Chico's FAS Inc (CHS) 2006 Q2 法說會逐字稿

Good day and welcome to today's teleconference. At this time all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A session. Please note this call may be recorded. I will now turn the program over to Michael Smith. You may go ahead.

Welcome to Chico's FAS Inc. second-quarter earnings call. With us today we have Scott Edmonds, our President and CEO, and Charlie Clemens, our CFO. Prior to the call beginning I'd like to read our Safe Harbor statement. Certain statements in the slideshow including those addressing the Company's beliefs, plans, objectives, estimates or expectations of possible future results or events are forward-looking statements. They are based on the assumptions, beliefs and expectations of our management team as of the date this presentation was prepared.

Forward-looking statements involve known or unknown risks including general economic and business conditions and conditions in the specialty retail industry. Forward-looking statements may also be affected if our assumptions turn out to be inaccurate. Consequently no forward-looking statement can be guaranteed and actual future results, performance or achievements may vary materially from those expressed or implied by such forward-looking statements.

For additional information concerning other factors that may affect the Company's current and future business results of operations and financial condition, we suggest you review the Company's latest annual report on Form 10-K and other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update the forward-looking statements to reflect events or circumstances that may arise after the date hereof. Now I'd like to introduce Scott Edmonds, our President and CEO.

Thanks Michael and thanks to everyone for attending our second-quarter fiscal '06 conference call. Our net sales for the second quarter ended July 29, 2006 increased 18% to a record $405 million from $343 million for the second quarter ended July 30, 2005. Net income rose to $54 million or $0.30 per diluted share compared to net income of $49 million or $0.27 per diluted share in the prior year's second quarter. The effect of stock compensation expense for the second quarter of fiscal 2006 was approximately $3 million or $0.02 per diluted share.

Comparable store sales for the 13 week period ended July 29, 2006 increased 5.7%. For the quarter the Chico's brand same-store sales increased 3% while White House/Black Market increased by 19%. While we are pleased to report that the Company once again produced record sales and profit for the quarter, we are not satisfied with the Company's execution of its 2006 business plan on the Chico's brand. We have not realized the level of same-store sales in the Chico's brand that we originally anticipated and it appears we are facing our first negative same-store sales results in over nine years.

August is a disappointment to all of us. We believe the same-store sales decline is due to a combination of factors including the lack of wear now merchandise in our stores, a reduction in overall store traffic, and a preplanned marketing effort that did not inspire our customer to shop. The August catalog that arrived in homes the last week of July was created prior to the arrival of our new Chief Marketing Officer, Michael Leedy. It was too dark and uninspiring at best.

However, the September book began arriving this week and includes some of Michael's initial concepts including the Chico's hotlist, the integral part of coordinated marketing and promotional approach. We are excited about the creativity that Michael is bringing to our marketing and promotional activities and anticipate updating you with further news on this in the future.

While we are aggressively implementing short-term initiatives we are committed to our long-term strategy. Given these trends and other factors we are lowering our same-store sales expectations for the Chico's brand and consequently our future operating margin expectations for the next four quarters. Still however -- we still, however, anticipate our operating margin will remain one of the best in the industry.

With respect to our other brands, White House/Black Market continues to perform very well with gains driven by strong comp growth and new store openings. Margins and average transaction amounts continue to increase as well -- tangible indications of the success of our investment in the White House/Black Market brand. As we continue to develop this brand, our Black Book sign ups are increasing at a much faster rate than the Passport club. Beginning with the November catalog White House/Black Market will adopt a new compelling and distinctive image.

The Soma by Chico's intimates business continues to improve. Although there are only ten stores in the base, some have recorded positive comp store sales in the quarter. We've begun testing local marketing around grand openings and these local marketing efforts have yielded considerable success and will be expanded in the fall. We continue to see strong repeat bra purchases. The summer productline will further benefit from the launch of a new bra collection in the fall, continued refinement of the sleepwear and activewear assortments and a revamped panty program in the holiday period.

Substantial progress has been made consolidating Fitigues into the Chico's FAS infrastructure. Key activities include upgrading systems, store management, logistics and supply chain. Additions will be made to design a merchandising staff in preparation for adding a limited number of stores in 2007.

In order to fully assess our current business and our future prospects it is important to examine Chico's FAS within the context of the business strategy we have been executing for three years. For a number of years the Chico's brand enjoyed strong double-digit growth in sales and profitability as we rolled out stores and introduced millions of women to a spectacular productline and our most amazing personal service.

In 2003 management and the Board of Directors adopted a strategy to develop a portfolio of strong specialty retail brands targeted to high-income female consumers. The White House/Black Market and Fitigues acquisitions and the entry into the intimates category with internally developed Soma by Chico's brand were carefully crafted executions of our portfolio strategy.

White House/Black Market has done a spectacular success story allowing us to leverage the Chico's balance sheet and infrastructure to rapidly realize the growth and profitability potential of this brand. Likewise with Soma we have leveraged our Chico's brand and company asset to successfully enter a particularly challenging product category with the potential for strong growth and profit expansion with the added advantage of significant barriers to competitive entry.

Fitigues adds dimension to our business with another underdeveloped brand having significant growth and leverage opportunity without cannibalization of our other brands. Simply put, we believe our strategy is working. White House/Black Market's store expansion and comp store growth have helped offset slowing of the Chico's growth rate. White House sales and margin growth remain strong, contributing to a 20% plus operating margin in the second quarter. Soma is on track to be profitable in 2008 and contribute meaningfully to sales and profitability in 2009 and beyond. Fitigues is also being positioned to be a strong growth vehicle by 2009-2010.

Supporting the growth of existing brands is fueling the development of new accelerated growth brands requires significant financial investment. New brands such as Soma are a drain on the P&L in the early years because the sales volume and margins do not support the dedicated brand merchandising team and rapid store rollouts result in significant store startup costs being absorbed in the early years. In 2006 we are increasing the Soma store count by 3.5 times with most of these stores and the associated start-up cost occurring in the second half.

None of our other brands were developed at such a dramatic rate, but the economics of the intimates business are much more favorable at a store count over 100 than they are today. Soma investment can be expected to negatively impact the P&L for the next two years until the base business volume is large enough to support its own expansion and higher margins. A similar situation can be expected as we begin to rollout Fitigues since the brand will be expanding off a very small store base of ten stores.

Management and the Board remain convinced of the soundness of our long-term brand portfolio strategy. In reviewing the current environment we have determined the best action we can take for our shareholders is to support the long-term growth of the business by continuing to fund investment in our brands and infrastructure so that we can build a model that supports long-term earnings growth.

On Wednesday, August 23rd we announced the addition of Michele Delahunty Cloutier to Chico's as the Executive Vice President of Merchandising. Michelle will report directly to Pat Murphy Kerstein, our Chief Merchandising Officer for the Chico's brand. Michelle will be responsible for overseeing and directing all merchandising activities for the Chico's brand as well as the planning and allocation function.

Michelle joins Ms. Toni Robinson, Senior Vice President of Planning and Allocation, and Michael Leedy, Chief Marketing Officer, as the most recent additions to Chico's senior management team. These executives bring significant talent and a fresh perspective and I expect each of them will make a significant contribution to our future performance. In closing, all of us at Chico's understand that our past success is just that, in the past, and we do not intend to rest on our past success. Our job is to focus on driving strong earnings growth in the future. Charlie?

Thanks, Scott and good morning, everyone, as we hold our first morning conference call since the late 1990s when we were trying to stand out in a sea of many, many calls. Today this type of conference call is much more common, but we've changed this call from a late afternoon call to a morning call at your request. We heard that you wanted more time to digest our release and we heard that you wanted a much shorter call with less opening remarks so that you will get.

I'd still like to welcome you, though, to our second-quarter conference call for fiscal 2006, our 54th call like this since going public in 1993. But before I get to the quarter, the guidance and all of that, I'd like to thank all of the dedicated associates that have helped produce one of the longest, if not the longest, run of positive same-store sales in retail history.

Since February of 1997 the Chico's brand and the Chico's consolidated brands have put up a positive comp for every one of those 113 straight months, the bulk of which were actually double-digit comps. This has not been done by one person or even a handful of people but rather a family of associates who have been committed to our cause and who put in dedication beyond the norm and who put up with a lot of set backs along the way.

In February of 1997 after several tough repositioning years, and by the way that's the year that this run of comps began, we had just under 1,000 employees and today, nine plus years later, we have just over 12,000 employees in a family of brands that we still refer to as Chico's, although we haven't really sold White House/Black Market on this concept quite yet. Amazingly enough though, we have over 10% of those 1997 employees still working here as 135 employees are to be congratulated for being here for the entire marathon.

I thank all 135 of you for all that you've done to help us with this remarkable run. All things must come to an end though, as they have this month, but personally I am looking forward to the next marathon as I think the run we just completed might have only been the warm-up.

Although we are experiencing a negative same-store sales month along with several lower than expected months prior to this, do not think we are simply accepting this. The Chico's growth is not over, I assure you. These calls, although designed to assist the Street with a complex analysis they have to perform -- and I know how tough this is -- are also listened to by our associates. And the tribute I just did is for those 135 people that worked with our incredible management team to accomplish everything that we did over those nine years. Thank you.

Now let's get back to the quarter review. Despite a second quarter of comps that have not lived up to our or your expectations, we managed to have another quarter with solid sales and earnings growth and was one of the top operating margins in the industry. During this quarter we also completed our second stock buyback plan which effectively reduced the number of shares outstanding and benefited the rest of the shareholders by slightly improving earnings.

Further, we held a lid on any excess spending to improve our year-over-year earnings even after the reductions cause by the new compensation expensing requirements. Today I'm spending little or no time reviewing all those numbers in the release, but I will emphasize some of the more important ones in the press release and the 10-Q which we filed last night.

As Scott indicated, we've looked at the level of our investments in new brands from a strategic perspective, we've analyzed the potential costs associated with our move to a multi branded retailer and the complexities involved with that move, and we've concluded that in hindsight we need to reinvest more of our operating margin back into our core brand, Chico's, and into our overall shared services costs to assure we produce the best operating margin that makes sense for the future.

Although we have downgraded our future operating margin expectations, these expectations are still that we will produce one of the top operating margins in the specialty apparel industry and we will do this for many years to come. With that said, we evaluated what type of investment this might consist of, how much and for how long it might affect our earnings and margins and we forecast the impact of this for you in the press release based on certain comp assumptions that are relative to recent business trends.

The estimated earnings and operating margins for the rest of this year and our initial estimates for these values for next year take into account these investments and their associated costs. This combined with a conservative forward view for our same-store sales is what is driving the difference between our estimates provided on our first-quarter call and our current estimates.

We of course are not satisfied with those results and we will strive to beat those numbers, but we wanted to let the Street know what we thought could be a so-called worst-case during this repositioning to a growth oriented, multi-branded retailer that is shifting to store footprints that are somewhat larger to accommodate our outstanding sales per square foot numbers.

At the same time that we are executing the above discussed plan -- number one, we plan to invest in our store payroll to elevate the level of our customer service; number two, we plan to continue to beef up the Chico's side of product development and merchandise management in a manner as you saw in the press release yesterday; and number three, we plan to move all of our brands to the more scalable SAP software package over the next several years.

Within the forecasted earnings and operating margin amounts you can expect to see gross margin declines slightly ahead of the previous range of 40 to 80 basis points we discussed on the last quarterly call for the third and fourth quarter of this year largely due to the lower same-store sales estimates combined with our continuing investment in merchandising. This gross margin decrease will moderate somewhat next year especially as we move through the year.

On the SG&A side we expect to see fairly significant deleverage for the rest of this year, again, largely due to the lowered same-store sales forecast for the rest of the year as well as our store payroll reinvestment. In the first two quarters of next year we expect again to see moderating SG&A deleverage with leverage expected to begin in the back half of the year as the anniversary the huge store opening program of this year, a significant increase to larger stores for Chico's and White House/Black Market in fiscal 2006, and the mix change caused by the shift in brand emphasis from Chico's to our younger brands.

The concept of improving operating margins in the back half of next year should not be new to most of you as we've talked about this on several earlier conference calls and at numerous conferences over the last half year. We have not talked about a slowdown in the Chico's brand comps on these calls and, after the August same-store sales performance; we've decided to lower our guidance in this area which reduces most of the metrics.

We have indicated many times we would reevaluate our same-store sales guidance after we saw the August results and we are doing that now. With all that said I have not changed my view of the turn in operating margin that I still see coming mid next year, nor have I lost any confidence in our ability to operate one of the most profitable multi-branded specialty apparel chains in America.

Stepping back though, when I look at our estimates for operating margins and earnings growth in this year of repositioning I'm very proud to say that the estimates we provided and we believe in are still at or near the top of operating margins in the specialty retail arena with a midpoint earnings growth rate of 13% before options change this year and 18% next year. These new estimates of lowered operating margins should allow us to reinvest in our brands, reposition the Company for stronger future growth, and yet still provide extremely strong cash flows with solid earnings and revenue growth for an extended time.

So to summarize our view for the next four quarters and beyond -- we see declining operating margins through the first half of next year with moderating to improving operating margins in the back half of next year and beyond as we complete the toughest part of our move to a multi-branded retailer as we complete some required infrastructure initiatives including SAP as part of that group and as we complete our reinvestment in our core brand.

Next a note on the balance sheet and cash flow and then we'll open it up for questions. First, the balance sheet. Our balance sheet remains very strong as we entered the second quarter with just over $0.25 billion in cash and marketable securities after buying back 200 million of stock this year and acquiring the 22 acres adjacent to our property for approximately $26 million. We have no large planned capital expenditures coming until we begin construction on the expansion of our distribution center which we described in the 10-Q filed last night and we expect cash flow to remain very strong for the remainder of this year, next year and in the future.

Regarding our distribution expansion slated for opening in fiscal 2008, we'll get back to you with a CapEx figure at or near year end. Further, we currently have no large headquarters CapEx planned for this fiscal year and we are evaluating how much space and what types, if any, of refurbishments we need to do to the existing buildings; although we do not think it will be a significant CapEx event.

We end the quarter with a solid and fresh inventory that comes in at $68 per square foot, up somewhat from last year's second-quarter level of $59 per square foot. Although this increase is higher than our sales increase since that period we are pleased with this level of inventory as most of the increase in dollars per square foot was caused by an artificial spike in the inventory dollars in preparation for a very large third-quarter store opening and expansion program.

We've got 22 new stores opened already this quarter, that's two more since the press release hit last night by the way, and eight expansion relocations so far this quarter, that's also another relocation since the press release last night. The increase is also tied to an expanded ocean shipping program which adds to our new inventory in transit, but also enhances our merchandise margins and it's also tied to our increased investment in direct to consumer sales for all four brands as we pursue aggressively expanding this area.

For future guidance you should expect more moderated increases in the inventory per square foot as we continue rolling out Soma stores which are SKU intensive and run a higher inventory per square foot and as we continue with our push into direct to consumers since that is cyberspace with essentially no square footage.

Back to cash flow for a minute. Our cash flow from operations generated just over $140 million this year versus just over $128 million last year, a solid 10% increase even though the accounting regulations do not allow us to restate the last year to be comparable. The lack of ability to reformat last year to account for the switch and how we must account for tax benefit for stock options is kind of amazing to me; but if you were to do this correction you'd see the cash flow from operating activities actually increased an even more solid 23% on a true comparable year-over-year basis.

To wrap up I again want to thank all the employees, vendors, suppliers and other people associated with Chico's that helped us on our incredible 113-month run of positive same-store sales. We have always viewed our approach to the business as long-term in nature and we're ready to set this company up for another marathon of strong growth in earnings for many, many years. As Scott said though, we realize we will have to show you that we can make the estimates we laid out for you and we realize that there will be many challenges along the way.

But we all must realize that we are still producing very profitable stores with enviable store economics, enviable consolidated profit margins and solid cash flows and we intend on improving these margins in the future. Thanks for being with us on our second-quarter fiscal 2006 conference call and now we'll take some questions. Nathan?

(OPERATOR INSTRUCTIONS). Jeff Black, Lehman Brothers.

I guess I had a question on the investments we're making in the store expansions. I mean it looks like they weighed a pretty significant amount on the operating margin in the quarter, yet if we look at your 10-Q and what you say about comps we're getting a very modest 1% plus impact on a comp store basis from the expansion. So are they tracking in line from a cost perspective from where you had originally talked about and do we feel like we're getting the bang for the buck for the store expansion program and what really leads us to the conclusion that this can be a worthwhile return on investment? Thanks.

The store expansion program has not really got going yet this year, so no, it did not weigh on our quarterly results and so far this year it has not had a big impact on our comps. We've got the bulk of our store expansions are coming in the third quarter that's built into our estimates and it will weigh quite hard on the earnings for the third and fourth quarters, but it has not really got going yet.

What we've seen with the store expansions -- I believe we did 35 or so last year -- is that we generally see about a 20% pop in sales immediately upon the expansions which generally costs somewhat less than a new store. So they pay off much quicker than a new store and they allow the stores to grow for several years to come. They are extremely profitable. We've tracked them all and they are extremely profitable in the short and long runs, but they're mostly coming this quarter. I hope that answers it.

And on the cost side of the equation, are these expansions running in line or is that an area where we've also seen an uptick in costs versus what you planned?

They're right in line where we planned, we know what it cost per square foot to expand and/or relocate them and they are right in line. They are not ahead. We have not done that many this year. There are a lot coming in the third and fourth quarters, as we indicated in our 10-Q though, and they will improve sales for next year. That's part of the reason you're seeing that turn by next year on the operating margin. We're going to have a ton of larger stores that can do more volume in them by that time. There's a little bit of pain as you're doing that, but it's a very smart move for us.

All right, thanks. Good luck.

Kimberly Greenberger, Citigroup.

Good morning. Scott, I was opening you could talk a little bit about the change for this new marketing event you ran here in August, what was disappointing about it in your view? And did you in any way change the couponing that you did here in August relative to last year? Thanks.

We had one less coupon out there in August this year than we did last year I believe, Kimberly. The fall preview sale -- when the book hit -- the August book hit the fourth week of July we didn't see the pop that we'd like to see. And I think if you went back and listened to Charlie's sales call, the fourth week was one of our worst weeks in July if not the worst week.

And so we were concerned then that we weren't seeing the response to the book and the merchandise and so we -- and again, a lot of this thought process was driven by Mike Leedy and that was -- okay, if we don't see the response what are we going to with this fall merchandise. And so we created this fall preview event and sort of put it on the desktop, if you will, waiting to see whether or not we needed to execute it. And when we didn't see the performance that we had hoped to see in early August we then rolled out the fall preview sale.

It wasn't an event that we planned back in the spring or something like that; it was really an event that -- it was a reaction to the poor performing book in late July and early August.

Was it too late to reinstate that incremental coupon that you had eliminated in August?

One thing we would like to do is try to wean her a little bit off some of these coupons. We feel like we've just couponed her to death over the years. And what really needs to drive her into the store is a compelling merchandise offer. That's what really needs to drive her into the store. So you're going to see I think with Mike Leedy and with Toni Robinson and where we are today relevant to that -- we're going to really try to focus on the merchandising and the overall quality of the store service and the overall quality of the marketing effort to drive our customers into the stores, not necessarily when we aren't seeing business we automatically send her a coupon. We think that we need to try to get off of that.

And as we look into the next six months, how does your marketing plan this year line up with last year?

Michael has been here since April -- April 3rd I think it was. He has really been trying to get his arms around his department, the quality of his people, this September book that is hitting right now that has Ann on the front in that wrap and has the 12 hotlist items is the first impact he's had really on the imagery at all. He is looking at the back half relevant to the television spend, relative to the prospecting spend and things like that and I don't think you're going to see a like back half marketing effort.

But with that being said, I don't know exactly what we're going to do in the -- also considering current trends we may make some adjustments in the fourth quarter to our marketing effort. I think the days of looking at our business, Kimberly, of last year the first week of September they dropped the book and they were 50% off one item, this year they're going to do the same thing -- those days are behind us. We need to get a lot more creative in our marketing.

So you're going to be depending on improved product in the catalogs to bring the customer into the store?

We're going to continue to market, there's no question, but we may take a different approach to marketing and the cadence may be different. We're going to have a tremendous amount -- put a tremendous amount of effort into the catalog and maybe the reimaging, but we've never done a great job with our windows and we have over 200,000 linear feet of windows out there. And we spend all this money on prospecting and television to try to get a new customer in the door.

I think maybe we need to focus a lot more effort on the 200,000 linear feet of billboard that we have and make her turn left in the mall or in the strip center and come into the door versus paying all of this money to try to educate a customer on our brand and have her get off her couch and drive all the way to the center. We're going to focus a lot more on trying to get the people that are already there to come see our store.

That makes sense. I just wonder, Scott, if Chico's isn't really like a teen retailer where teenagers are hanging out in the mall and you can really impact your traffic by improving the windows. I just don't know that the 51-year-old woman is hanging out in the mall the way the teenagers are. She sort of needs an incentive; it would seem to me, to get into the car and bother to drive to the mall. Anyway, I'll just share that with you.

I would agree with that, Kimberly, totally. But it's not like we're going to do all of one and none of the other. It's really a combination of improving the imagery in our catalogs, being a little more focused on who they go to and how we excite them and combined with a lot more effort on our windows. It's just -- I cannot tell you how refreshing it is to have a new perspective and a new thought process on the marketing approach to all of our brands.

Thanks, Scott.

Thank you, Kimberly.

Lorraine Maikis, Merrill Lynch.

Good morning. Can you just talk a little bit about what analysis you've done and how you've gotten comfort that Chico's comps will turn positive for the second half of this year?

When we look at our business and we do a bottoms-up plan -- and again, we're fortunate enough to have Toni Robinson on board which she clearly is the brightest mind we've ever had in Fort Myers relative to planning and allocation -- and we do a bottoms-up plan we have confidence that we can deliver on the new comps that we've laid out in the press release. With that being said, comp guidance is not science, it's art.

It will all depend on the quality of our merchandise offer and that's why we know we have to deliver results, that's what we have to do. The comp guidance that we gave you is a conservative comp guidance that we believe based on Toni Robinson's analysis from bottom up and combined with what we know we're going to do from a marketing approach and store service approach it is a conservative estimate of what we firmly believe we can accomplish.

And just a follow-up quickly on that. Is there a point either in your comps or your revenue growth where you would reconsider your store opening for Chico's for the next couple of years, maybe pull back a bit?

There may be but we haven't seen it yet.

Okay, thank you.

Neely Tamminga, Piper Jaffray.

Scott, I was just wondering if you can just help us further understand some of this. Obviously you guys in your past success has been very much predicated on two things, penetrating the wardrobe of your core consumer who has gone to you month after month after month and found things successfully. But then also a gold standard of new customer acquisition that has really been driven by this catalog and the Passport program.

And I'm just wondering -- one, what have the trends been on either one of those components that's causing maybe this kind of about-face a little bit or this pause to refresh? And how is that shaping the way you guys are spending your capital? I'm just trying to understand what you guys are seeing in terms of is it just simply a fashion miss or is it in fact you've hit kind of a maturity on prospecting for customers?

We think that our current level of business is being driven primarily by a lack of exciting new merchandise and a staleness in our marketing. That's what we think our current business trends are being driven off of. We don't see any market change in the Passport sign up rate and that type of thing, Neely, so I wouldn't get too focused on that. If you look at our books -- if you go pull our books from five years and you them and look at the book that went in July, there's not much difference. After a while it starts to look like wallpaper.

And we just have to -- we should have to spend as much time and effort on revitalizing our marketing effort and our Passport program as we do on our merchandise. And based on what we saw in late July and now in early August we are doing an entire deep dive review of all of our forward receipts. We are playing off of what's selling now and trying to bring some of that merchandise back in if it's seasonally correct if you will or appropriate. We are canceling receipts on some of the stuff that's not performing. We're doing a full review of late fall and all of holiday. We're focused -- just have a tremendous focus on improving the merchandise.

Michael is not here, he is at a photo shoot as we speak and you're going to see -- I did say on the call, Neely, that you're going to see an entire new approach to the White House imagery, if you will, in the holiday catalog and you're going to see the same thing in Chico's. Come holiday the books will not look like they look like now. And we're excited to see what that does to invigorate our customer and we're excited to see what we can deliver with a full review of all of our merchandise receipts.

But as we've been saying on the call since we dialed in at 8:30, we know we're in a "show me" mode. We have to show each other and show the investment community that we can correct this and deliver and that's where all of our focus is.

Congratulations, or I guess best of luck. But also in terms of Lece Lohr, can you please give us an update as to whether or not she's still with the Company?

Lece an absolute committed executive. She is an outstanding performer. Charlie and Michael spend a lot more time on the Street and they say there's some chatter on the Street that a lot of this is Lece driven. That's really not a fair comment. Lece is the Senior Vice President, General Merchandising Manager over a $1 billion business. She does an incredible job, she's a great partner and she's not going anywhere.

She is excited to have Michelle come in. Michel spent ten years in the GAAP organization specifically a lot of time at Banana and learned an awful lot from Jean Jackson and that group. She is an outstanding new talent and we are all excited to have Michelle join the business. Lece Lohr is not going anywhere.

Best of luck.

Thank you very much, Neely.

Brian Tunick, JPMorgan.

Thanks. A couple of questions. I guess the really heart of it is the traffic issue at Chico's. I guess maybe Scott, if you could talk about where there any regional differences like you saw in the first quarter between the northern and southern stores? Secondly, maybe Charlie could break out the comp between traffic and AUR at core Chico's. And then finally, just on the store service approach, are you saying to us that you're going to be adding payroll hours or is there going to be training? What exactly are you going to do? You already are known for having some of the best customer service on the Street.

Good questions. As far as the traffic being different regionally -- no, we have not seen a big difference in traffic from the north to the south or from the east to the west, Brian. And as far as the store payroll, we believe that we have under funded the store payroll really as a result of new legislation out in California required us to take all of our store managers and assistant managers from salary to hourly. And we made that shift back in late '05. And we've tried to manage our payroll as a percent of sales to the same number with our staff being on hourly and not on salary and we think we squeezed stores a little too much.

So as Charlie indicated, we're throwing 40 basis points back at store payroll. And thank you for the comment on service. What we want to do is make sure that we protect that because it is a part of the DNA of our company and part of our past success has been excellent store service. And so we just have to assure that we continue to deliver that.

Regarding the average transaction versus traffic, we'll post that next Thursday for you, but certainly we have seen a decline in the number of transactions during August, there's no doubt about that and the price points really haven't changed much. We don't expect large increases in price points for this fall as we saw large increases last fall.

Thanks, good luck.

Gabrielle Kivitz, Deutsche Bank.

Two questions. First on White House/Black Market, you had such robust performance the past couple of years there and it's really remarkable to see the sales per square foot productivity for White House has really come up to Chico's levels which is among the highest in the industry. You seem quite confident that the White House business can keep putting up very strong comp increases despite the high productivity. Can you just help us understand what you're seeing in that business that supports the confidence?

That's the size of the store. We opened this year -- let me step back. When the first acquired White House the average store was 1,100 square feet. We've expanded it somewhat, probably a little slower than we should have, but the average store at the beginning of this year was 1,450 net selling feet. The stores we're opening this year are roughly 2,300, the ones last year are 1,800 -- those stores are not doing $1100 per square foot and those are the stores that are going to drive it in the future.

There were only 103 White Houses on the day we acquired them. We've been expanding them rapidly, that's why we hope to drive that number down over time. And we hope that that is what is going to drive their comps in the long run and we've got a Black Book which is new and there's a lot of new marketing efforts we've just done with that brand. That brand is a very young brand compared to Chico's; that's why we think -- although you can see we've scaled back our expectations somewhat there on our press release.

Gabrielle, did you get the September White House book yet?

I did.

Did you notice if you look at it -- Manhattan moments, for the first time -- I mean like if you turn to the inside page or first couple pages the name of the item she's wearing is the Hudson Hoodie and the Brownstone Bracelet. For the first time in the history of our company there is a great synergy between the marketing group and the merchandising group and that is the first hint of that that you've seen and we think that that is going to pay some pretty strong dividends down the line.

Great. Well, the product is definitely great so that's wonderful. And then second question was, if you could just talk a little bit more about the investments that you're making at the Chico's brand. Just to look at the downside here, downside protection; is there a point at which you would decide to pull back on some of those investments? If comps continue to be negative throughout this quarter and maybe into next quarter, would you reconsider some of those spending increases?

I think we would have to see a continuing deterioration in our comp performance before we would cut any of the muscle in the business to tell you the truth. One of the ways we were able to make the second quarter and we are continuing intense expense control is really controlling our expenses. We have an incredible balance sheet and we do not want to forego long-term strategic initiatives just to make the next quarter or two. We don't believe we need to do that. I think someone a little earlier asked about slowing down the store opening pace. We currently have no plans to pull back on any of our long-term initiatives right now including store openings, investment in product development areas, SAP, all of the above, Gabrielle. But that is where we are today.

We don't know what is the economy going to look like in 120 days? What is going to happen with the business 180 days from now? So we will continue to monitor that, and we have a very strong Board of Directors and we meet quarterly. And if in one of those meetings we conclude that we need to make some sort of strategic change, you guys will be the first to know.

Great, and good luck for the second half of the year. Thanks.

Adrienne Tennant, Friedman Billings.

A quick question on the fall preview merchandise is that you said that particular promotional event didn't work. What is happening with that merchandise now? Have you worked through it and should we expect to see a lot more markdown in the stores over the next quarter?

Secondly, on the store payroll can you give us any indication of how much more investment is going in, in terms of store payroll dollars and where the SG&A breakeven might be Q3, Q4 and then for '07? Thank you.

The investment back into payroll is the 40 basis points that we have been referring to. The fall preseason sale focused on platinum denim jackets and denim vests, platinum pants, debut sweaters, some mocks. And we are seeing good sell-through on our markdowns right now, but we did miss our plan. We are running six comp negative at Chico's right now, and that certainly wasn't our plan. So you may see some of heavier markdowns depending on where the business trends from this point forward.

Can you give a little more color on is it top specific, bottom specific, is it category, or do you think it is price point? Just any more color on that.

As we indicated on the first-quarter conference call, we're going to try to stay away from the specifics because we know that a lot of our good friends that we call competitors are listening as well. We're going to try to say away from the specifics. So I will share with you some of the categories, but that is about it.

Then just kind of a follow -- sorry, can you go over the breakeven comp?

Well, we're not really going to go over a breakeven comp. I stopped that several quarters ago. The third quarter is certainly a breakeven comp that we can't make; it is going to deleverage. There is no doubt no matter what comp you put on the board, it's going to deleverage with the huge store opening an expansion program we've got going on. I think we have said that all along too, so that is not a shock. It is going to be 40 basis points higher in terms of payroll for at least the third quarter.

We don't think we have to make as large of an investment in the fourth quarter because we our anniversarying that switch from hourly to salary where we did deleverage quite hard last year. But for at least the next quarter we're going to reinvest in payroll and see what that does to our sales. We're just started this program now.

Just another question, on the ocean, how much of that is -- you've moved from air to ocean? What's the target on that and does that in any way impact your ability to be fresh?

No, we're really only putting stuff on the ocean that we get far enough ahead on and are more basics than the real novelty. And what was the other question, Charlie?

I think she wanted to know how much -- that's up -- I believe about 10% more of our product is now on the ocean. And as Scott said, it's the basics that we can plan and we have time to plan. Like the travelers for example would be an example of that. So we're getting better at now future planning for our more basics or core items, not our novelty items.

Great, thanks so much and good luck.

Tracy Kogan, Credit Suisse.

You guys have talked about competition being a possible reason for the slowdown in the first half. First, where do you see more of your competition coming from, specialty stores or department stores? And what do you believe these competitors are doing differently that's winning more consumers? And then lastly, can you just remind us how your stores do when a Coldwater Creek store opens in the same mall? Thanks.

When a Coldwater Creek store opens in the mall -- we did a study about I think eight to ten weeks ago, a little longer than that maybe, and we saw that they had a negative impact, a slight impact immediately, but within a couple months we generally pop back up to what we were running at before they opened.

We are doing a lot more forensic research on our competition today than we've ever done. In hindsight maybe we didn't take some of our competition as serious as we should have. And so I'm not going to spend a lot of time on sharing with this group what we have found out about our competition, but I will tell you, Tracy, that we probably spend as much or more time in specialty stores and department stores as they spend at Chico's and White House.

Thank you; good luck.

Margaret Mager, Goldman Sachs.

In the release you did say that in the quarter you had a reduction in overall store traffic, but that Chico's did see an increase in average transaction amount and average unit retail. Can you just give a little more detail on how much traffic is actually trending down? And can you talk about the prospecting that you have been doing and what is the response rate there? Are you just finding that you're not able to recruit new customers to the concept the way you have been?

And quite frankly, Scott, if I listen to you over the past really six months, you added TV and didn't get the response you wanted from that, you're doing clientelling efforts in your stores and it doesn't seem to be driving traffic and you're also continuing with your catalog program and that doesn't seem to be getting response either. So it seems like it's a bit more than just a bad catalog in the most recent months that is impairing your traffic at Chico's. So if you could provide a little more depth on that that would be helpful?

And then secondly, with regard to the outlook for the third quarter and your view that you can actually achieve a positive same-store sales number for the third quarter, with the Chico's brand currently running down six what makes this the inflection point where you would actually start to trend upward again? Because again, over the past six months the trend has been a weakening one and now you would need a strengthening one to actually end up in a positive comp for the quarter? Thanks.

As far as the positive comp for the quarter, it is a new season, it is fall and I do think that we transition to fall too early, Margaret. As far as the traffic, as you were going through your commentary there and saying the television wasn't driving prospects in and clientelling wasn't driving prospects in and the new catalog hasn't been driving prospects in -- the answer is evident, it's merchandise.

We have got to -- bit it's also I think the television ads were very stale. I mean, how many times can you hear It's a Chico's Kind of Day? I didn't want to see the television add any more so I think the same is about the book. But we're in the business of merchandise and until we are able to put great, fresh, new merchandise on the floor combined with a fresh new marketing approach and continue to ensure that we have our trademark service we're going to be challenged.

We do believe the comps we put out there -- the comp guidance for third and fourth quarter, again from a bottom up and from a trending standpoint and with what we believe we're going to deliver with marketing and with some promotional activity in the store that we can get to a flat comp.

And regarding the actual transaction data for the second quarter, the average unit retail for the Chico's brand was up about 4.5% while the comps were only up 3, so that would suggest somewhere near a 2% decline in the number of transactions for the year. We think she was there, we just didn't sell her on the product.

That's a great point, Charlie, because we can do everything we can to drive traffic to the store, but we have to focus on conversion, Margaret. If we convert more people into a sale then we can offset a decline in traffic.

So you don't have any more depth of analysis around conversion and traffic, it's just a back end type calculation.

We don't have counters, we are going to put counters in a few of our stores so that we can have some hard data.

Okay. And then can you just remind me before we go to the next question, how many of the Chico's stores are in malls versus how many are not in malls?

That's on our slideshow. I believe it's 119 or something like that, it's not a very high percentage, it's less than 30%. But go right to our slideshow, it has the breakdown. In fact, Michael just gave it to me. So it's about 125 Chico's stores and 70 White House stores or 28% of our stores. We're not mall based.

Right. So aren't you even more dependent on driving traffic versus using windows?

Well, the specialty apparel centers are very much like malls. If you look at the Bell Tower, our local one here, that is essentially a mall without a roof. So most of our specialty centers are driving traffic themselves. You're right on the street front ones, you need to drive her to the store for the street fronts, but not these outdoor specialty centers. They're driving their own traffic similar to malls.

I wish you the best of luck. Your record really speaks for itself, so good luck going ahead.

See you soon.

Connie Wong, Cowen & Co.

Good morning. It is actually Lauren Levitan, thanks. Scott, I am still looking for a little bit more clarification on some of your Chico's comments. I know we have gone through a lot of this, but maybe can you give us some additional thoughts on what you were referring to when you said that the rapid growth has yielded some issues? What does that mean for your additional concept development over and above those brands that are already in the portfolio?

Also, when you talk about the short-term initiatives, should we put those into two buckets as in-store experience and marketing, or are there are other things to stimulate the businesslike promotions which I guess you did reference? Then finally, in terms of the Passport dynamics, just looking for a little bit more color on have you had the chance to dig in and see, is there any difference in their behavior between different tiers of Passport membership or permanent versus temporary that has led to the comp decline? Because it sounds like you feel comfortable that even within Q3, you can get back to positive comps based on the guidance. And I guess I'm still struggling to understand who is driving that decrease, and do you know how to identify them to affect an increase? Thanks very much.

I'm trying to rewind; that was a lot of questions. First I think was my comment on the rapid growth has yielded some issues, and when you take a business like Chico's, and the overall company obviously took 21 years to get to the first billion and take about 36 months or so to get to the second with the core brand driving an awful lot of that. When business was running double-digit comp and everybody was just working at mock speed, Lauren, I don't think we stopped as we should have and looked at just how we were structured in the Chico's core product development area. And when you look at a business like Chico's where the core brand is doing $1 billion and you look at how we are structured over there, we are very light, and I think that is causing us some issues.

We should have a senior merchant just over accessories. We should have a senior merchant just over travelers. Those categories have exploded and we have continued to manage them the same way we did five and six years ago, and I think that that is a mistake. And I think those are the type of issues that were yielded with this hyper growth that we experienced.

As far as the Passport data, we do have a new Vice President of Direct Marketing, Peter Leech. He has been with us now six or eight months. He takes a different approach to analyzing the Passport data, and we are spending more time slicing and dicing that data in trying to determine how we want to use it and how it is going to help us drive additional volume. But we're not going to share that on the conference call. What was the other --?

What are other short-term initiatives? I mean, we've already talked about how we should be looking for a different face to the marketing as well as increased store expense to increase the coverage there. But when you talked about these short-term initiatives, are there other buckets that we should be watching for that you will be using to reengage the core Chico's shopper?

There are, but a lot of them are very small, whether it is a store contest, whether it is a calling campaign where we are utilizing our call center to call certain Passport customers, things like that, along with again deep dive on our merchandise, price point review. But I don't think -- well, I can tell you, you are not going to see a postcard in your mailbox tomorrow or anything like that. We are really trying to get off some of that reactionary methodology, if you will.

When you go back to that product development piece and merchandising management piece, you have added some senior level talent. How long do you think it takes to get the organization for the heftier, more robust organization that you're saying you feel you now need? What should we be watching for and what do you think the time frame is to really develop that talent pool?

I think it is different for each person. Toni Robinson, Toni joined us back on May 15th as Senior VP of Planning and Allocation, so it is right at three months. She is beginning to have an impact. At the same time, she is going to play a major role in the SAP implementation and she is going to help drive improvements in our systems, and that is a long-term initiative.

But at the same time, she's doing a full review of our methodologies of buying, planning and allocating, and she is beginning to make some differences now. Mike Leedy has been with us since April. He is already making a difference. The September catalogs were the very first that he had any influence on. He together with our new VP of Direct Marketing are going to -- you're going to see an entire different approach to our direct business.

This catalog has been a store traffic driver since 1999, and our direct business Web and catalog is still only 3% of our total revenue and that is extremely too low. We're going to take a fresh approach on our direct business. I think you'll see new websites over the next -- within the next 6 to 12 months. You'll see an entirely different approach to our direct business. Our catalog and how it integrates with our stores and our marketing pieces. So it's just going to take a while. That's all part of and all baked into this conservative guidance that we've just given you guys.

I guess the last follow-up I have was with respect to how you approach additional concepts and where management resources will be devoted relative to the existing portfolio versus additional opportunities. Can you talk a little bit about that both for yourself and for the rest of the team now that you've identified this notion that you need to be building up even more on the product side and the core business?

Well, we're not acquisitive at all. I want to make sure I put that to bed right now. If we do anything new it's going to be a new category for Chico's -- the petites or something like that. So the management team of Chico's is focused on the core brand of Chico's. The management group under Patricia Smith's leadership is focused strictly on White House. Chuck and [Terry Mitener] our driving Soma, and Barry Shapiro and the Rosensteins are driving Fitigues and we don't see anything else coming down in line right now.

Great, thank you and good luck.

Barbara Wyckoff, Buckingham Research.

A couple questions. I see that you have made some changes in the management team and operations area such as HR. What openings do you have in senior management at this point? Are you filling these jobs internally? Have you retained a search firm, timing on replacements and impact on some of these initiatives you talked about, new people hiring? And can you talk about what specifically people will be adding in merchandising, some of the other areas, White House, (indiscernible) Fitigues?

And then I guess, Charlie, how should be view the cost of SAP? When are they going to start? How do we work them into the models? Do you have a ballpark number to start with?

The SAP side, as we have always said, we are launching it for the Soma brand first this year. Once we launch it, the software itself is in the 10 to $12 million range being amortized over seven years or so. So that you will see through depreciation starting when we launch Soma. It doesn't start, of course, until then. And that is going to be the cost for all three brands. We don't have to pay a license fee for the other brands. So there will be some integration costs that will be capitalized in the future, but they will be minor. You'll see during the third quarter probably, I will guess, $1 million of training and I will say education costs that you have to expense. We have budgeted that all along. That is nothing new.

But that is about the extent of the change to it, other than the more important one is that it does take a lot of time from a lot of people, and that is an unmeasurable cost. But that is what it is going to do. Once we get Soma up and running, we will feel much more confident about the next two brands which come behind that. So the cost side is not as significant as, let's call it, the distraction side.

As far as senior level positions opening, we only have one. That is the HR executive, and we do have a consulting firm working with us on that search currently. As far as what you're going to see at White House and Soma and Fitigues, White House, we are continuing to beef up their product design department. Their model is shifting a little bit from a buying organization to a product development and design. So we are continuing to fund that, but not at the officer level, more at the director level.

The same at Soma and Fitigues, they are really director level positions. They probably wouldn't be appropriate to talk about, but only -- HR is the only executive opening today.

Okay, thank you.

Margaret Whitfield, Ryan Beck.

Good morning. You said your comp forecast for the Q3 was based on, in part, on how things have been trending. I know comps went negative in the final week of July. I wondered if you could comment about the weekly trends at the Chico's brand during August.

We'll get to that next Thursday, Margaret. We're going to wait and see what the trend is through the end of this week and then we'll get to that because we'll publish them, as we always do, on Thursday morning.

Can you say if the trend improved as the month progressed or if in fact it got worse?

We're not going to comment on that at this time.

Okay. And also, you've indicated you won't be sending out postcards anymore. I wondered if that in a way was why the fall preview event fell short of your expectations. Did you signal it to your core customers in any other way such as phone calls or did they need to be in the mall to see the signage to enter the store to make the buy?

First off, Margaret, I want to clear up something. We did not say that we will no longer be sending postcards. What we did say is we may not drop them as a reaction as we have in the past and we may not drop as many. Regarding the fall preview sale, yes, we did have a call-in campaign to key customers that was in concert with the launching of the sale.

Okay. I wondered if you studied your Passport list to see if the defections or the limited spending has occurred at lower income levels versus the higher -- trying to find out if there's an economic or a competitive impact here.

We do a lot of that stuff, we just don't share it with our competition.

Okay. And can you comment on what you might have in mind for fall marketing in terms of September/October specifically?

We'll probably let Michael speak to that. If you want to place a call to Michael.

And you mentioned you transitioned early to fall. How did that differ from last year? Because you mentioned you have a lack of wear now merchandise in August.

I'll tell you, I'm just very disappointed in the Company's performance in August, Margaret. It's always hot in August and we should know that. And we just didn't do a good job, that's really the only comment I can make.

And also I guess you were focusing early on on the pant [fit] program. I take it that was also not appropriate given the hot weather in August?

Actually we were excited about the pant program and we were seeing good reaction to it. But we didn't think that it would build the volume as much as the fall preseason sale would, Margaret, so we had to preempt that with the fall preseason sale. And knowing you and how much time and what a good job you do shopping the stores, you probably saw that we pushed it into the back -- we just kept the rack and pushed it into the back. And it continued to perform, but we didn't model it building the volume as we had modeled the fall preseason build in the volume.

Okay, thanks. And best of luck for the fall holiday period.

Thank you, Margaret.

Dana Telsey, Telsey Advisory.

Good morning, everyone. Can you talk a little bit about the IMU and how that's being managed, how you see any opportunities for that going forward? And also, I believe last year as you evaluated Thanksgiving and the hindsight, being more giftable was one of the focuses of holiday. How are you looking at holiday this year for the brands? Thank you.

I'll let Charlie talk to the IMU and I'll talk about what we're doing for holiday then.

Last year in the third and fourth quarter we drove our IMU up I believe 150 to 180 basis points. It was our largest IMU increase that we've seen in an extended period of time. We do not expect much higher IMUs for this year for the Chico's brand anyway. We are seeing improvements, as we have for a long time now, in both Soma and in White House/Black Market so we expect that's going to continue. But the Chico's brand ran the highest IMU ever in the third and fourth quarter.

Don't forget that third quarter we're up against a 22.9 operating margin, so we have some room to give some operating margin and be extremely successful in all these future quarters. I think all of us have forgotten how high our operating margin is and how if we just reinvest a couple points here we're still a mile ahead of almost everyone. We can't forget that. But I'll let Scott answer the holiday because we have lots of plans for the holiday.

Yes, Dana, we have probably the best focus that we've ever had on holiday here at Chico's across all the brands and probably no doubt the best integrated effort between stores, marketing and product. With that being said, I wouldn't say another word about marketing -- I mean about what our holiday plans are on this call with all due respect because I know there are a lot of people listening.

Thank you.

Bill [Pritim], [Clear] Capital.

Good morning and thanks for taking my call. I just wanted to get a little bit more color. When you're looking at your demands on your capital in relation to increasing your square footage where you compare the expanding and relocating your stores versus your new stores. Can you give me a feel of where the higher returning capital comes from, either the new stores or the expansion and how that incremental margin has been trending over the last few quarters?

The expanded and relocated stores have not really changed much in the last three or four years. They generally, like I said, top 20% in sales; they're generally stores that are doing over $1500 a foot, they'll drop down to 700 to 800 a foot when we first expand them and they will run for three to five years we've seen so far because we've been expanding them since 1998 at that pace. So there's a payback immediate and there's a long-term payback.

When you're running almost $1100 a foot in the chain you've got the opposite problem of most retailers. You must drive that down. Now with that said, that's a reinvestment in our operating margin, we understand that, but if it adds more earnings per share, which it does, and it adds a lot of earnings per share every time we expand these stores -- an example would be the Plaza Las Americas stores for White House/Black Market that we doubled the size of and it is going to almost double its sales.

There's a tremendous amount of traffic coming from all that. Yes, it does reduce the metric somewhat, but the profitability is just stunning on these stores.

Okay, great. Thank you.

We'll take one or two more questions.

Robin Murchison, SunTrust Robinson.

Have you given any thought to possibly lowering some of the price points at the core Chico's? In the stores, not always in the catalog, but frequently I'll see jackets with price points in excess of $150. I've noticed that the Western Desert Diamondback jacket is a price point -- started at $298, it's been out for a couple of months, it's now marked down I guess to $166. Just your whole pricing strategy within the core brand, any comments?

Robin, it was a great question and, yes, that's part of the deep dive that we're doing and also part of the competitive forensic research that we're doing.

Okay, so that's sort of a yes that we may see --

We're taking a very hard look at our prices.

I know you don't want to get too granular on [what's missed] thus far, but I kept hearing platinum and denim, platinum and denim. Fair to say that August sales trends today to the extent they're missing that denim category is a majority of the disappointment?

I wouldn't say it's the majority of it, but it certainly is a disappointment. Certain styles of novelty jackets as well and the sweater business -- certain sweaters, sleeveless, mock and sweater knit tank were below expectations and sort of basic denim missed the plan.

I'll just squeeze one more in. On the first-quarter conference call you indicated you were going to -- square footage in the out year 20 to 25%. Do you still want to hold with that or why not throttle it back a little bit and focus on getting some of these other pieces more stable?

Currently we have '07 well in hand as far as a real estate standpoint goes. As far as the merchandise and marketing it's going to apply to 550 stores or 600 stores, so currently we're not cutting back.

Thanks very much and good luck.

Christine Chen, Pacific Growth.

Wondering if you could give us the metrics for Q2 for average unit retail and transaction by concept? I found the White House/Black Market numbers in the Q but couldn't locate it for Chico's and Soma.

They're right in the press release. For Chico's the average transaction was up 2.6% and the average unit retail was up 4.5. The first bullet in the press release.

Okay, what about for Soma.

We don't give that out for Soma at this time.

Okay. And then can you comment on the average dollar per transaction for Black Book and for Passport and if that's changed any since you last gave the metric out?

No, that changes every quarter and we publish it. It's out on our website right now, but the average transaction for the Passport club was $110 and the average transaction for the Black Book was actually $110 as well for the first six months of this year. And that's out on our website right now on page 12 of our slideshow. Which by the way is a brand-new slideshow, you guys might want to go look at it.

Okay, thank you. Good luck for the fall and holiday.

Thank you.

Nicole [Shevins], UBS.

It's actually Meredith Kent. Good morning. I just wanted to touch on the outlet business a little bit. I think there was some decline in margins. The press release says it's a change in mix of brand sales. Can you just elaborate on that? And then also, are you seeing anything going on in the outlet in terms of an impact of higher gas prices, more traffic declines there versus the mall stores and is there a change in the percentage of made for outlet product as we go forward?

Well, the outlets -- because we're adding White House/Black Market, to get White House/Black Market up to 1 per 20 stores, which is our goal that we have for all of it is to clear merchandise, and White House runs slightly lower margin, that's the mix change I'm talking about that's going through there. We're also clearing Soma product through there which runs lower margins. So that's the mix change and that slight 20 -- I believe 20 basis point decline is largely due to that.

Regarding the traffic in the outlets, it's actually been stronger than that so we have not seen -- it's very strong in the outlets right now. Maybe that's because of consumers looking for bargains and that's overriding gas prices. I don't really know of course. But we have seen very strong traffic in the outlets, much stronger than in the front-line stores. Did I answer all those questions?

Yes. And then the percentage of made for outlet product, how does that compare?

That's been flattish over the years. It tends to run up to 20 to 25%. It really depends upon what we're getting from our front-line stores. As you can imagine, right now they're probably getting more than they need in the outlets because we're missing plans. So they will scale back; that will cause them to scale back the made for outlets. And as we get less in the outlets we tend to scale it up. That's really a filler in for when we don't have enough goods in the outlets and to help move some of the goods because we never get a black pant in the outlets for example.

Okay, great. Thanks. Good luck for the back half of the year, guys.

Leah Vermulen, Tiburon Research Group.

Good morning. Today there seems to be a lot of disparity between the customer care level at White House/Black Market and Chico's. As you focused more on the younger brands do you foresee putting greater emphasis on customer care at White House/Black Market?

Leah, that's a good question. We do have some concerns that we're not delivering the type of trademark service at White House that we're known for at Chico's and there is a focus there. And I'm sorry to see that you've experienced that.

Great, thank you.

We'll take one more question.

Jennifer Black, Jennifer Black & Assoc.

Under the wire. I just have a few questions. I wonder first of all, do you feel you have enough accessories at both brands and are you happy with the accessory assortment? That's my first question.

I think the percent to sales is okay, but the quality of the accessories at Chico's is improving. And I think at the White House brand I think we could use more accessories, but we have a square footage issue I think.

Okay. And then secondly, I wondered if you had an opportunity in markets where you don't have a Soma -- I know you have SPANX, but can you put lingerie in some of your Chico's stores?

In some of our larger stores like -- probably right there in Lake Oswego we could do that. And quite frankly, it's something we're looking at right now. Our former marketing executive really felt that that was the wrong approach from a branding standpoint and we honor that but we are taking a fresh look at that.

It just seems like that to do that would help women also in making the clothes look better if they have imperfections. And so I wondered about that. And then lastly, I don't know if you talked about this -- are you changing your incentives at all with either of the brands for employees? I'm not asking for specifics, I just wondered is that something you're looking at.

Well, actually we changed it I think -- Charlie, was it about a year ago we went from --

Almost three years ago now.

It was that long ago? No, we changed for headquarters about a year ago (multiple speakers). We're currently not reviewing that, Jennifer.

We're not looking at that right now, although that is always a talk within the office as to whether we should look at it, but that's a very serious thing when you're fooling with that. So at this point we are not looking at it, we think it works. But there was talk amongst all of us as to what if any should we be doing to tweak this in the future. We have not made any decisions or really had any serious talk about it yet.

But Jennifer, that's an interesting question though coming from you. Is there a little more to it?

No, I just -- as you know, I'm in a market that's got lots of retail and I see a lot of people moving around, not necessarily from your company, but I think you know my market pretty well. And it just seems like you don't want your people to get picked off. And so -- either concept and so I just wondered if that's something that you've got under your microscope and that's why I asked the question.

That's great feedback. Thank you for that.

Well, good luck and your new catalog does look a lot better.

Do you remember your Passport number?

I'm not going to answer that.

Thank you very much.

Thank you very much and thank you for being on our second-quarter conference call. We'll see you for the third quarter in about 90 days. Thank you.

This concludes today's conference call. You may disconnect at any time and have a great day.