Chico's FAS Inc (CHS) 2006 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Chico's FAS Incorporated fourth quarter and year-end earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

I would now like to introduce Mr. Michael Smith, Vice President of Investor and Community Relations. Sir, you may begin your conference.

Good morning. Welcome to our fourth quarter and year-end earnings call. Today we have Scott Edmonds our President and CEO; and Charlie Kleman our CFO here to discuss the business followed by Q&A. Prior to getting started let me read our Safe Harbor statement.

Certain statements contained here and 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 being looking statements will occur. Users of forward-looking statements are are encouraged to review the Company's latest annual report on Form 10-K, its listings on Form 10-Q, management's discussion and analysis in the Company's latest Annual Report to stockholders, the Company's filing on Form 8-K and other Federal Securities laws filings for a description of other important factors that may effect the Company's business, results of operations and financial conditions. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized. I would now like to pass the call over to Scott Edmonds our President and CEO.

Thank you, Michael and thanks everyone for attending our fourth quarter fiscal 2006 conference Call. With me on the call today are Charlie Kleman our CFO; and Michael Leedy our Chief Marketing Officer. For the 14 week, fourth quarter ended February 3, 2007 net sales increased 18.8% to 446 million from 376 million for the 13 week fourth quarter ended January 28, 2006. Net income was 18 million or $0.10 a diluted share compared to net income of 44 million or $0.24 a diluted share in the prior year's fourth quarter. During the fourth quarter of fiscal 2006, the Company recorded pre-tax impairment related expenses totaling approximately 8.6 million or approximately $0.03 per diluted share related to the planned closure of its Fitigues brand operations in the first quarter of fiscal 2007.

Comparable store sales for the Company owned stores decreased 2% for the 14 week fourth quarter ended February 3, 2007, compared to the same 14 week period last year which was consistent in both the Chico's and White House brand, excuse me, White House/Black Market brands. For the 53 week fiscal year ended February 3, 2007, fiscal 2006, net sales increased to 17.2% to 1.65 billion from 1.4 billion for the 52 week fiscal year ended January 28, 2006, or fiscal '05. Net income totaled 167 million or $0.93 a diluted share compared to net income of 194 million or $1.06 a diluted share in the prior period. Total stock based compensation expense for the current fiscal year increased approximately 12.6 million net of tax or $0.07 per diluted share over the prior fiscal year. Comparable store sales for the Company owned stores increased to 2.1% for fiscal 2006 compared to the same 53 week period last year. For fiscal 2006, the Chico's brand same-store sales were essentially flat. While the same-store sales for the White House/Black Market brand increased by approximately 11%.

The latter part of fiscal 2006 were certainly difficult at Chico's. With the fourth quarter being the most challenging. As we indicated on our third quarter conference call, we faced fashion missteps that required much heavier markdowns than originally planned. We committed to clearing our fashion mistakes by year-end and I'm pleased to report we were able to do just that. We have also begun to see some positive results from our operational initiatives. Although February sales and same-store sales were somewhat off plan levels, we're pleased with our initial sell-through of most of our spring line and our February gross margins especially considering the weather. However, we have not fully realized the corrective measures we've been talking about at either Chico's or White House/Black Market, especially in providing our customers with a product offering that is more compelling in fashion terms.

I'm pleased to announce that we are no longer in the franchise business. We recently closed the previously announced acquisition of the Minnesota franchise rights and just completed the acquisition of the Winter Park, Florida franchise, the last of the franchisees. This gives us total control of the brand image and customer experience and the opportunity to grow the current stores and expand within these markets.

We are completely focused on our for Chico's and White House/Black Market brands as well as our emerging Soma brand. We've decided that Fatigues brand did not meet our internal expectations and opportunity for rollout thus we think our shareholders are better served by closing down this brand at this time. We've also decided to slowdown the Soma store growth somewhat so that we can focus on strengthening the management team, improving profitability, and expanding Soma beyond the Chico's customer for the long term benefit of the Soma concept and our shareholders. This strategy was successful for us in the '94, '95 time frame when we slowed the growth of the Chico's concept so that we could improve our operations and build a solid foundation to achieve much stronger growth over the long term. We continue to believe now more than ever that the Soma intimate apparel concept represents an excellent market opportunity within the specialty apparel arena.

The Company has been carefully reviewing and rethinking its recent practice of providing specific quarterly and annual sales and earnings guidance. The retail industry is unique in providing monthly sales and comparable store sales data as well as detailed operational data for individual brands which provides interested parties with much greater detail than is presented in the Company's financial statements. Therefore, while we remain committed to maintaining the transparency in our financial reporting, we will no longer provide such specific sales and earnings guidance as part of our regular financial reporting process; however, we do expect to comment on the Street consensus estimates from time to time as appropriate.

In a separate press release, we announced several key promotions that should position us to better address our future. Michele Cloutier, Patricia Darrow-Smith, and Michael Leedy in particular have shown their ability to lead and manage their respective duties with innovation and creativity. I would like to expand further on these key promotions.

As we have evolved our business model from a single brand platform to a multi-brand platform, it has become clearer that each of our brands needs a leader dedicated solely to that business unit, a brand president, if you will. An executive with full P&L responsibility. Patricia Smith's appointment as brand President of White House/Black Market is the first step in the process of moving away from a shared services structure to a brand President structure. We fully expect that this new structure we are undertaking should provide the customer of each of our brands a clarity of offer that is sharper in focus and more compelling in fashion terms. Patricia Smith is a co-Founder of the White House/Black Market brand has been the lead merchant in the business since its in exception.

Michele joined Chico's in August 2006. Since that time, Michele has focused her effort on the Chico's customer. Michele and Pat Murphy Kerstein have traveled extensively and Pat has done an outstanding job in sharing her knowledge of the customer, the product development process, production and sourcing initiatives, her planning and allocation philosophies, markdown strategies, and overall general knowledge of the Chico's business she has gained since joining Chico's in 1997. When Michele joined Chico's, we were optimistic that we had found Pat's successor. Over the last six months, Michele has proven herself to be an out commanding merchant. As we transition the Chief Merchandising Officer title over to Michele, she will continue to have the benefit of Pat's partnership in the business. Pat Murphy Kerstein will continue to consult the business through 2011 as detailed in her employment contract dated April 2006.

Michael Leedy joined us in April of 2006. Over this past here, I've come to count on Michael's leadership across all three of our brands, in particular, Michael's leadership on our branding strategies, our direct-to-consumer business both web and catalog, consumer research, store design and visual presentation have been outstanding. I'm confident that these three key executives will help us improve our performance so that we can achieve positive same-store sales in an earnings growth environment. In closing, I believe we are well positioned for an improvement in our performance in 2007 and beyond. I believe we have a much clearer focus on what needs to be accomplished here and I'm very excited about the future at Chico's. Now, over to Charlie.

Thanks, Scott, and good morning, everyone and welcome to our fourth quarter conference call for fiscal 2006. We wrap up a challenging fiscal 2006 with our conference call today and we've got some regular quarterly items to go over as well as some year-end metrics to review. As you can see from the announcements last night, we are refocusing our efforts on our two core brands plus our Soma brand and for that end, we announced several exciting promotions that will help us intensify that focus.

The fourth quarter was certainly a challenging quarter not only for Chico's but for essentially all of the missy specialty apparel retailers as we believe there was a general lack of newness and freshness of product in this segment including our stores. Our surveys indicate this to be the case, and our customers loud and clear she will pay full price for new and fresh styles but she will not pay full price for items she perceives are already in her closet.

As you can see from the press release, the quarter saw small declines in same-store sales for both the Chico's and White House/Black Market brands as the Chico's brand lacked enough newness to please the customer at full price and the White House/Black Market brand offered too much color that diluted the brand and was likely too casual for the customers fourth quarter needs. We discussed this to some degree on our last quarterly conference call as with we began to see where the holiday season was shaking out. In late summer last year, we indicated that we expected improving sales during the holiday period and we bought to meet those needs. Consequently, we were in an over bought condition during the fourth quarter which caused markdowns above and beyond value driven markdowns associated with a lack of newness. During the quarter we saw declines in the gross margin in all three of our brands although these declines were against the highest fourth quarter gross margins in our history for all three brands. As we went further through the quarter, it became apparent we would have to be quite aggressive with markdowns to assure we ended the year with a fresh and clean inventory and we did just that. The first two weeks of January produced quite strong same-store sales as we aggressively pursued clearing the inventory and we delayed some spring receipts to assure she was focused on our markdowns. We did react to our markdowns and promotions and we likely cleared the merchandise a little too quickly as we became somewhat short of units in the last few weeks of January, thus the decline in same-store sales for these weeks.

Because of our aggressive promotions and our focus on leaving the year clean, we ended the quarter with inventory lower than we originally expected at $57 per selling foot, down about 11% from last year's $64 per square foot. As another frame of reference, the inventories increased on raw dollars by about 16% while sales increased by 17% and square footage increased by 30%. We ended February somewhat short of units in our stores to the White House/Black Market brand and we were not able to add enough newness early in the spring quarter and this certainly held back our same-store stales for the month although with the weather the way it was during February, the extra goods might have resulted in more markdowns in any event. I can say that February's gross margins were up significantly year-over-year for White House Black Market and Chico's gross margins were on plan which was slightly off our record gross margins from February last year.

The increase in SG&A for the fourth quarter and year-end that occurred in all three brands is generally tied back to several reasons including our reinvestment and overall payroll dollars to improve floor coverage as we look to protect our culture that promotes our trademark service level of the most amazing personal service. For the fourth quarter, it is also associated as well with deleverage associated with a decreased same-store sales across both brands. A larger factor though for the SG&A increase as a percentage of sales results from the significant investment in larger stores in both 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 summer stores as a percentage of our stores. We have been talking about this for some time and I'll reiterate my thoughts in this area as there is confusion on the short-term versus long term impact of these larger stores and this shift in mix.

The larger stores we've been opening and there's a summary of the size of these new stores by year in the slide show on our website if you want to see that, the larger stores we've been opening initially result in higher occupancy cost as a percent of sales although they generally are running higher occupancy cost, they are also generally producing net contribution dollars ahead of the first year profits of the smaller stores of the past. Further, these stores have a significant likelihood that the dollar contribution amount and the percent profit will increase and they will produce sustainable same-store sales increases for a longer period of time and that they will be moving to the profitability levels of our larger stores that are more mature. I'll speak more to the profitability of the more mature larger stores later but remember though that these larger stores are still generally under 3,500 to 4,000 selling feet for Chico's and generally under 3,000 selling feet for the White House/Black Market and remember that these stores are still much smaller than almost all of our competitors.

In our fourth quarter release you can see this deleverage impact to some degree on the depreciation which deleveraged for the fourth quarter from 3.5% of sales last year to 4% of sales this year in spite of the extra week of sales this year, which, by the way, amounted to approximately $23.3 million, about 1.65 billion annual sales. Wrapping this largest store conversation up, I'd like to give you some numbers to show you why we're so bullish that the store size is the appropriate size long term even though it has the short-term effect of reducing operating margins to some degree.

Every year I look at our top stores in each brand to look back at the best and what I'll call the not so best stores. In the Chico's brand, I group all the stores that produce over $1 million in profit as our best stores. This year, we had slightly over 90 stores in that what I call best store category and that's nearly 20% of all our stores that were open for the full year. Not only do these stores run the highest profit dollars but they also produce the highest four wall profit percent as well. Now let's look at the size of these stores.

In the group of these high performing stores, 35% of these stores were over 3,000 square feet and the average of all these stores was actually 2,900 square feet. That's a third larger than the rest of the stores. To put this another way, half of all those stores over 3,000 square feet that were open all year are on this best store list. The same ratios of our best stores as they relate to larger stores on a much smaller scale holds true for White House/Black Market as we have only recently begun expanding their stores.

Now, beyond the improved merchandising capabilities in these larger stores, the reduction in long lines and the ability to test in these larger stores, those strong profits are why we are so confident that this store size is right of considering the short-term reduction we do experience in certain operating ratios. Regarding the mix shift impact on the operating margins that 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 to see this mix shift as I call it be less dramatic by the third quarter of this year and then it should result in operating margin improvements in the fourth quarter as we anniversary the significant change in mix, the investment in store payroll, the dramatic change in store size, et cetera, et cetera. We have been forecasting this phenomenon even previous to the reporting of this fourth quarter results. We have been investing in the future for some time knowing that the White House/Black Market and Soma brands have tremendous opportunity to begin leveraging SG&A costs as we saw with the Chico's brand over the last nine years or so.

We closed the year with an increase of 30% in our selling square footage which resulted from opening 147 new stores, net of closures, and net of the ten Fitigues stores we will be closing this year. That amounted to 44 net new Chico stores, 66 net new White House/Black Market stores and 37 new Soma stores. We ended the year with 1.941 million, selling square feet across all brands, again, net of the ten Fitigues stores. The average new Chico's front line store for last year came in at 3,119 selling feet and the average across the chain is now 2,350 selling feet up from last year's 2,129. The average Chico's front line store produced sales of 2.15 million and $973 per selling foot. We plan to open 55 to 60 net new Chico's stores in fiscal 2007 at a planned size that should average about 3,300 selling feet.

On the White House/Black Market side, the 66 stores we opened last year averaged 2,244 selling feet and the average size of our White House Black Market front line store is is up to 1,720 selling feet. The average White House/Black Market front line store produced sales of about 1.6 million up from last year's 1.4 million and their 11% annual same-store sales increase raised the sales per selling foot from 1,031 to 1,055 in spite of the increased size of stores. We plan to open a 55 to 60 net new White House/Black Market stores in fiscal 2007 at a planned size that should average 2,600 square feet.

On another note and speaking to the mix shift effect, last year the White House/Black Market sales amounted to 21.5% of annual sales with last year's fourth quarter jumping to 23.5% of sales. For this year, we expect White House/Black Market will increase to 24.5% of the overall annual sales likely with improving profit margins as we saw in all of fiscal 2005 and the first half of fiscal 2006. On the Soma side, we more than tripled the number of stores last year opening 37 new stores that ranged in size from just over 1,000 selling feet to just over 3,000 selling feet with an average store at 1,886 selling feet across all of the openings. The varying size of the stores reflects our testing of different sizes and locations for the Soma brand. You might have noticed we closed two Soma stores in February as we've learned that Soma needs to be in high traffic areas rather than destinations so we closed our Memphis and Birmingham stores which were part of our original ten stores opened in 2004. We are learning more about the size, demographic requirements, and traffic patterns required for Soma openings and we are being more selective with this knowledge with a slower growth plan for the future. The 50 remaining Soma stores now average 2,020 selling feet. We only had 15 stores open last year but those stores averaged $1.044 million per store at 434 sales per selling foot.

As noted in the press release, we have decided to step away from quarterly earnings estimates as these tend to focus the investment community on too short of a time horizon and generally the analyst community has not been far off on these estimates in any event since we published the most important number of our sales every month. We did indicate in our press release that with a low single digit same-store sales increase we leave the First Call estimates are reasonable at this time. Although we did not meet this low single digit same-store sales increase in February, February is the smallest month of the quarter and we saw signs that our spring assortment was being accepted much better than our fall and holiday offerings. Regarding operating margin, the only forward guidance we will give at this time is the same as we said last quarter. We still expect declines in the operating margin for the first three quarters with a lessening in the decline in the third quarter and with improvement quarter-over-quarter in the fourth quarter of fiscal 2007.

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 fourth quarter with just about $275 million in cash and marketable securities after buying back $200 million of stock earlier last year, and after acquiring the 22 acres of land 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 new distribution center which will likely not be until fiscal 2008 due to the lower number of stores we are currently planning. Our CapEx for the year-ended at $218 million, slightly ahead of our guidance of 200 million as we effectively exceeded our combined store opening and expansion relocation goals. We expect that fiscal 2007 CapEx expenditures will be in the 215 to $235 million range depending on where we fall in the range of store openings, expansions, and relocations. Included in the fiscal 2006 and the fiscal 2007 CapEx is about 20 to 25 million for the SAP and other conversions each year.

As most of you know, we converted the Soma Brand early this year and we anticipate converting Chico's and the White House/Black Market in the next year to year and a half. Contrary to what has been rumored in some areas the conversion went about as expected and we look forward to the next two conversions that we expect with little disruption. Regarding the possibility of a new stock repurchase plan, we are evaluating all of our possible uses of cash and the timing of such needs or uses and we will consider a stock repurchase plan as one of these options for the future.

To wrap up, we were not pleased with our fourth quarter or year-end results and we are diligently addressing what we perceive to be the issues that surround these results. We have decided to shed the Fitigues brand which added complexity to our current family of brands and which will now take some pressure off our year-over-year earnings. We have decided to slow the launch of Soma so we can refocus on profitability and improved product offerings. We have placed significant new responsibilities on several officers that we believe will help take each of the respective brands and the consolidated entity to new levels of sales and profitability.

Finally, we have reduced our square footage goals to more realistic levels that will not put excessive pressures on the staff or on the operating margin. Although no one likes to run into quarters where we missteps and where we become so clearance oriented, we believe this is short-term in nature. We realize we will have to show you that we can turn around the downward operating margin trend as we indicated should happen in Q4 this year and we realize that there will be challenges along the way but we all must also realize that we are still producing very profitable stores with enviable store economics, with strong consolidated profit margins, and solid cash flows and we intend on improving this in the future. Thanks for being with us for this fourth quarter and year-end conference call and now we'll take some questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Lorraine Maikis with Merrill Lynch.

You talked a little bit about changing the demographic focus of Soma or expanding that, rather. I was just wondering, what indications you've gotten that perhaps the younger customer would be interested in this product and what specifically are you working on to expand this before you rollout a higher number of stores?

Lorraine, we're not focusing on the younger customer. We're just focusing on a wider net, if you will, towards the targeted demographic of 35 to 55 or 60 years old. We believe that dropping the tag line by Chico's and just marketing it strictly as Soma intimates, we'll be able to appeal to any woman in that age category, if you will. Currently, 90% of the business is coming from Chico's customers, and that -- those customers are producing store sales as Charlie indicated earlier by over $1 million a store last year and we think that there's great opportunity in dropping the tag line by Chico's.

Your next question comes from Kimberly Greenberger with Citigroup.

Great. Thank you. Good morning.

Good morning, Kimberly.

I was wondering if you could just give us a little bit of color on the commentary, you indicated you're pleased with the sell-through of spring goods. I'm wondering, are you seeing better performance in your warmer weather stores or if you could just give us any color on that, it would be helpful, and then inventory planning going forward into Q1. If you could talk about where you're thinking inventories might end for the quarter and when do you think you'll be out of this somewhat depleted inventory situation you're in now. When do you feel good about your inventory levels? Thanks.

Well, we feel good about our inventory levels at Chico's currently and we're, we should be at an acceptable inventory level at White House/Black Market by mid March. A lot of that product is flowing through the distribution center right now and cascading out to the stores. Regarding the spring merchandise, it just seems that the customer was really focused on winter goods, holiday markdowns, if you will, in late January and then as we entered into February, she stayed focused on transitional merchandise, if you will, maybe stuff for like ribbed turtlenecks, suede jackets, and new colors. Unfortunately, she wanted those at a price, at a certain price which needed to be marked down. As we got deeper into the month of February, it seemed like she turned her head to spring merchandise after President's Day and we're really starting to see a nice sell-through on the spring merchandise post-President's Day and with a very nice margin at both brands.

And we did see improvement in the Southeast for a change. It's not one of our worst districts. As you heard when our Florida comp was in the fourth quarter, that has turned around so we were seeing strong sell-throughs down in where we were not having weather problems. If you noticed the Midwest was down double digits, they got pummeled by weather all month long.

Thanks, Charlie. Thanks, Michael.

Your next question comes from Lauren Levitan with Cowen & Co.

Thanks, good morning.

Lauren.

Scott, I was hoping you could elaborate on your comment that you haven't fully realized those corrective measures. If you could give us some sense as to how those product and merchandising initiatives and maybe marketing initiatives are flowing through and what we should be watching for over the next couple of quarters, and then I was hoping you could also just give us a little bit more information on Soma. With the lower store count over the next couple of years, what does that mean in terms of your thoughts about when the brand may reach profitability? I know in the past you'd talked about '08. Is that still realistic? And then related to that if you could also just talk about the marketing initiatives or other initiatives you think will allow you to reach beyond that core Chico's customer at Soma. Thanks very much.

As far as the operational initiatives, the things we talked about over the last months were everything from store payroll to really focusing on the merchandise and bringing an offer that was a lot more focused in fashion terms and it just seems like at the Chico's core brand that the customer, any time she sees something that she perceives is already in her closet, she will only pay for it at a markdown price. Anything that is new, she is willing to pay full price for and we've just, when I talk about getting -- we haven't fully recognized the operational initiatives. Primarily it's still on the product side, Lauren.

Regarding Soma, I think as far as when it's going to breakeven and start to make money, certainly, that's going to spread out a little further than '08 at this point when we slowdown the store growth but I'm much more concerned with building the foundation of the Soma business, reaching out to other customers, non-Chico's customers, and making sure that we have a great foundation for long term growth than whether or not we breakeven in '08 or '09. This customer, in all the customer research we've done, the customer has voted for the Soma concept. The issue at Soma that we've experienced really comes down to execution. We just recently turned on the SAP software which is our replenishment software that we needed, we really needed to fire up this business. We've spent a lot of time strengthening the management team. We just hired a new stores leader. We just hired some new product development people. This drop in the Buy Chico's tag line is going to be a very positive move for the business, and we want to see what all of these initiatives can deliver for the brand before we start definitively forecasting a break even time frame, if you will.

As far as what new marketing initiatives we might undertake to drive the customer, I'm going to flip it over to Michael and let him give you a little bit of color on some of that stuff.

Lauren, some of the things we're doing is really relooking at the way we're opening Soma stores so we have a new grand opening strategy, and because of where our -- the way our real estate is arrayed, we have an opportunity in certain markets to do some television and some other media to really get attention for this brand.

Great. Thanks very much and good luck.

Your next question comes from Randal Konik with Bear Stearns.

Hi. Thank you very much. Pleased to hear about the comments on the focus on the core businesses. Scott, when you just think about the strategic direction of the Company in terms of your portfolio strategy and so forth with the recent closing of Fitigues, can you just give us an update of how you think about longer term? Should we think that the next few years we'll continue to see a very strong focus on White House and Chico's and building Soma and don't expect acquisitions using cash for buybacks? And then just secondly, you talked about some of the new management appointments moving away from some of the shared services type of model. What other kind of hires do you need to make in some of the divisions to fortify that move away from shared services? Thank you.

It's not as much as far as, I'll answer the shared services question first. It's not as much as additional hires as it is really re aligning the reporting structure. We have great field people. We have great marketing people. We have some very strong people. Currently operating in those brands, it's really who they're reporting to from a shared services up to a President's structure. Regarding the future outlook strategically, you're exactly right. Our focus right now is on the core brands. We're going to worry about an acquisition strategy a little further down the line when we're really tracking and posting the type of result that we expect internally on our businesses and along the way, we should be accumulating a nice amount of cash and we'll continue to evaluate what usage we want -- what we want to use that cash for, but I don't think you should expect to see any M&A activity done here for quite some time.

Thank you.

Your next question comes from Brian Tunick with JPMorgan.

Two questions, I guess, maybe Scott, as far as initial price point at Chico's, it looks like we've seen some of the more basics, I think pricing come down. Maybe you could talk about how you view initial selling right now and then as far as Michael, you didn't talk about Passport at all on the call which I think is the first time I ever heard that and maybe just talk about what you're seeing there, what you saw in the fourth quarter and maybe any marketing initiatives at the core Chico's business, maybe that you've had a chance to sort of look at and changes we could see coming this year. Thanks very much.

Your read on some of our price points is exactly that. We are doing a full evaluation of our price points, especially on key items, tees, things like that. As far as flipping it over to Michael to talk about the Passport database, certainly, he can speak to that. As far as flipping it over to Michael to talk about the Passport database, the Black Book database, certainly he can speak to that, but we're not going to spend any time talking about what marketing initiatives you're going to see in the future just as we're not going to spend any time talking about what merchandise changes you might see but with that, I'll flip it over to Michael.

I guess Scott took me off the hook on the marketing question, I appreciate that. As far as, Brian, as far as the Passport program and the Black Book program go, the growth rate of the total database as a percent of the total has slowed over the last couple of years and you guys know that but what we're really focused on is acquiring new customers of course but also in growing the number of active customers that we have, and when we look at active customers on that database, they're the most valuable ones obviously. We look at them on a 12 month rolling basis. In Q4 '06, versus '05, the active number of customers for each brand was up so we're really encouraged by that and then the second thing we're really focused on, is we get more of these customers on the database active. It's raising the average dollar sale that we get from them.

Your next question comes from Barbara Wyckoff with Buckingham Research.

Hi, everyone. Good morning.

Good morning.

Question about Soma. Soma has been building its own bras with inconsistent results. Are are you looking at using third parties to help improve the hit ratio in Soma and if so who are you using and what is the timing of the first receipts? And then sort of adjunct to that, could you talk about how you testout a new bra? Do you do wear tests with employees or do you just decide, use a fit model and then just decide to buy it? What exactly is the process in Soma now?

Barbara, I think there's a misunderstanding. We have not been building our own bras. We have been using third party vendors since the launch and so I don't know where that miscommunication came from and I want to make sure we clear that up. As far as the vendor base that we've been using, VF, Ace, Triumph, these are people that we've been partnering for quite some time now. We are attracting a much stronger vendor base when we went from 15 stores to 52 stores, we came -- I think we really woke up the vendor base a little bit and they realized our committment to this and until then, we really didn't have access to a lot of the technology that's out there driving the bra business today, and we're in a real technological cycle in the bra business, so we're much more excited about our vendor base and our vendor relationship than we are today. What was the -- was the second part about a wear test?

Yes, do you conduct wear tests?

Yes, we conduct wear tests both internally and as well as with our customer base.

Okay. Thanks a lot.

Thank you, Barbara.

Your next question comes from Adrienne Tennant with Friedman Billings.

Good morning everyone. First congratulations on everyone on their promotions. My first question, Scott, can you talk a little bit about the slowdown in the square footage growth in '94, '95 and what you learned from that and how you think it parallels kind of the Soma slowdown now? And then in terms of the inventory plans, Charlie can you talk about where you think on a per square foot basis they should be at the end of the first quarter or the first half of the year and do you still want to be at that kind of mid $60 level even in the larger stores? Thanks.

I'll start with the inventory one. We're buying more conservatively than we have in the past. I think we're doing a much better job at that and I think you'll see slightly reduced inventory per square foot numbers throughout the rest of the year, not just the first quarter so you'll see them come down off what they were last year. Scott?

Yes, regarding the similarity between the slowdown at Chico's '94, '95 and the slowdown in Soma, in '94, '95, we had just gone through an explosive growth period. The IPO was in '93 and we didn't feel like we had our arms around store service. We didn't feel like we had our arms around the proper distribution processes. We were right then. We had just changed to the Island Pacific Software and we were on a steep learning curve there. We weren't -- I think we weren't really solid on our real estate strategy. I think we were leaning too heavily towards malls and we were going down the wrong path there so we slowed down really, it was really the Thanksgiving to Christmas period of '94 into early '95 and we just took a deep breath and said let's make sure that we have the foundation of our business very solid before we go back out there and start running the growth up. And there's a lot of similarities to where we are in the Soma life cycle.

We just changed over to SAP. Distributing goods at both in the stores business and in the direct business, it's a little different with intimates than it is for sportswear. We really didn't have the right level of store leadership. I certainly, I can tell you dropping Chico's off the tag line is going to have an impact on our real estate strategy and we need to make darn sure we're analyzing that stuff before we go out there and go from opening 35 stores to 45 stores because when you sign a ten year deal on a piece of real estate, if you're paying $200,000 a year in rent, it's like signing a $2 million note. These are big decisions and so just to me it's much wiser to slowdown the growth and to make sure that we have a very focused model and I think that's the right direction.

Okay, great. Charlie, just two housekeeping questions. As we look at the store break down by quarter, should it be smoother than last year because there was that big pop in Q3 and then where should we be thinking about kind of a breakeven comp for this year if you're willing to kind of give that color? Thank you.

Well, we said all along in the breakeven comp the first three quarters we are not going to have a breakeven comp because of the mix shift and the larger stores and I don't know what the number is but it's a big big comp so you're going to see operating margin decline the first three quarters. Regarding the mix of stores the third quarter is going to be the heaviest. It will not be as heavy as last year, it will be slightly ahead of '05. If you look back to '05, right now we're forecasting Q2 will be a little heavier than '05 but nowhere near what happened in '06 for Q3 and Q4.

Okay, great. Thank you very much and good luck.

Your next question comes from Dana Telsey with Telsey Advisory Group.

Good morning, everyone.

Hi, Dana.

Hi. Wondered if you could give us an update on I believe SAP was introduced in February for Soma. How did that go, and Michael Leedy, catalog and lifestyle marketing, how do you see the catalogs progressing? Where will they be going to from where they are right now? And lastly, you had chatted in the last quarter about clarity in the product offering for each of the different brands. Do you have more clarity on that and when do you think you get to where you want to be? Thank you.

I'll take the SAP question.

Sure, Dana, I'm going to answer your question about the mail order marketing first.

Thank you.

The mail order marketing has been improving but there's still plenty of room for improvement. I think maybe when we pushed over to life cycle we pushed a little bit too far and the pendulum is now swinging back and we're adjusting. Our goal is to make sure that the customers feel the lifestyle part of the shoot in the catalog but also get a really clear understanding about what the product is and what the details are in the product and if you follow our mail orders closely you probably have seen that already start to happen. You're going to see more of that as we move forward.

As far as the SAP, we have a Vice President of IT that has done 27 SAP implementations and it really couldn't have gone any better. Charlie and Michael tell me that there's a little noise out there that it didn't go well and that is incorrect. I mean, we've already processed purchase orders, store to store DC transfers, reallocations, full replenishment, we're matching invoices using the new process, we're printing checks, we're posting on the general ledger, sales transactions between POS and SAP. I mean, our business intelligence reporting, we're getting our reports and our queries, our markdowns are coming through, our documents are being passed between SAP and the old legacy system. I can't imagine an SAP conversion going any better, but with that being said, there's a tremendous learning curve on the Soma group's shoulders right now to learn how to use the software now that it's up.

Got it. And then on the product offering?

I'm sorry, what was the question on the product offering?

You'd mentioned that you would be looking to attain more clarity in the product offering for each of the different brands. How are you given that obviously there's been changes in leadership in some of the brands, how are you in getting the clarity of the direction of where you want the product to be or what the brand stands for or means?

Well, I will tell you, part of the change of Michele's title to CMO is she now has full authority over the merchandise. Until yesterday, Pat still had full authority over the merchandise. While Pat had done a magnificent job for nine and a half years for the Company and will still travel with Michelle and Linda over the next three to six months, the burden now rests clearly on Michele's shoulders, and the timing of that is important because we're just about to put Fall and Holiday to bed over the next 45 to 60 days and so I believe that we have -- it's also important to point out, Dana, that even though the authority has switched from Pat to Michele, the team below them has not changed. Linda Costello and her entire group are still the product development team reporting up to Michele so I think it's really the back half of this year before we fully see the operational initiatives that we've undertaken at the Chico's Brand, and Patricia and her team, I believe, are much closer than the Chico's Group.

Dana, it's Michael Leedy. The only thing I would add is that the marketing and merchandising groups work more closely than ever before, so when we launch new product or deliver new product, the messages from a marketing standpoint, are going to be a lot more clearly focused on the product.

And then on the Soma product, we have actually new bra styles every month through Fall, and 60% of the bra styles will be new by late Fall, and we continue to build on the successful bras that we have out there as well as we just launched -- had a new panty launch that we were a little sluggish and we wanted to get it out before the SAP conversion shut down the DC for a little bit and we didn't do that so the new panty launch is really out there over the last week and we're seeing good sell-throughs on that.

Thank you very much.

Thank you.

Your next question comes from Margaret Mager with Goldman Sachs.

Hi. A couple things. On the store growth for Chico's and White House/Black Market over the next two years, I'm just wondering what is your end target -- or in terms of total store potential for both of those brands and has that been changed at all in light of your slowing square footage target? And then on White House/Black Market, could you just talk about the new spring product and the current competitive environment and how you're feeling about that White House versus the competition? I don't know if I missed it, but did you say anywhere what February comps were for Chico's and White House and if so, can you just repeat that for me? And lastly, on Soma, the loss widening in 2007, can you just give me the one liner on why that is? The management changes or strengthening management team at Soma is that the things you mentioned, the stores leader, product development people, et cetera, And lastly, why is it beneficial to drop by Chico's from Soma? Is that a negative commentary on the Chico's customer vis-a-vis the Soma brand? Thanks.

Let me start with the first few and I'll let these guys, I'll let Michael take the Soma and Scott's got one of them but we're still at between 700 and 850 stores for both Chico's brand and White House/Black Market brand. That's not really affected by the strolling down of the numbers. Most of the slowing of the numbers you'll notice was on the Soma side. It was not necessarily on either the Chico's or the White House side. In fact I think the White House side increased a little bit for '08 so that has not affected our overall view of either of those brands. Regarding the comps, we don't put that in our press release by brand. I do read it on the sales information line that we have in White House/Black Market on an adjusted basis was down 7% for the month while Chico's was down 3% for the month to get to that 4.3% that we were down. I also talk on the press release about the unadjusted comp expense, like if that's interesting to you as well, and that's mainly for comparability purposes to those retailers that do report an unadjusted comp.

Regarding the widening loss in '07, that was somewhat predicted and driven primarily by stacking 37 stores on top of a store base of 15. Regarding the question of how White House merchandise is stacking up, if I heard it right, Margaret, against the competition in spring, I think that again, I don't think the customer at either brand turned their head towards the spring merchandise until after President's Day, so I don't think that we have a good read yet on how we're stacking up against the competition.

Margaret, it's Michael Leedy. In regards to your question about Soma by Chico's changing to Soma Intimates, we love the Chico's customer. We think it's the best customer in the world, so it's in no way a commentary on the Chico's customer. It's more about the psychology of customers in general. We think we can continue to market very very successfully to the Chico's customer without having to buy Chico's name on the front of the store, but we think by dropping it and adding intimates, it adds a lot of clarity about what the store is about to other customers and really opens us up to Talbot's customers, J. Jill customers, Banana customers, you name it because we think we have a product that really serves everyone.

And with her shopping only twice a year for this category, Margaret, it's really important that we again. that we sort of cast a wider net for customers than just the Chico's customer.

Okay.

And the reason that we named it Soma Intimates, I mean, Soma by Chico's was so that we could eventually drop the by Chico's. That's been in the design since we named it Soma by Chico's. We just decided that now was the right time to do that.

Makes sense. Thanks and good luck in '07.

Thanks for the question, Margaret. I guess we got time for maybe one or two.

Your next question comes from Tracy Kogan with Credit Suisse.

Good morning. You guys have talked recently about long term operating margin goals of 16 to 18%. What does this assume for the long term potential margin at each of the businesses and what level of comps do you need to achieve those goals? And then just secondly, Scott, at Soma, what is it that you perceive to be the biggest problem there? Is it the product? Is it the in store environment, the service level? Just a question on Soma. Thanks.

We've talked on the operating margin line that we think we can get back to a 16 to 18% overall operating margin on the longer term, not the shorter term and once we get by the anniversary on these larger stores, the mix shifts that are much more dramatic early on than they are later on when the brand can actually catch up margin wise with with the mix shift, that will happen about the fourth quarter. Now, because of what happened this fourth quarter versus last year, that might not be a fair one but after the fourth quarter, we should be in the 5 comp range, 3 to 5 comp range from where we would either breakeven or leverage cost and that should stay pretty steady once we get beyond the mix shift and everything else that is going on this year that we've talked about for the last two years and I'll let Scott take the Soma side.

Yes. In the apparel business, be it sportswear or intimate, there are two primary things to drive your business. Product and customers. I think our product is improving every day, especially as we took the store base from 15 to over 50 and the vendors are really interested in doing business with us today. The second is customers. We have to drive more customers to the store and that is where our focus is and that is -- product and customers and that's where our focus is.

Your next question comes from Neely Tamminga with Piper Jaffray.

Great. Good morning. Scott, could you comment a little bit on what seems to be a test online this Chi-Cats, and who is this under in terms of the focus internally, and just kind of wondering where you might play and take this girl's apparel? And then also, if you could comment a little bit on the leadership at Soma. I mean, clearly dropping the Chico's name has been part of the plan, probably is a very good idea to cast that wider net but are you guys operating Soma as its own entity similar to the brand President structure even though you may not have a named brand President or is it still folded in under Chico's. Thanks.

Thank you, Neely. The Chi-Cats, again is not a test to launch a children's line. It's a gifting strategy. We know that the Chico's store experience is a very warm, friendly experience. We have a lot of grandmothers and mothers that shop in that store and Pat and Linda and Michelle came up with this idea to have some of this merchandise in the stores for Christmas. And then we followed that up with some of it at Valentine's Day and we'll have a little bit more of it throughout the year, but it is not a test for a children's line launch, I want to clear that up. Regarding Soma, and leadership, the Soma Intimate apparel business still reports to Chuck Nesbitt. We're still under the shared services model there, and we'll probably continue in that model in '07 at the Soma Brand.

Thanks.

We're going to have time for one more question.

Your final question comes from Jeff Black with Lehman Brothers.

Thanks and good morning. I just wanted to quickly revisit the shared services and get a better sense of what are the key benefits you're targeting from this move. Is it more efficient product development, reduced lead time, lower cost? And secondly, on the AUR hike or rise in White House in February, does that indicate anything about Spring, and what we're seeing in terms of product traction there? Thank you very much.

The first question really is about clarity of concept and clarity of offer and clarity of the brand. It really needs to come through one person. There needs to be the vision of that business, needs to be driven by one person instead of having stores being designed under a store leadership team for all the brands, marketing being run for all three of the brands, store leadership being divided, store visual, it all needs to be run through one brand leader so that there is a clarity of concept and offer and a crisp message delivered to the customer. That is the change that we're moving towards structurally. What was the back half of this question?

Again, the AUR trend, if you will, really at both brands, when you look at again the customer really in our mind didn't turn our head to Spring merchandise until after President's Day. That got sort of exacerbated a little bit at the White House brand when we came in on such a light inventory at the beginning of the month, and we won't be up to acceptable inventory levels until the middle of March so I would say that the AUR trend at White House in February was driven primarily by the inventory level. The mix and the fact that the weather really drove the customers buying habits through President's Day.

Great. Thanks. Good luck for '07.

Thank you very much for listening to the call and participating and we'll follow-up with calls to Charlie and I as soon as we hang up the call. Talk to you soon.

Thank you everybody for attending the call.

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