Chico's FAS Inc (CHS) 2006 Q3 法說會逐字稿

Welcome to today's teleconference.

At this time all participants are in a listen-only mode. Later there will be an opportunity ask questions during our Q&A session. As a reminder, this call may be recorded.

I would now like to turn the program over to Mr. Michael Smith. Please go ahead.

Welcome to the Chico's FAS third quarter 2006 earnings conference call. Today we have Scott Edmonds, our President and CEO, and Charlie Kleman, our CFO.

Prior to getting started I'd like to read our Safe Harbor statement. Certain statements contained herein including without limitation statements addressing the beliefs, plans, objectives, estimates or expectations of the Company or future results or events constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

Such forward-looking statements involve known or unknown risks, including but not limited to general, economic and business conditions and conditions in the specialty retail industry. There can be no assurance that the actual future results, performance or 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's discussions and analysis in the Company's latest Annual Report to stockholder, 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 operation, and financial conditions.

The Company does not undertake to publicly update, 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. Thank you.

And I would like to now hand it over to Scott Edmonds.

Thank you, Michael. And thanks to everyone for attending our third quarter fiscal '06 conference call.

With me on the call today are Charlie Kleman, our CFO, and Mike Leedy, our Chief Marketing Officer.

Net sales for the third quarter ended October 28, 2006 increased 12.5% to $404 million from $359 million for the third quarter ending October 29, 2005. Net income decreased to $42 million, or $0.24 a diluted share compared to net income of $53 million, or $0.29 a diluted share in the prior year's third quarter.

Comp store sales for the company-owned stores decrease 1.2% for the third quarter ended October 28, 2006 compared to the same period last year.

For the quarter the Chico's brand same-store sales decreased approximately 3%, while the same-store sales for White House/Black Market brand increased by approximately 5%. The third quarter decline in earnings growth is the first negative quarter Chico's has experienced in over 10 years of quarterly reporting.

Regarding the 3% decline in same-store sales for the Chico's core brand, we believe this was principally due to missteps in fashion merchandising, an aggressive store opening, relocation and expansion program that we believe contributed to less than acceptable store service levels and the refocusing in the direction of the Company's marketing initiative. We've been working on providing our customer with a clarity of offer that is sharper in focus and more compelling in fashion terms in the near future.

Under the leadership of Mike Leedy, our Chief Marketing Officer, the catalogs our customers are receiving now have more of a lifestyle component to them. Thus far we are pleased with the results of the new format of these catalogs.

As I indicated on the August 24th call, we believe we were underfunding store payroll. Since that time we've allocated additional payroll dollars to the stores and we are seeing signs of improvement in our store service levels.

However, the aggressive store opening, relocation and expansion program put a lot of pressure on our regional and district managers in the quarter and, therefore, I don't think we will fully realize the impact of these additional payroll dollars until sometime in early 2007 when the dust settles.

With respect to the White House/Black Market brand, we achieved a same-store sales increase of approximately 5%. Although this was below our August guidance of high single to low double-digit, we believe the shortfall to guidance is the result of fashion merchandising missteps as well as having the anniversary of third quarter same-store sales increase of approximately 50% in Q3 of 2005.

And although we fell short of our guidance, we were pleased with the overall performance of the White House/Black Market brand in Q3 and maintain our confidence in expansion of this brand as a significant contributor to the Chico's portfolio.

The Soma by Chico's intimates business is growing. We opened 16 new Soma stores in the third quarter bringing the total number of Soma stores to 37 at the end of Q3.

We are planning on ending fiscal 2006 with between 48 and 51 Soma stores. We continue to add management talent to the Soma team and currently plan to convert the brand over to the SAP software in early February '07.

Regarding the margin decline in Q3, we have promotional offerings to support the launch of the 16 new stores, including a $29 introductory hot price to launch the Soma Sensuals bra, we had extra markdowns to move excess inventory resulting from store slides in the opening cadence. We have extra markdowns to move the panty inventory preparing for a launch of a new panty program in spring of 2007.

Regarding Fitigues, we continue to work on integrating Fitigues into the Chico's infrastructure. We recently relocated the flagship store in Scottsdale and have a few other small real estate moves coming up in the immediate future.

Although the Chico's November same-store sales were essentially in line with our August guidance, our overall November same-store sales were below guidance mostly because the White House/Black Market same-store sales fell short of plan.

Regarding White House/Black Market, we believe we've identified the primary reason for the recent slowdown in comp. Earlier in the year we had good success with our casual assortment, but we made the mistake of carrying too much of a casual assortment into Q3 and Q4.

We believe we did not have enough of a dressy assortment which we call "Classic Sydney". Additionally, we believe we were over assorted in different shades of gray and beige making it harder for her to put the outfit together. We have recently set the floor with more dresses and have several new floor sets planned for the remainder of Q4.

So far in the first month of Q4, we are finding that the combination of our own fashion errors, along with a more promotional retail environment, has resulted in a higher than anticipated markdown rate. However, since we are only four weeks into the quarter and we do have a number of marketing events planned for the remaining period, we do not believe it would be prudent to provide updated guidance for the fourth quarter or for fiscal '07 at this particular time.

The strength of our balance sheet with over a quarter of a billion dollars in cash and no debt, combined with our continued ability to generate strong cash flows from our existing and new stores, provides us with a platform to grow our portfolio of strong specially retail brands targeted to high income female consumers. The best action we can take for our shareholders is to support the long-term growth of the business by continuing to fund investments in our brands and in our infrastructure.

Management and the Board remain convinced of the soundness of our long-term brand portfolio strategy. As I stated on the August 24th conference call, our job is to focus on driving strong earnings growth well into the future.

Now over to Charlie for his comments.

Thanks, Scott, and good morning, everyone, and welcome to our third quarter conference call for fiscal 2006.

We've become somewhat acclimated to these morning calls with the actual release after hours the night before, and I hope this allows you time to review and more fully understand the release prior to this call.

Despite our first quarter resulting in a decline in earnings growth, as Scott said, after over 10 consecutive years of quarterly earnings growth, we still posted a $0.24 quarter with over $40 million of net income during our most aggressive quarterly store opening program ever.

Our cash flow from operations remains quite strong at $214 million versus $215 million last year, and our new stores are tracking very close to our planned store economics. Today, I'm spending little or no time reviewing all those numbers in the release, but I will emphasize some of the more important items in the press release and the 10-Q which we filed last night.

As we indicated on last quarter's conference call, we've begun to reinvest some of our last year's record operating margins back into the store floor coverage and training and in our product development and merchandise management departments, as well as in certain shared service costs that we believe will allow us to produce the best operating margin that makes sense for the future.

As you can see from the press release, we saw declines in the gross margin in all three of our brands, principally due though slowing sales, planned reductions in certain price points, and a highly promotional environment we are seeing at this time. We currently expect gross margin decreases generally in the same range for the fourth quarter.

The increase in SG&A that occurred in all three brands as well is generally tied back to that reinvestment in floor coverage and overall payroll dollars as we look to protect our culture that promotes our trademark service level of the most amazing personal service. The SG&A increase also resulted from the significant investment in larger stores across the Chico's and White House/Black Market brands and the significant switch in store mix that is moving us to more White House/Black Market and Soma stores as a percentage of our stores.

The larger stores we've been opening initially result in higher occupancy costs as a percent of sales, although they generally are producing net contribution dollars that are very close to an average store and they have a much more significant likelihood that this dollar contribution will increase and that we will leverage these existing occupancy costs.

Remember, these larger stores and I have that in quotes, are still generally under 3500 to 4,000 selling feet for Chico's and 3,000 selling feet for White House/Black Market. We expect these larger store footprints should result in stronger growth and stronger growth for a longer period of time.

Regarding the mix shift I mentioned earlier, and that we have talked about for some time now, we are diligently working on improving the store level SG&A cost for both of our younger brands and we expect overall leverage in this area to begin sometime in late fiscal 2007 after the mix shift becomes less pronounced as a percentage of sales. The White House/Black Market and Soma brands have the most opportunity to leverage SG&A costs similar to what we saw with the Chico's brand over the last eight years or so.

With respect to the November sales, we are pleased to see an increase in the average number of transactions per store in the Chico's brand after two of the last three months showed decreases in the average transactions per store for this brand. The White House/Black Market brand has shown increases in the average number of transactions for all of the last four months and, of course, in the previous months.

With the average transaction down 3.4% in the Chico's brand and 8.6% in the White House/Black Market brand, principally due to higher markdowns, we were pleased with the same-store sales results which reflect that the increase in transactions almost offset the transaction declines of the month. Although we are currently clearing excess inventories resulting from lower than planned sales, and we expect this could continue for the fourth quarter, we realize this results in pressure on the average price point and transaction size.

We do believe, though, that this is a short-term issue that is part of the fashion missteps we spoke of, and we think it is more important to end the year with a clean inventory as we look forward to the new deliveries for the spring season for all brands.

Regarding the decision to not update our earnings guidance, certainly the fourth quarter opened with lower than expected sales, at least in the first couple of weeks, and it also opened with lower than expected margins. With the big Christmas month yet to come and the recent volatility in same-store sales, we are against providing estimates that may be viewed as low ball or estimates that we could miss.

Next a note on the balance sheet and then we'll open it up for questions. Our balance sheet remains very strong as we ended the second quarter with just over a quarter billion dollars in cash and marketable securities after buying back $200 million of stock earlier 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 describe in the 10-Q filed last night, and we expect cash flow to remain very strong for the remainder of this year and next year.

Regarding our distribution expansion currently slated for opening in fiscal 2008, we'll get back to you with a Cap Ex figure at or near year-end. We currently have no large headquarters Cap Ex planned for this or the next fiscal year and we are evaluating how much space and what types, if any, of refurbishment we may need for next year, although we do not think it will be significant.

Speaking of inventories, we end the quarter with inventories that are up from $71 per selling square-foot at the end of the third quarter last year, to $77 per selling square-foot at the end of this year's third quarter. Although this is only an 8% increase on the square footage basis, it is a 36% increase in the raw dollars since last year's third quarter that goes with a 20% increase in sales since that time.

The discrepancy between these percentage increases indicates our new larger stores are coming in at a lower sales level per square-foot than our existing stores, and this is to be expected as we planned to open our newer stores in the $650 per selling square-foot range, which results in a slightly lower turn than our existing stores.

Since last year, the average selling feet across all 562 Chico's stores has moved from approximately 2100 selling feet last year to 2300-square-foot this year, almost a 10% increase in size during this period, which would average an approximate 10% more overall inventory footage stores.

During the same timeframe, the average White House-Black Market store moved from an average of 1400 selling square feet to 1600 selling square feet, almost a 15% increase across its 249 stores. This likely accounted for 8 to 10% of the 36% raw dollar increase although it accounted for none of the 8% inventory per square-foot increase.

I hope that that helps you reconcile the discrepancy between these two percentages. Beyond that, the increase in inventories on a per square-foot basis and the raw dollar percentage is tied to our extremely heavy store opening program in October and the fourth quarter, the ramp-up of our direct to consumer sales and our drive to move more basic items from air to ocean shipments.

During October and November of this year we opened 30 stores each month and we relocated or expanded another 27 stores in the same timeframe. The October stores we opened and expanded produced, of course, very little sales to match the roughly $3 million of inventory that this would have caused, while the fourth quarter store openings and expansions were essentially fully bought at between 4 and $5 million with no square footage or sales to report until after the quarter ended.

This heavy store opening program likely increased our inventories by approximately 7% of the 36% increase and by approximately $3 per selling foot of the overall $6 increase.

Further in our recent efforts to increase our direct to consumer business, we've almost doubled our inventories in this area and have recently seen sizable increases in the direct to consumer sales although this increase has raised our inventory per square-foot by about $1since there are no selling feet used for these activities. Beyond that we have been quite successful at moving more of our basic shipments from air to ocean shipments and this has increased our goods in transit year-over-year by approximately $3 million, or $2 per selling foot as well.

Moving out of the inventory arena, you might also notice that our receivables showed an increase from $7 million last year to $19 million this year. This is not credit related since we do not have a Chico's credit card, rather it is principally due to the tenant improvement monies due on all the new stores we've been opening.

Lastly, on the balance sheet the land held for sale represents the original 105 acres we acquired last year for a possible new headquarters but for which we have decided to sell with no material gain or loss likely.

To wrap up, we have always viewed our approach to the business as long-term in nature and we're preparing this company for strong future growth in a multi-branded retail environment. Although no one likes to run into quarters where we make missteps and where we become very clearance oriented, we believe this is short-term in nature as we are addressing the growth oriented issues we've identified by enhancing our management team and systems and by focusing on our service levels and much more intensely on our customer's opinions, needs and desires.

We realize we will have to show you that we can turnaround the downward operating margin trend and we realize that there will challenges along the way, but we also 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 this in the future.

Thanks for being with us on the third quarter fiscal 2006 conference call. And now we'll take some questions.

[OPERATOR INSTRUCTIONS] We will take our first question from Tracy Kogan with Credit Suisse. Please go ahead.

Hi, thanks. Good morning.

You guys mentioned in your 10-Q a change in your marketing strategy as it relates to new customer acquisitions. Can you just go into a little more detail on that and also any other major changes you're seeing under Michael Leedy? Thanks.

Hi, Tracy, it's Michael Leedy. I think the Q explains it really well. I will go through it for you.

Basically over the last few years, and I think you've all noticed this, the rate of growth for our customer database began to slow down. The number of new preliminary customers that we were able to sign up for Passport overall also began to slow down. There were still large gains by almost anyone's measure over the quarter of the year before, but overall as a percent of the total, it started to slow down.

In June of this year, we started to study this really closely and we used in-house resources, some out-source talent, and what we discovered was that the cost of acquiring a name from our traditional strategy, or one of our traditional strategies, television advertising and magazine catalog sections, was extremely expensive on a per customer basis. After acquiring the name we still had to mail the customer and then convert them into a buying customer.

We historically called this type of customer inquiries. We also historically included these customers, even though they maybe had not yet made a purchase in our database as prelim customers.

So as a result of the study, we did some testing and we looked at a couple of other ways of acquiring customers, and what we realized was that acquiring customers through third-party databases would be much less expensive on a per customer basis. The response rate, pardon me, of third-party database names was really similar to inquiries and, again, at a much lower cost per customer.

We also took a look at what we would call the halo factor, and that's really from this television advertising what other positive effect did we get. We were not able to quantify any real positive effect. If there was any it was very small based on the way the television advertising was bought.

So in our opinion after the study, the best way to move forward was to use third-party database names, and that's what we've done and, quite frankly, we have seen a pretty positive effect from it in our mailings.

And can assume going forward that advertising as a percent of sales will be lower sort of like in the third quarter?

No. No. No. No. I mean, advertising, and I'll just cover this question because I'm sure somebody else is going to ask it later, advertising on a dollar basis from our original plan is going to be flat. But based on where we're heading from a sales standpoint for the year right now, it would be a little bit higher as a percent to the total.

Now, as far as the go-forward, I mean, the go-forward is we need to do, you know, different things to acquire customers so we're really looking at a lot of different things because driving traffic is our number one job so we've tested a lot of things, and you will see some new things in the coming year to drive traffic to the stores.

But Tracy, from a modeling standpoint we don't see any change in marketing as a percent to the total.

Thank you.

We will take our next question from Stacy Pak with Prudential. Please go ahead.

Hi. Thanks. A couple of questions.

First of all, I was wondering if you could address what changed at the end of November such that the run rate improved to positive mid single digits? Did you see that improvement in both divisions at the end of the month and what was it attributable to? Was it the gift catalogs, product, what?

And second of all, I was hoping you could comment some more on the negative comp at White House. You know, was it all categories?

I guess I'm just wondering, you know, what are you doing to address it? You talked some about the dress set getting better reaction and some new deliveries in December.

Are there any other incremental catalogs, new product? You know, if you could just touch on those two things that'd be great. Thanks.

Stacy, I'll talk a little bit about the run rate in week four as a company we don't really break it out by brand. Earlier in the year, when Michael joined the Company and then earlier when Michele Cloutier joined the Company, we really put a lot of focus on holiday, and we really put a lot of collaborative effort into, you know, what we were going to stand for at Thanksgiving and at holiday, and I think the run rate was a direct result of the collaborative effort in the preplanning that went into holiday.

Regarding the negative same-store sales for White House in November, first, you know, again, we are up against huge comps, north of 40% in Q4 last year, and we really carried the casual assortment too far into the quarter. We-- I think we were over assorted in beige and in gray.

As far as what we're doing to correct it, we're doing everything that we can in Q4, including, we had planned deliveries in floor sets remaining for the quarter and some additional marketing events. So we'll just have to see how that plays out over the next, I guess, nine weeks or so.

I'm just curious, though, Scott, can you comment, I mean you made some reference to the dresses at White House. Did that change the run rate at White House or not? Can you address that?

Again, if you go back a call or two we're not going to get too specific on merchandise issues on the call. We just believe that a lot of that is proprietary.

Okay. Thanks.

We will take our next question from Kimberly Greenberger with Citigroup. Please go ahead.

Great. Thank you. Good morning.

Charlie, I'm wondering if you can help us think about fourth quarter earnings without providing any guidance, and if we assume that there's no change in the sales trend from November, how should we be thinking about SG&A and I think you already gave some gross margin color, which was helpful, and EPS as well. That would be helpful, thanks.

We're not going to give any guidance. We've decided not to give it but, certainly, if the comp were to come in in the same rate that is flattish or is slightly down from November to the rest of the quarter, that would certainly raise the SG&A as a percent of sales. There's no question about that.

Would it be somewhat similar to what we're seeing here in the third quarter?

We're not going to comment on that but, certainly, the third quarter was down 1.2%. If it came in down 1.2% it would be in that range offset by the 53rd week effect which is a little bit of a halo effect.

Okay.

And then in terms of the store payroll increases that you're seeing across all of your brands, can you talk about what portion of it is related to your expansion versus the increase in payroll in existing stores?

And just talk about what controls you have on store payroll so that if your sales numbers are coming in lighter than you expected, what ability do you have to sort of adjust your store payroll to the customer and selling trends that you're seeing.

The stores are tied directly to their volume week-by-week so if they come in with their first week and they're lower than planned they've got to cut their payroll for the next week. So it's planned week-by-week.

So that, we've got a very reactive sense to we are actively investing in this, so don't think this is just that our store payroll is going up because we're not aware of it or something. We are actively investing in our stores, principally on Fridays and Saturdays, our big volume days and, yes, the new store, the aggressive new store program does cause us to pull many staff members out of one store, put them in another store for training, so that has put quite a bit of pressure on our store payroll for the third and we've got a pretty heavy opening program in fourth as well, then it should even out much more next year.

So that has put pressure on it, but we are actively investing in principally the weekends for store payroll to make sure our customer service is at the level that we think it should be at. We think that's very important to this brand.

That makes a lot of sense, Charlie. I'm just scratching my head a little bit because of the 280 basis point increase at White House/Black Market in SG&A despite the plus 5% comp. I've just never have seen that happen so I'm just trying to understand.

Well that's a function somewhat of the slowdown in the comp, the aggressive store opening plan, which was the heaviest for White House/Black Market, and the larger size of the stores which do require more floor coverage on these larger stores. So we're just sort of adapting to that. I think you'll see that slowdown after we get beyond the fourth quarter.

Okay. Great. Thank you and good luck for holiday.

Thanks.

We'll take your next question from Adrienne Tennant with Friedman, Billings and Ramsey. Please go ahead.

Good morning.

Just for Michael Leedy, can you talk a little bit about the imagery or the life-style brand that you're trying to develop?

And then, and secondly, where are you finding the talent for all these new stores in terms of store managers? Are you pulling from some of your existing stores? Are you finding them at other stores in the mall?

And then finally, Charlie, and/or Scott, is there any kind of rethinking of the 25% target for next year's square footage growth just given some of the additional pressures that it's putting on the SG&A? Thank you.

I'm going to answer both the store-- the management question and then the square footage growth question for next year. We're not changing the square footage growth for 2007. A majority of those leases are signed and executed and we're very comfortable with that and very comfortable at executing to that square footage number.

Relevant to where we are finding the staff for all of these stores, you know, I'm very pleased to say that we went into holiday with almost no open store management positions in the entire franchise. There were a few at Chico's and one or two at Soma but there were virtually none at White House.

So the recruiting department has done a fantastic job recruiting and placing management in these new stores, and they're utilizing everything from Monster.com to referrals from the stores to headhunters. It's a full court with press ongoing. That's the only way that we've been able to achieve that.

Michael you want to talk about, then, about where you're headed with the lifestyle?

Sure. Sure. Adrienne, I'll talk about Chico's first.

In talking to the Chico's customer, one of the things that was a revelation is this, not really a revelation, but this customer's alive and they wanted to see themselves that way, not see themselves in a mailer in an environment by themselves. So when you go into a Chico's store, you know, go any Saturday, and you're going to see the interaction between our associates and the customer and people that are happy and having fun. We wanted to capture that in the book, and I think we did.

In addition to that, we really wanted to start to call out some of the fashion that is within the Chico's assortment that you weren't seeing, maybe, in the book as much in the past. So stories that really talk about the trends that are happening. And I think we did an okay job there and there's certainly a lot of room for improvement.

To make sure that we weren't taking a step in the wrong direction, we surveyed our Passport customers about the book. And one of the questions was on a scale from one to five, how a satisfied were you with the new mail order and 70% of the customers said they were satisfied. So we feel like we're headed in the right direction, have some things to do.

One of the other opportunities is really now developing the store environment. So the store environment has strong fashion statements and also matches back to the imagery and the feeling that we're pushing in the mailer.

White House is a little bit of a different situation. You know, White House, the store environment is a bit more developed. There's probably some opportunity for stronger fashion statements.

The mailer is really an attempt to capture a much more defined customer in Sydney, which is our edit point for the White House brand. And we feel like we've elevated that mail order and we're going to continue to execute to that with, again, some tweaks.

That's very helpful. Thank you.

Charlie, do you just have the ending square feet and the impact of the 53rd week? Thank you and good luck.

The square footage by brand is on our Web site, I believe, now. It was a little late getting on there. I was not aware it was not up yet, but it was 1,797,000 square-foot overall and the breakdown by brand is on the Web.

Okay.

The impact of the 53rd week is roughly a week of sales and you can just divide it out and see it's a week of sales in the 20, $25 million range.

It should have a penny to two impact probably near the $0.02 range because a lot of the store costs are, of course, fixed with that extra week, rent doesn't really change other than percentage rent. So it should have a halo effect offset by the fact that we have not been running strong comps so far for the quarter.

Okay. Thank you. Good luck for holiday.

Thank you.

We will take our next question from Marni Shapiro with the Retail Tracker. Please go ahead.

Hey, guys.

Good morning.

Could you talk a little bit on the product side of the two brands? Beyond what you've sort of struggled through, is there anything as we are going into the holiday season that carries us into spring that you're seeing traction with?

And you called out the dresses at White House. Are there other segments be it accessories or knit tops? And at Chico's, you know, velvet or accessories or some of the other items that seem to be gaining a little traction in the stores. Can you talk a little bit about that?

Marni, I don't want to get too much into detail because, as you know again, a lot of people listen to the call. We do have some items in both brands, all three brands, for that matter, including Soma that we're carrying straight through at least until the transition season. But I really don't want to get into specifics on our merchandise.

I understand. On the marketing side, could you guys talk a little bit about as you've changed the focus of the catalogs any change in the redemption patterns of the coupons that you attach to that?

One of the things that came out in the survey, Marni, that we did was, and not surprisingly, the coupon is the number one driver in the book. So what I would tell you is on an average store basis at Chico's we're driving more business with the book. White House, not surprisingly with the store opening plan, about flat, but for both businesses more gross margin dollars.

Great. Thanks, guys.

We will take our next question from Jennifer Black with Jennifer Black & Associates. Please go ahead.

Good morning. I have a couple of questions.

I wonder, first, if you can speak to White House/Black Market? I know that you just on Black Friday, you had a $25 gift card with $100 purchase. I wondered if that's different for you, and I wondered what the response was like?

Jennifer, you know I'd rather not get into that kind of detail just for competitive reasons. It was something that's new for us, we're going to try some new things, but I'd rather not get into the response rate. The holiday season is not over yet.

Right. Okay.

And then I wondered, Scott, if you can talk about the fit at Chico's. I know you have one fit on your jackets, and I wondered-- and it's a little more tapered at the waist. Do you plan on adding any more and are you still stocking out of zeros? Can you speak to that?

Michele Cloutier joined us August 24th. She has hit the ground running, and one of the things that she is focused on is the fit. Not only in jackets, but in bottoms and across the entire Chico's brand, if you will.

Regarding the zero comment, there's, I think, a different opinion here versus out in Portland or wherever you're shopping on the sell-through relevant to the inventory ownership with the zeros. We're becoming more comfortable with our zero allocation, Jennifer.

Yes, I didn't have an opinion, I just was curious.

And then lastly, you talked about the color pallet at White House/Black Market. In looking back what would you have done differently with the quality and the fit at White House/Black Market? Would you have done anything differently?

For the quarter?

Yes. Would you have done anything differently? You said you didn't--

Yes, I don't think we have a quality issue. I think it's more of, again, I think we were too casual as we rolled into Q3 into early Q4. I think we got a little bit away from the pure black and white presentation.

I think we should own black and white and I think we got a little too gray and a little too beige. But I don't think we had any quality issues.

Okay. Well, I really like the black velvet jacket with the tie. So good luck.

Thank you.

We'll take our next question from Randall Connick with Bear Stearns.

Thanks a lot. Scott, just a quick question.

In terms of number of initiatives being undertaken across the portfolio, whether it be real estate, operations, marketing and product, have you been making any changes to the existing corporate management structure besides your new hires to handle these initiatives, or how are the uses and demands of your time and the rest of the executive leadership been changing?

That's interesting because I obviously read a lot of the write-ups and I see consistently that management is stretched too thin and that's, the results are reflective of that and I disagree with that. I think that we have a very strong management team.

I like the structure, not that we don't look at longer term how the business is structured today and what am I to look like at $3 billion, $4 billion, $5 billion? But regarding the management group, you know, being stretched too thin and that's resulting in the slowing of comps, I think that's a misstatement and a misinterpretation of what is really going on down here.

First and foremost in this industry, it's about the merchandise. And we're really working on a clarity of our offer that is a lot sharper in focus and is more compelling to our customer.

And I think if we deliver that then you'll see the comps that you want to see and people won't start sort of looking at is the business, is the management team stretched too thin? Do they have too many initiatives? We're a big business today and we have to take on a lot of initiatives to accomplish growth and if we weren't doing that, and just focused on a couple of smaller initiatives I think we'd have a very short run.

You know, we're trying to run the business, not really for the next 13 weeks, we're trying to run it for the next 13 years and so that takes a lot of initiatives. And I'm very comfortable with the bandwidth of the talent that we have to accomplish those initiatives.

Can you just talk about where you focus, you personally focus most of your time today versus maybe where you focused your time six months ago? Where has that changed?

Well, I have a lot of new leadership in the business with Michael and Michele and Toni, and a little bit of time at the Fitigues brand, not much at all.

But most of my time with is my executive management team. There are over 40 officers in the Company today. We have an executive committee that's very close, and I spend my time with the executive management team.

I don't spend my time in the investment community, as you guys know. Charlie and Michael handle that and I try to stay focused on growing the business, and I spend my time with the executive management team.

Thanks.

We will take our next question from Dana Telsey with TAG.

Hi, good morning, everyone.

Hi, Dana.

Can you talk a little bit about planning and allocation, how the process is for White House and for core Chico's are changing? And just how you look at managing inventory and managing product flows going forward? Is it different from what you have done in the past? Thank you.

Yes. It's more complicated as we've spoken in the past, Dana and Toni's been with us now since early spring and she has had a positive influence and impact on the way that we plan and allocate at the core brand.

We have seen some success in regional allocation. We are focused a lot more on the cold weather, warm weather, transitional period of late January early February. I think that we have that dead in our sights this year. I think Toni's done a great job there.

Over at the White House business, you know, with 250 plus stores not a whole lot has changed. They're still running on the STS platform. We're going to move the Soma brand, we're planning the move in early '07 from STS over to SAP.

Both Rod Olson, and Toni Robinson are involved in setting up the SAP software in the planning and allocation arena for Chico's and White House which will follow sometime thereafter the Soma conversion. But we've seen a lot more change, I think, at the core brand with Toni joining the business than we've seen over at the White House.

I think that while we're improving over at the White House the methodologies, I don't think, haven't changed as much as perhaps they have over at Chico's with the size of our business.

How long do you think for each of the businesses do you think it's fall '07, do you think it's spring '07 when the merchandise is more differentiated from in the point where you would like it, Scott?

No, I don't think it's that far, you know, I really don't. I think that we've identified in both brands, some of the fashion missteps that we've taken. I think you're going to see steadily see improvements.

You know, it may be as late as fall of '07 before we get 100% back to where we think we want to be because, strictly because of the time it takes to really get out there on novelty. We are working right now on fall '07 in both brands, and some, most of spring is already put to bed. We were able to affect it a little bit.

But you're going to see, I think, in '07 a steady improvement in the fashion assortment and appeal to the customer.

Terrific. Thank you. Good luck.

We will take our next question from Margaret Mager with Goldman Sachs. Please go ahead.

Hi. It's Margaret Mager, Goldman Sachs. A couple of things.

First of all, on your service in your stores and your payroll, are you doing anything as far as special incentives or changes in your commissions for your salespeople in the stores to get them to really get transactions going?

And then with regard to the clearance, how are you executing that in your full-price stores versus your factory outlet stores? Is it, are the factory outlet stores really the main vehicle or has the clearance increased materially in the full-priced stores?

And are you increasing the coupons or promotions for the Passport customers? So could you talk about that like how you're actually executing the clearance? Thanks.

Margaret, I'll answer the clearance discussion and throw it over to Michael for the coupon discussion.

Our outlet stores, we categorize as outlet stores not factory stores, because they truly are a liquidation vehicle for the frontline stores. With that being said, with our miss in comp we're certainly clear in both at the frontline and at the outlet store, but, certainly, some of the margin deterioration you saw at the outlets is a direct result of the slowdown in the comp at the frontline stores. So we're having to utilize both frontline square footage as well as our outlet store square footage for markdowns and liquidation.

Relevant to what we're doing with store payroll, we are making tweaks to their incentive packages, but if I were to tell you exactly what that was I would bet that there'd be two or three competitors matching it within the next 24 hours.

I just noticed your salespeople seem to be more aggressive than normal. They really are pouncing on customers when they walk in the door and kind of fighting with each other to make sales.

Well, I don't really like to hear that because we don't want it to be that aggressive, but we certainly don't want just stand in the front door and say hi, welcome to Chico's.

Well, at least you're moving the goods. On the promotions for the coupons or Passport customer promotions how has that changes year-over-year?

So what are you looking for, Margaret? Can you ask your original question again?

Right. On your promotions for Passport customers, coupons or other promotions, percentages off that you give to your Passport customers. How is that changing year-over-year? Is that rising as well for, you know, provide greater incentives to drive traffic and move goods?

You know, what we've done this year that's, I think, different possibly from the way it was done in the past is we built an original plan and we built a back-up plan. So what we do on a regular basis is we look at the sales and we talk about what we need to do to drive sales and do we need to go-- dip into that back-up plan.

So promotional activity has grown a little bit, but we really have it under control. So it's not something that we're doing without looking at the markdowns at the store level. You know, we're working together to move the inventory and to drive sales.

Okay. That's good flexible part of your marketing program. So thank you.

We will take our next question from Margaret Whitfield with Ryan Beck. Please go ahead.

Good morning, everyone.

Michael, I'd noticed the in-store signage over the Thanksgiving weekend, buy one get one 50% off on jewelry and accessories. I wondered how that worked and if there'll be more use of the stores to provide offers for clients-- customers?

Yes, again, you know, I would rather not talk about the results of anything that we just did because we're still in the holiday season, so stay tuned.

Okay. But the use of in-store signage will be ongoing? More so than in the past?

We will definitely use in-store signing when necessary. And I think it's, obviously, it's a great tool to educate the customer and let the customer know what's going on in the store.

And for Scott it sort of sounds clear as to what the merchandising issues are at White House, but at Chico's apart from fit what else is Michele focused on in terms of resolving the issues there? And any significant hires in merchandise to aid her in this goal.

I think working very close with Pat, she's been here a very short period of time, Michele has hit the ground running. She's been everything that we had hoped for when we did our search and we came to terms and brought her on board. She is working very collaboratively with the entire organization whether it's -- she has merchandise planning allocation reporting directly to her right now.

But she's working very closely with Pat, with Linda Costello, our Senior VP of Product Development, she's working very close with Charles McMurray, our VP of Production. She's working very close with Joe [Alera], our director of tech, she's working very close with Michael Leedy on marketing and with Mora McKenzie in share on stores.

So she's out in the stores a lot getting to know the customers. She's really just getting fully immersed into the business and making a positive impact on a daily basis. With that being said, she's been here a very short period of time.

I wondered, you would moved your average age down by about two years when you mentioned it last. Has it gone down any further or what is the average age of your customer now?

There hasn't been much change.

Okay. And for Charlie, where do you think the inventories will end at the end of Q4?

That still remains to be seen how we're going to go through the season. Certainly, you can tell by the increase in the size of our average store that on a percentage basis, it's going to be going up just because of the larger size of the stores.

But with the slower store opening pace in the first quarter of next year compared to the third and fourth quarter, you shouldn't see that bump caused by all of the new stores opening, so it shouldn't be as high as a percent over the last year as it has been for the last two quarters because of the large store opening program.

And finally, could I ask what the response has been to the revamped Web site?

The response so far to all three Web sites has been very positive. So we're very pleased with the usability of the Web sites and the sales we're driving through the Web business.

Okay. Thank you and good luck for holiday.

We will take our next question from Barbara Wyckoff with Buckingham Research Group. Please go ahead.

Hi, everyone. Can you hear me?

Yes, good morning, Barbara.

Scott, question for you.

Is Pat Murphy-Kerstein back on Chico's merchandising full-time working with Michele, of course? And if not how is she allocating her time? And when do you think we'll start to see, you know, improved merchandising?

And then about White House, what do you-- how long do you think it will take to get the merchandising back on track? Are we looking at first and second quarter? And then that's it.

Pat is and will be totally focused on the Chico's core brand. She's working very closely with Michele to download everything that Pat has learned since joining our company in 1997 to Michele. They're almost inseparable today.

Regarding when White House merchandise will get back on track, as I said a little earlier on the call, Barbara, I think you're going to see improving deliveries in the beginning of '07 right through the end of '07.

Okay. Thanks.

We will take our next question from Neely Tamminga with Piper Jaffray. Please go ahead.

Great. Good morning. Thank you.

You know, I guess Charlie or Scott, could you talk a little bit about the shifting of the goods in terms of the transportation mode from air to ocean? Give us a sense of kind of what those goods are, if they're for one of the other brands, and I guess maybe speak to the cost savings as well as, just conceptually it would seem to me that given that you guys are in this transition, or trying to really kind of meet the customer's need and kind of get a better read and a more refined read on the product merchandise itself, that you'd still want to have the extra time before you cut the fabric, before you bring the goods in.

Just wondering, what these goods are that you're shifting, and is it really for spring or is it for holiday?

What we do, Neely, primarily is we put key items on the ocean. We put virtually no novelty on the ocean. Coming into Q3, denim, sweaters, outerwear, we were able to put that on the ocean.

They're very heavy fabrics, very expensive to fly so we put those on the ocean. We don't have a lot of that still coming in on the ocean, it was planned primarily for Q3. You know, we are putting intimates on the ocean, because it's such a long delivery time, and we don't-- I don't want you to think that we're putting a majority of our merchandise on the ocean, because we are not.

We are just moving, and we were almost pure air freight for many, many years, and in order to try to squeeze more profit dollars out of the business we really took a good look at what we were doing and what we might be able to affect.

Now with that being said, the transit time today for ocean versus the transit time a year or two ago for ocean has increased and improved dramatically. The difference less than a month for air and ocean.

The grand total for this, as I said on the call, was only $3 million. That is almost nothing in the scheme of things compared to what we sell every month, so it is truly our basics that we're putting on that to take advantage of that.

There is a substantial freight savings on that. I'm not sure exactly what it is in relation to air right now, but it's substantial. And it is very small in the scheme of things, but it was $2 per square foot.

That's really helpful. I guess just one more question, I guess, maybe following up on Adrienne's question.

I think she asked about the 53rd week. If you guys would be willing to quantify what that is for your business.

Well I already said it's between 20 and $25 million for sales. It has little expenses associated with it as you would expect, and we quantified it to maybe $0.02 maybe $0.03.

Great. And I guess one more thing.

In terms of, for you, Scott, I guess in terms of, you know, the deal table on the real estate discussions, you know, have you, bringing together the White House/Black Market brand and the Chico's brand and now you've got Soma and Fitigues, do you find that you're getting more favorable lease terms on the '07,'08 deals that you're talking relative to where you were in '06 or '05 or it is more about just better locations with a mall or getting the exact right location? If you could give us an update as to what's going on with that.

We're not seeing vastly improved deals, Neely, but we are, by far the premier retailer in the malls development plan. A lot of developers start with us and if they can get Chico's primarily, we're still the most sought after Chico's, and then White House and Soma.

If they can get us on a hard corner in a center then all off a sudden the pack follows us. So we do have a very, very strong positioning discussion with the developers today versus several years ago, but the deal terms aren't vastly improved. We were cutting a pretty good deal several years ago.

Great. Excellent and good luck this holiday.

Thanks.

We will take our next question from Robin Murchison with SunTrust. Please go ahead.

Hi. Good morning. Question for Michael Leedy.

In the catalog that launched mid-month for Chico's, did the $25 off of a $50 or more purchase only go to Passport members and the catalogs that went to preliminary members had a different incentive?

There were different offers for different kinds of customers. That's correct.

Okay.

And also in terms of the bounce-back, what-- I believe the bounce-back redeemed November 14th and it was initiated at the beginning of the month or at the tail end of October?

Yes, you know, I would like to not give out details on the timing of the different marketing vehicles and the circulation for competitive reasons.

Okay. I understand.

Everybody else in the world's listening to our call and they'd love to know everything that we're going to do.

I understand. Okay.

Then lastly regarding Soma, I think, I know you're testing the content, working with the content ratio between foundations and loungewear, are you testing store size as well?

Yes, we're testing everything from the passthroughs to the store size and we're learning an awful lot about the different venues, who the best co-tenants are. It's been, you know, it's been a highly educational process for us, and so we are testing everything from square footage to venue to co-tenancy.

Okay. Thank you very much. Good luck with fourth quarter.

Thank you, Robin.

We will take our next question from Rob Wilson with Tiburon Research. Please go ahead.

Thank you.

Charlie, I guess you guys reported that your outlet channel had 600 basis points lower merchandise margin. What was that comparable to last year in the outlet channel?

Do you mean did they have an increase last year?

Yes, I mean--

Yes, they had an increase. They are really just, they're an inverse of our frontline stores. When the frontline stores are doing very well, well, they're not an inverse, they're the same, when the frontline stores are doing very well there's very little to sell at the outlets and their margins go up dramatically.

When the frontline stores do poorly, there's a lot a lot to sell at the outlets and their job is to move through the inventory as they have to today, so they have to sell it at lower margins. So the outlets tend to be-- they tend to go with the frontline stores but go wildly harder at it, because when the frontlines don't sell well they must move the merchandise and that effects their margin. So it's not unusual to see that.

So the outlet channel last year had a higher merchandise margin in Q3?

Well, then the year before that yes.

Okay.

Because last year we ran very strong comps in the Chico's brand. But with that said, the inverse goes with comps, as the frontlines do poorly in comps, the outlets will do great in comps. They'll do bad in margins but they'll do great in comps.

Last year the outlets did not run a good comp, but ran good merchandise margins. The net effect is about the same on the gross margin dollars but the two metrics, that is gross margin percent and comps, are offset by each other.

Okay.

That's very normal. That's been happening year after year after year at the outlets because they are purely a clearance vehicle.

And also your average unit retail decline in November was quite pronounced, and I'm wondering if that is indicative of a greater merchandise margin miss that we should expect in Q4?

We already said we're expecting merchandise margins to be in line with the third quarter. So if you consider that a big miss, yes, it's going to be like that but it should be in line with the third quarter.

Fair enough. And one final question.

You mentioned in your 10-Q that you had higher shrink results in Q3. Could you give us some color on that? Thanks.

That's more for the 10-Q that we put that in there. It's a very small increase, but you do have to describe all of the different increases.

There's been a slight increase in the inventory shrinkage year-over-year. We attribute that largely to this heavy store opening pace. There tends to be more goods lost in a book manner when you open up stores because you have to allocate to these stores months in advance of these stores opening, you tend to lose track of product more often. So I think that's largely related to this high store opening pace, and it is very immaterial.

All right. Thanks for taking my call.

Operator, we'll take one more question, then I'd like to close with a comment, if I could.

Okay. We will take our last question from Christine Chen with Pacific Growth. Please go ahead.

Thank you. Just under the wire.

Wanted to ask about Soma. I think on the last call you gave, I know you don't give comp numbers per se but you did mention that Soma was positive in Q2 and that was very exciting. I'm just wondering, maybe I missed it, what Soma comped in Q3?

I'm not so sure we through it out there this time, Charlie, did we?

No, we didn't put it out there.

Is it included in the Chico's comp number, because I think you keep saying Chico's/Soma.

Has to be.

Yes, yes, it has to be. Yes.

Would you care to share with us what it might be on its own?

There are only 10 stores in the comp base. The main reason we're not sharing that is it's very volatile because it's only 10 stores and we're landing stores right beside other Soma stores so it's a in the flattish to low single-digit range.

It's a small comp but, again, there's only 10 stores in it. By next year we will likely have 30 stores in this, and we'll probably start publishing these numbers later on sometime.

Okay. Well, thank you. I mean I think that was very helpful. Good luck for the holiday.

In closing, I'd like to thank everybody for their time on the call and I just want to read just a couple of comments on some of the write-ups that came out last night after we reported.

We believe the Company as a strong portfolio of brands that will enable it to achieve good long-term earnings growth. That's one. Chico's is a core holding in retail with still strong growth prospects for the longer term.

The next one. We believe Chico's shares are best for accounts with a longer term time horizon. That's what we have is a longer term time horizon and we are here for the long-term to drive long-term sustainable growth. That's what we're executing to.

Thank you very much.

This concludes today's teleconference. At this time you may disconnect. Thank you and have a great day.