow the same pattern in terms of Chico's doing small store tests and doing regional test, the same pattern.

Okay and then just another quickie. Where do you see average unit retail trends throughout the rest of the year on both brands?

I think it really depends on the category, and we are all about value. We're not going to take average unit retails up just for the sake of taking them up. Some of them are initial markup initiatives that we are able to secure through better costing. So that the markups take care, we don't have to change the retail. But we're very conscious of the fact that we don't have to change retail prices just to change them, and it's all about the value. But we still see opportunities for average unit retail going forward in certain categories.

In terms of the White House/Black Market, we have seen our ARU go up in apparel in certain categories such as dress and jackets. Those categories have really increased the quality, and we felt that the increase in price was really warranted. In nonapparel, same thing, shoes, belts and bags increasing all the quality, adding leather. So we have seen an increase. We do, as Pat said, really focus on the value that we offer to our customers. But again, we do see opportunity out there, although we are not planning any significant increases.

Margaret Mager, Goldman Sachs.

Pat, on the IMUs at Chico's, you're saying some better costing. Can you talk about that a little bit more? Are you doing anything, moving your sourcing or any change in quality? I'm going to guess you're going to say no, but I would love a little bit more color on how you're getting the IMUs higher at Chico's because when I look at this quarter, you know you did better on the gross margins and a little worse on the SG&A. So clearly you have room in the gross margins, and I would like to understand that better.

And then I have a second question about just Chico's and the traffic at Chico's and how that is going and some of the initiatives that you use to drive traffic, be it expansion of your direct-mail list or getting your associates to make phone calls or using TV. It just seems like some of these initiatives maybe aren't getting the bang for the buck that maybe they did in the past on the traffic front. And lastly, a quick question -- exactly how many stores are you going to open in the third quarter? Thanks.

Yes, I will answer the IMU question. Through long-term partnerships with vendors, we are able to certainly give them projections for going forward. Sometimes we are able to take advantage of securing fabric early in advance as actually knowing what we are going to do with it. So we use a lot of different factors which actually contribute to the IMU. Every one of the product managers in all the regions have IMU goals. So we definitely have our target that we want to reach, and we work very hard to secure that. And you know, just being a multidoor retailer in terms of quantities. Sometimes in securing larger quantities, I mean you can certainly negotiate a better cost, which definitely contributes to the IMU. And then --

It is Michael Leedy. We don't have traffic counters in White House/Black Market or in Chico's at this point. It is something that we're going to test. So we don't have a great gauge of traffic. I will tell you that sales per catalog, so sales per catalog that we send to customers during the quarter increased 9%.

And then the store count in the third quarter, and Pat, on the IMUs, is it well-balanced across the classifications, or is there one or two that are particularly strong or moving up that are helping move the whole needle on Chico's?

Well, depending if it is a key item buy. You know, it is probably a better opportunity than something that is just a single item novelty jacket or something that is a fashion item. But literally across the board we look for the opportunity on IMUs. So I cannot say it is anyone category more than another.

That is helpful. Thank you.

For the store opening, our 10-K is still pretty accurate for the breakdown of the stores by quarter. Some have slid, some have not. There is no way to give an exact number right at this point because we will have some slide in building permits that might move from the second to the third, third to the fourth, and we will have some sliding grand openings for that matter. Sometimes the malls don't open on time or the space does not become available as quickly as we like. Right now I think we're somewhere near 80 to 90 stores for the third quarter, and we are somewhere near probably another 30 relocations during that quarter. So the grand total of stores that will be effective will be north of 100.

Harry Ikenson, Nollenberger Capital.

Congratulations on being persistent and making all the investments that I think are really going to pay off, and I mean that sincerely. Okay. Two questions. One, could you tell us what the effect is in total sales volume for the extra week?

And two, could you also review with us your latest thinking on the second milestones for Chico's or Soma by Chico's? The first milestone being breakeven for the 100, but I know that at 250 it is another meaningful milestone. But I don't think we've really gotten enough detail on that. So could you update us on that, Chuck? Thank you.

Regarding the extra week, go back and look at January and February. It will be at the high side. We just divide last year's January by four and multiply it by a comp. You won't quite hit the number because as we move through January, the sales get stronger and stronger. Off the top of my head, I don't know what that number is. I don't want to throw a number out that I'm not sure of, but it is certainly -- it is actually going to be the first week of February is what you gain. So that will be a fairly strong number. Every retail is going to feel it.

Right no, I know that but -- (multiple speakers). But some retailers are giving some number guidance on it, so I thought I would ask you.

Well, I can give you some numbers once I look -- (multiple speakers)

I will deal with it off-line. Secondly, what about Soma milestone when you get to 250, what is the meaning there? 100 is breakeven.

100 we said is where you get to where you're making minimums on all the products we buy. Okay? Roughly around the 250 range is where you can have on replenishment items constant production, which gives you additional efficiencies which should translate down through margins. I would rather not comment on the amount of that debt margin potential, but I think you should say that we are focused in Soma in generating a return on sales that is consistent with the other major national retailer. That is the focus as we look at building this brand.

Okay. But then with a follow-up comment to that is, you will be or it seems like your box is going to be about half the size of that other national retailer. So if you really execute down the road, is there potential for you to do even better?

Well, I think the box today is I believe they actually started out with smaller stores than we have today. So I would suggest that the model will be similar to every other specialty retailer. As the business grows, the size of the store will grow as well. So I would not say that that we are limited by that box.

Barbara Wyckoff, Buckingham Research.

I have a couple of questions. Kind of thoughts on the side-by-side Soma boutiques. When will the first ones open? Where will they be? How are you approaching the editing process? What are you eliminating? Are you just going to have a little less of everything? Smaller size runs or whole classifications missing.

And then the second question I have is, on the Passport customers, can you talk about whether or not you have different levels of Passport customers? Do the higher levels get different offers than sort of the regular customers?

Soma boutiques, the first ones will open in third quarter, possibly late second quarter. Again, it depends on when the real estate and the buildout comes through. I would rather not comment on the specific locations of the boutiques right now.

In terms of the editing of the assortment, we basically are going to be focused on the most -- the highest volume items as with some of the -- and make sure we're always carrying the mailer items. We will have enough fashion in order to provide the sizzle that is needed to sustain the business. But we will have fewer bra styles, fewer sleepwear styles, fewer panty styles. So we will essentially have best-selling items, and then obviously our customers will have the opportunity to order off the website any styles that they would be missing from boutique.

It is Michael Leedy. There is currently only really one level of Passport customer, and there very well maybe an opportunity for segmentation of not only the Passport customers but the preliminary Passport customers. So that in the future customers get different offers, and we do a better job of moving people from preliminary up to Passport and then beyond once they are in Passport.

Roxanne Meyer, CIBC.

A few questions. First, where are the future gross margin improvements at White House coming from to narrow the difference between White House and Chico's?

We really see -- should we go into that detail? (multiple speakers).

One thing to remember before she answers though. If you can pick -- if you compare White House/Black Market at $250 million back to Chico's in 2001 when it was $250 million, there was only a 2 point difference in that time. They are going to gain 2 points clearly purely from scale, going from .25 billion to 1 billion. So that we just see as a given. It is a scale-driven thing, and then how is it going to gain the other 2 points is what she is now going to talk about.

We only see opportunity in terms of volume as our quantities increase. That is a very big one. Sourcing again we're finding better and better partners that we do business with, and our sourcing is improving, and we have a new sourcing department that is really helping with that. Also, we see opportunities in areas where our design team has really increased the quality of garments, so we see opportunities there as well.

Okay. Great. That is really helpful. What percent of the merchandise at Soma is where you want it? You know I imagine there's still a lot that is a work-in-progress, and I guess what categories are they?

We are really very pleased with the progress we have made in the foundations area, and we think you will see in the fall some changes that will bring us right in line with where we want to be. There will be a number of bra launches in the fall. We have made a lot of progress over the spring, but in the fall we should have a very tight well-defined foundations business where we want it in bras.

Panties is an area we are still working on. We are not satisfied yet with where our panty assortment is. It is probably going to be late fall, early spring before we get it to exactly where we want that to be. And sleepwear, since it is one of the more fashion-driven pieces of the business, it is an evolution. Sleep and active is something we are constantly reinventing. It flows a lot more like the core Chico's and White House businesses. We are pleased overall with where we are right now. We think our fall plan is very strong. Obviously with those assortment since they are not replenishing businesses, the consumer is going to vote when she comes in the store.

Okay. Thanks. That is helpful as well. And last, I was just wondering how are new Chico's or even existing Chico's doing in some smaller markets versus larger markets?

The smaller markets generally run lower sales than do the bigger markets, but they run about half the rent. So really in terms of profitability, the two stores are about the same, but they do locker run lower metrics. They run higher net operating margins for the most part. So we tend to find them in a lot of the smaller markets. We are kind of like the store of destination because there's not a lot of shopping in these markets. So we draw from a much wider area our studies show than we do from the larger market stores.

Okay. Great. Thanks and good luck with all of your initiatives.

Lauren Levitan, Cowen & Co.

Scott, I was wondering if you could reflect on some of the fashion issues that you referred to in the core Chico's brand in the first quarter? I know you said that it is your belief that this is not a rejection from customers or a competitive issue. Can you give a sense of what kind of customer research or anecdotal information you're getting from customers or themes in the Passport trend that build your confidence that that is the case?

Related to that, could you also give us some sense of how the progress -- why kind of progress you're making in terms of shifting the age of the customer base for core Chico's?

And then separately, just quickly could you clarify, Charlie, what you were saying on the new $100 million repurchase program in terms of whether or not that is incorporated into your guidance for '06, or I think you should we should think about that as more of an '07 event?

And then finally, if you could just update us on how we should think about the cash potential associated with the land you purchased for what you thought would have been the move for the headquarters?

I will start first, and then I will let Scott chime in on the other part. But for the land that we bought, we are still evaluating that. That land is going up so fast, we cannot stay on top of it. So we're in no rush to sell that 105 acres because it just seems to go up and up and up. So we are not going to rush to the exits for whatever that is going to produce. But in the long run, we're probably going to sell it, I would think. (multiple speakers)

We're really trying to maximize the shareholder value with an exit strategy on the land loan, and I met with some County officials yesterday. Again, we're just going to take our time and make sure we get the most we can for that property. Now then jumping back to (multiple speakers) you go ahead on that.

Okay. The stock repurchase plan, yes, that 100 million, I don't think we are going to go as quickly on that 100 million repurchase plan as we did on the first one. We may, but right now I'm not planning to move as quickly. But yes, it is built into our guidance. It won't have much impact. We have not even started it yet, and we are already through May of the first quarter -- through May of the second quarter. So it's not going to have much impact on the second quarter at all, and it will have a small impact on the third and fourth. But those two combined will start affecting '07, and that is built into my '07 as well.

And I know you completed -- the last program you bought 3.1 million shares with. Can you tell us what your Q2 guidance is based on in terms of average shares?

The shares that we published on our 10-Q that you will be able to get I think is 179 million. Plus you will have to add some options in. It is down lower than it was last year. There is no doubt about that.

Okay. Because the Q1 end is prior to more activity in the prior repurchase program.

I agree, but on the face of the Q, we have got a May 22 share --(multiple speakers)

Okay. So you have got your ending number when we see the Q. Got you. Perfect. Thank you.

On the age of the customer, we ended last year with the average age of the Chico's customer being 52, and we're very comfortable with where that is right now. We are not making a big push to bring it down any younger than that. We have talked about modernizing the assortment over the last six months, but that's a very fine line. We want to be very careful there you know (technical difficulty)--.

You know, when we talk about modernizing the assortment and Scott is right, we do talk about that. That is one of our initiatives. But we still love her the way she is, and a 52-year-old does not want to look old. So that is what we talk about. We love the spirit of our assortment and the way our Chico's brand looks, but we're still targeting the same customer.

And then relevant to the first-quarter merchandise misses, I would urge you to pull the May 2 press release and read that. Where we get our feedback and we did -- one of the things we have never been really good at at Chico's and that Michael Leedy is a big fan of is consumer research. We did, however, and I think in Michael's second or third week, he got to sit in on the presentation on some customer focus groups. We got direct feedback from customers, but the best feedback we get is from the 500 plus stores. We are very close with our store staff. You know Sherry, you know Morrie, Susan Powers and those guys. The executive team travels stores on a regular basis. We are in and out of stores. Most of the merchandise feedback we get is from our store staff, and we take it very seriously. So that is really how I would respond to the question regarding the first-quarter miss.

Great. That is helpful, and thank you for the detail you provided on operating margins by business. I really appreciate it. Thank you.

Jennifer Black, Jennifer Black & Associates.

I have a few questions. I wondered if you could comment about where you feel you are now with zeroes in Chico's. It still seems as though they are low many times when you're in the stores or merchandise will sell out before the catalog even drops in that size. Can you comment on that?

Again, I think that that is one of our planning and allocation opportunities. I think that that is something that Toni Robinson is going to be able to have a pretty substantial impact on.

Okay. Great. And then I wondered one of the other things I noticed was that your advertising that you're going to do DDs reuse and DDDs in bras at Soma. I wondered how big of an opportunity that is for you? It seems that that is a market that Tracy created. It is under-served there. Can you comment on that?

Well, I mean, as Scott indicated in his opening remarks, we're not after their customer. We are after the graduate. The reality is that a segment of the population, depending on measures out there, 25 to 30%, could be classified as on the larger side. We are not going after the plus size customer. I would like to make that very clear. Lane Bryant, their (indiscernible) program focuses on that. That is not our focus.

Now we do have women who do have special needs and special sizes within the range that we are in. We have found the DDs and DDDs this year to be a very strong business for us. It is still is a small segment of the total. It is not going to be the driver of the store, and we don't yet know what the upside is to that business. As Scott indicated in the opening remarks, we have had some stockouts in bras. Those have been highly concentrated in those extended sizes. And over the next three to four months, we will be testing with infusion of inventory what the upside potential is in those sizes.

Okay. Great. And then I have one other question, and that is it seems as though the market that I am in there are a lot of stores for the size of the population. And I was curious to know if there are other areas of the country that have the same number of stores and if you just have any commentary about that both with White House/Black Market and with Chico's?

Jennifer, we're in the business of growing our earnings per share. I know that a strong barometer or metric that the market watches is comps. But if we took your market, Portland, Oregon, as an example, Lake Oswego opened in '01. In '04 it did about $4 million in sales. So we opened in Tigard in Bridgeport Village, which you're familiar with, and we did $2 million in less than a year in that store and pulled -- and so Lake Oswego negatively comped. There is no question. But we pulled almost $1 million more in gross margin dollars out of that market. So while the comp number does not look attractive, the growth in our earnings is very attractive to us. So that's a sort of microcosm of the question. Right there in Portland.

If we look at a store like Kierland Commons in Scottsdale that you guys hear so much about, it is going to do $8 million out of 3333 square feet. They won't give us any additional space. We are not going to give up that great corner in that market, so we're probably going to open another store in one of those newer developments right outside of Kierland. We may go from $8 million in Kierland down to 5 million in Kierland, but we may do another 5 or $6 million within three to five miles of Kierland. That is the right decision. It is just tough sometimes I think for the street to understand. What that speaks to in my opinion is the additional opportunity the brand has, not that we maxed out or hit a ceiling of any type.

Okay, no, I was not insinuating that. I was just trying to understand because it seems like we have a lot of stores that are close together, and I'm trying to understand how many stores can you have in a given market? Is it market by market?

Yes, we have matured a lot in that area. As the real estate department has grown in the last six or seven years for me to about a dozen people and research people and a half-dozen attorneys, we now have a research department that is doing MSA studied by market. We have gotten a lot more sophisticated at where we put our stores, how many stores we think we can open, and then we have always said that the question is not necessarily how many stores can you open, but how many should you open, which is the exact reason why strategically we were interested in the White House. And the exact reason why strategically we are interested in Soma and Fitigues because we want to make sure that when we make the decision to take our foot off the accelerator on any one specific brand, we still have enough firepower to continue to drive the growth of the business. So we are much better at analyzing our real estate opportunities on a market by market basis today than we were. That was a very good question.

All right. Thank you very much and good luck.

Robin Murchison, SunTrust Robinson-Humphrey.

Just a few questions. And this first one sort of dovetails with someone's earlier question on Soma. It may be a little bit delicate, so address it however you may. But is your average bra size, that customer with the average draw size, does it correlate -- I think your average size in the core Chico's store is a size 2. Is there a correlation generally speaking that that is who you are -- where you're going to focus the depth of the inventory?

I think it would be fair to say that we're there today to serve the Chico's customer and that our sizing coordinates with her size as expressed in innerwear.

And then if Pat is still there, a couple of questions. I noted in one of the stores here I have noticed that there was a jacket that I think the price quote was like $188. It is not on your website when you go to jackets and you high to low. Are you experimenting with price points?

Well, there again I'm not sure which store you're talking about. But we have -- (multiple speakers) okay, we have some (multiple speakers)

Actually Green Hills. Nashville Green Hills.

Okay. We have some stores in the chain that definitely can sell higher price points, and we do special buys for those stores the same way we address regional needs. We also do smaller buys in higher priced items, and I think they add to the mix. They are a flavor on top of the general assortment, and we do it throughout the year.

Okay. So it might just be specific to some stores that are not indicative of (multiple speakers)

We're not pursuing a higher average price point or a high price point in jackets. We really want a balanced assortment so that we really have more in our typical price point and then just add some cream to the top of that for certain stores.

I understand. And conversely would you be considering taking any price point down or moderating -- any moderation in any categories in -- (multiple speakers)?

We've looked at that category by category and said, where is the customer responding? What is our typical? What is our best price point? And we work on a bell curve and just say, you know, you want the most where your best price point is. So in some instances that has taken some price points down, yes.

And then just if I can have two more questions. One is relative to Fitigues. If you're going to add five stores next year, I was just wondering if you can give any color on direction in terms of styling, predominate styling and price points? And then secondly, we're hearing more companies talking about moving to quarterly comps. Any commentary on your part regarding that whether or not that is something (multiple speakers)

Why don't I answer the quality quarterly comp first, and then I will let Scott talk about Fitigues. We have talked internally about quarterly comps. We don't think the monthly comp, that the actual reporting is very healthy. We think that the investment community relies on a one month trend and portrays it out over the course of the year and that (multiple speakers)

It is hard to actually keep the long-term strategies when you're judged every 28 days.

Well, with that said, we have been on quarterly comps from '93 to '95. We're on a quarterly comp, and that was worse than being on a monthly comp. So we are right now evaluating the pros and cons on this, and we don't have any decision on this yet.

But I would tell you this, in the event that our Board -- and this would be a board decision -- that we were to decide to go to a quarterly comp for some reason, we would not tell you today that we are going to be restarting the quarterlies tomorrow. We would put it out there on the calendar in the future, so we would play into that quarterly comp reporting.

Let's see the other question was about Fitigues. The only thing that I will tell you about Fitigues, because it is so small right now, is it will be the brand with the highest price points in our portfolio, if you will. It is definitely an upper end customer, which is why we don't think that this is a 400 or 500 store chain. We think it can be meaningful to the shareholders and to the earnings growth, but it's a little early in the game to start talking about average price points and things like that. I think at about this time next year we should have our hands, our arms around the business a little bit better and start to divulge a little bit more detail for you guys.

Liz Pierce, Sanders Morris.

Congratulations. Pat, I just have maybe a couple of quick questions for you. In terms of -- could you just refresh our memory what leadtimes could average? I realize it varies probably by classification.

It absolutely depends on the category. If you're doing a great novelty jacket with hand beading, it is going to be a longer leadtime. Certain fabrications take longer to make, so it really runs the gamut. We can turnaround very quickly if we have fabric in place within 30 days, or we can go out to a full month.

Okay. And then another question for you, Pat, and maybe this gets into the territory you guys don't want to talk about. Platinum, are you willing to give us what percent of that is at this point?

I think you know the answer to that?

Yes, that is exactly what we are going to stay away from, but I can understand why you would ask the question.

But it is doing well.

Right. It seems like it continues to expand (inaudible) in the product assortment. And I guess the other question that I had, would you ever consider doing like a platinum spinoff catalog?

You know, I think with Michael onboard, we have been already trucking around a lot of ideas, so I would not rule it out. But we have not even discussed that specifically.

I will say this. As we develop the website for Chico's, there definitely will be potential for expansions of product on the website.

Of the platinum specifically or just anything?

Anything.

Okay. And then a quick question for Charlie getting back to store economics. You have on the presentation and the slide presentation, I noticed that you have taken out the below and above, and now you're just going with a 3000.

Yes, because I did not think it was meaningful. I think the street really focused on really tying the size of the store to the volumes. It is more tied to the actual location than the size of the store. So I did not want the street -- I had seen Dave become confused that maybe a 2000 square foot store does this volume and a 3000 does this. It is really tied to where the store is located.

Right, and then I guess the question, what is the store base as it stand today? What is the average size?

For Chico's it is about 2100 feet.

2100. And then the remodels this year would bring you to what size?

Well, they are going to average we think about 1300 square foot. That is going to be an increase of 1300, so that will be across the board. We're expanding some stores that are like 1000 feet and some that are like 2000 feet. So they will all vary, but they are going to average going up about 1300 feet. That is on the Chico's side.

And you were going to do how many? I just could not remember.

It is going to be about 85% of the remodels. 80 to 85 will be Chico's, and we're going to do between 60 and 65. The balance will be White House/Black Market.

Crystal Lanigan, D.A. Davidson.

Charlie, just a couple of clarifications. It was really helpful when you give us earlier the components of the SG&A for Q1. Could you just verify, I know it was a lot of detail and you ran through it quickly, it looks like there is several components of that that won't carry forward. Would that be things like the headquarters and the SAP?

Certainly the headquarters was a onetime write-off. Those were costs that we could not carry forward that were part of the design of the building, so that was a onetime write-off. That will not happen again. We indicated we did not think the MIS was going to recur again after the first quarter. We really started the SAP installation -- the actual soft costs of that started in about the second quarter last year, and then we've got the recruiting and relocation. All these people that we have added here, they have cost us some money, and I don't think that is going to continue at the rate that it went in the first quarter. It was pretty heavy in the first quarter.

Great. That is really helpful. And then just looking -- you said your CapEx was going to come in more towards the lower end of the guided range, but with the amount of store growth going on and then the changes to your plans now for the headquarters, what does that mean for depreciation? How should we be looking at that?

Well, after the third quarter, you are going to see a pretty big jump in it. If we opened, let's say, 100 stores we are talking about in the first quarter, there will be a pretty big jump in the fourth quarter. I would go back and look at it like historically. Right now I think you saw a fairly big jump from the fourth to the first quarter I think. I will have to go back and look up what that was, but I would go back and look at that jump. It will not be as big in the second and third quarter. That jump was caused by and we had to accelerate the write-off of the software we're currently using so that it's going to be written off through 2008. That was a pretty big acceleration of write-offs and depreciation there, which you have to do now that we have planned to install SAP. So there will not be a huge jump in the second or third quarters, but there will be in the fourth. I can talk to you off-line with more details on that. But I would go back and look historically how it has jumped up.

Okay. So primarily tied to store openings, headquarters are more inconsequential for depreciation?

Oh, yes, headquarters is not going to matter. Like I said, that thing is fully leased out there right now ,and we don't even need space right today, but we will by next year and we will start moving into it.

Okay. Great. Thank you. And then just finally, Scott, if you will allow Pat just to maybe broadly give us some indications on what she is seeing as far as important trends for fall?

Broadly?

As full as you can get would be wonderful.

Well, we see some continuation of our novelty. We're looking forward to an exciting season. We are very excited about holiday with some of the velvets and novelty jackets that we're working on. Tunics still going on somewhat. No real one trend sticks out. We're concentrating on key items, and we are concentrating on our gift giving. I'm trying to think what they all are. But nothing -- no one particular trend, but we're really really excited about our assortment, and we feel very well-balanced concentrating on color and fabrication. I don't have a very definitive answer for you.

Scott likes that, too.

I'm being broad.

Any additional commentary from the White House side?

Well, absolutely. We're really excited about dresses. Suiting is really important. Woven tops are really strong. We feel really excited about the skinny leg pants. Leggings. Longer tops. Dresses with the leggings. Dresses with denim. Also, outerwear is exciting, and knitwear is really a growing trend.

Thank you, everyone. Good luck.

Okay. We will just take a couple more questions.

Pauline Reader, Thomas Weisel Partners.

I just have a few questions. The first one is about May. How much or how many of the issues put way down on your first-quarter comps and the Chico's concept were still lagging into May, whether it be the color or just the Northern/Southern issue or anything else? And then I will start with that, and then I will follow-up with some other questions.

Well, it is hard to quantify in exact numbers, but I will tell you that again we're comfortable with forecasts of mid single digits, and May is not very far off of that.

Did you start with -- how much -- when did the summer merchandise hit, and was there any similarity to it versus what you had in April?

Well, we float product, and we float product everyday. We are transitioning our business the entire month of April and the entire month of May. So while there was some carryover from the first quarter, some of the things that are driving our business were not in the stores in April.

Okay. Thanks. The other two question is, the first one, have you looked at how a class of Passport members is behaving if that has changed? I will give you an example. What I mean is, did the first-year Passport members in 2005, are they spending similar amounts as the first-year Passport members did a few years ago, second-year members if they are spending differently than a second-year a member a few years ago and so on and so on, or have the trends been consistent?

I get more reports from the marketing department than any other department right now, and (multiple speakers) yes, we have looked at that, and we have poured over that. We see a very distinct pattern. They spend the most money in the first year. They drop off pretty hard in the second year. It does not matter whether it is '99 or 2000 or 2001, it is very stable, a very stable pattern. And then we have learned that by year five, they are back up to the year-one spending. That really shocked us. So it is a very stable pattern.

But are the fifth-year members that were fifth year in 2005, are they behaving differently than fifth-year members did in 2004?

We have not seen that.

Okay. And then the other question is, obviously some stores are comping well above the average and some well below. Apart from the Northern/Southern idea you talked about and maybe some cannibalization, is there any other theme that you can see for stores that consistently comp above the average and stores that consistently comp below the average?

No, there is nothing -- North/South is the biggest theme.

Yes, there is nothing else that jumps out off any of the reports that would suggest that there is anything else going on.

Christine Chen, Pacific Growth.

I think almost all of my questions have been answered, so I just have an easy housekeeping one. Maybe I missed it. What was your ending square footage?

That is on the website. I think it is 1 million 5, isn't it, Michael? He is looking it up right now, but it is right on our website. 1 million 551, I believe. Okay. And that is right on our website. You can look back about six years at our square footage growth by quarter on our website. Okay?

I believe that was the last questions, so we thank you all for attending this rather long conference. We will see you for the second-quarter conference in about 90 days. Thanks.

This does conclude today's teleconference. You may disconnect at this time.