Chico's FAS Inc (CHS) 2007 Q2 法說會逐字稿

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Chico's second quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

I will now turn the call over to Mr. Michael Smith, VP, Investor and Community Relations. Please go ahead, sir.

Welcome to Chico's second quarter 2007 earnings call. Today we have with us Scott Edmonds, our President and CEO, and Charlie Kleman, our CFO, who will discuss business. This will be followed by Q&A.

Prior to starting, let me 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 filings 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 affect the Company's business, results of operation, and financial condition. 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 introduce you to Scott Edmonds, our President and CEO.

Thank you, Michael, and thanks to everyone for attending our second quarter fiscal '07 conference call. With me on the call today are Charlie Kleman, our CFO, and for Q&A, I have Michele Cloutier, our Chief Merchandising Officer for Chico's, and Michael Leedy, our Chief Marketing Officer.

Net sales for the second quarter ended August 4th, '07, increased 8.1% to $436 million from $403 million for the fiscal '06 second quarter ending July 29th, 2006. Income from continuing operations for the fiscal '07 second quarter was $39 million or $0.22 a diluted share, compared to income from continuing operations of $54 million or $0.31 a diluted share in the prior year second quarter. As previously reported, comp store sales decreased 5.6% for the 13-week period ending August 4th, 2007, compared to the comparable 13-week period last year ending August 5, 2006. The Chico's brand same-store sales decreased by approximately 6% and the White House/Black Market brand same-store sales decreased by approximately 3%. Gross profit for the fiscal 2007 second quarter increased 3.2% to $252 million from $244 million in the prior year second quarter. Gross profit as a percentage of sales for the current quarter was 57.7% compared to 60.4% in the prior year's second quarter. White House/Black Market's front line stores merchandise margins in the current quarter decreased by approximately 360 basis points compared to the prior year second quarter. The margin decrease at White House/Black Market was attributable primarily to a higher markdown rate.

At the same time, the Chico's front line stores merchandise margins for the current quarter decreased by approximately 120 basis points due primarily to a higher markdown rate, and to a lesser extent from a slightly lower IMU, or initial markup on new products. To a lesser extent, our overall gross margin was also impacted by the mix effect resulting from the White House/Black Market and some intimate sales continuing to become a larger portion of our Company's overall net sales, both of which operate with lower gross margins than the gross margins experienced by the Chico's core brand, and by our continued investment in the product development and merchandising functions for each of our three brands. No one at Chico's is pleased with our performance so far this year. This is a difficult time, and our results show that. But we continue to take action to improve our underlying performance while we compete within a difficult macroeconomic environment. We will continue to work hard to address expenses in the back half of 2007, and we will be extremely disciplined regarding our inventory management.

We have also implemented a more stringent capital allocation process with a higher bar for cash flows and return on invested capital. To that end, we're going to take a more conservative approach to our annual square footage growth for 2008 and 2009. We are now planning for square footage growth of approximately 12% to 15% for fiscal year 2008, and in the range of 10% for fiscal year 2009. These plans, however, will depend on the market conditions over the next six to 12 months. We continue to take action across the Company to improve our performance, even though we continue to see year-over-year gains in the total number of active customers in each of our brands' loyalty programs, we'll be launching a test of our new loyalty program in the near future. Michael Leedy and his team have spent the better part of 2007 conducting the program research to enhance our already outstanding customer loyalty program.

We've also been working on improving the visual presentation of all of our brands. We recently completed a visual presentation test -- excuse me, test project for the Chico's core brand, which received a positive response from our customers. Accordingly, we would intend to implement this new visual presentation in a group of key locations in the immediate future. Since Michele Cloutier was promoted to Chief Merchandising Officer of Chico's on March -- in March 2007, she has been taking corrective measures to improve our product assortment. As we indicated on the last two conference calls, Michele's impact would begin to be seen in the third quarter. So far, she's been able to impact some of the merchandise in the third quarter, more in the fourth quarter, and all of 2008.

Regarding our core brand Chico's second quarter performance, our product mix, combined with our decision not to deliver a June catalog, resulted in poor performance for the Chico's brand. Although we positioned the sale postcard to anniversary the last year volume, it failed to deliver the sales of a full catalog presentation. This is in key higher priced fashion in novelty led to a suboptimal product mix dominated by lower priced wear-now merchandise. In addition, by distorting the casual side of our assortment, we failed to maximize our dressy product offerings, forcing our customer to shop elsewhere for her occasion dressing. Despite these challenges, we navigated through the quarter by effectively managing markdowns and drove successes in several key product areas. Although the macroeconomic issues have continued in August, we have found some success in our strategy to increase our bottoms business, and have seen some nice selling in our transitional and fall product, particularly in sweaters and outerwear. Even though the August results for Chico's month to date are trending similar to the past few months, we're seeing the beginnings of a positive reaction to our first fall catalog, which just arrived in customers' homes within the past week.

Our outlook on the balance of the season remains optimistic. We're seeing payback on our pants and denim investment, and we're on track to deliver increasing amounts of novelty and fashion. We have corrected our assortment imbalance, and we will deliver many new product choices that we believe should satisfy both our customers casual and dressy needs. As a result of our continued optimism, we have decided to substantially increase our marketing spend in the second half of 2007 compared to the second half of 2006. We believe this initiative will help to protect and enhance our market share and should also serve to highlight our fall and holiday offerings.

As you are all aware, Donna Noce was named President of White House/Black Market effective August 8th, 2007. The complexity of a business increases exponentially above $500 million in revenue, and although it will take some time for Donna to get her arms around the business, we're confident in her ability to lead the White House/Black Market brand. Regarding the recent second quarter performance of the White House/Black Market brand, after struggling through the first quarter and identifying significant fashion misses, we chased the emerging trends into the second quarter. We overreacted to first quarter selling in certain categories and chased overly aggressive buys. As we built the inventory, the sales never materialized to our expectations, leading to over-assortment and high inventory levels. Even with the chased buys, we still did not maximize the most current fashion trends and wound up with duplication across silhouette, print and categories. This left us with heavy markdowns to clear in the months of July and August.

Coming off a difficult second quarter, the White House/Black Market business continues to struggle with product and merchandising challenges. The assortment did not transition well as we entered August, which resulted in sluggish full price business. Fashion and newness is working, and generating the highest productivity. However, the investments are small, and do not have the velocity to sustain and drive strong top line full price sales. As for the next steps and opportunities, the White House/Black Market team is quickly responding to emerging business and fashion trends, and is currently reevaluating fourth quarter deliveries. We are also working on repositioning our investments in inventory to increase penetration of fashionable, brand-right merchandise, and rebalance by category where appropriate.

Today the Soma Intimates business has 63 front line locations and one outlet. Although we are realizing improvement in the Soma Intimates business, we still have a lot of hard work ahead of us. On the first quarter earnings call, I stated that we had successfully converted Soma Intimates to the SAP software. I also indicated that this conversion had a negative impact on the business in the first quarter that was somewhat more than expected. The Soma Intimates team has since become more proficient with the system, and is gaining a better understanding of how the SAP software can be used to more effectively manage the business. We are planning several exciting product launches for Soma in the second half of 2007, and we will be supporting these launches with additional marketing dollars. We expect to see an improvement in the Soma Intimates brand in the second half of 2007.

We continue to be very excited about the growth of our direct-to-consumer business, with second quarter revenue increases of 42% and Web traffic up 108% over the same period last year. We continue to take market share from our competitors through this channel. We will continue to fund this area of tremendous growth for all three of our brands through additional investments in technology, head count, and added infrastructure.

Our CFO search is going well. We have two very solid candidates that are highly interested in joining our Company, and I expect to finalize this very important search some time in the second half of 2007. In the meantime, I greatly appreciate Charlie's continuing commitment to Chico's and his support of the many initiatives we have underway to improve our company's performance. On August 24th, Chico's FAS announced the appointment of John J. Mahoney to our Board of Directors. John is the Vice Chairman and Chief Financial Officer of Staples Inc. He has been with Staples since '96, and is also a former partner of Ernst & Young. We're delighted to welcome John and his outstanding background and retail experience to our Board of Directors.

To summarize, we recognize there are a multitude of challenges out there. However, our core brand, Chico's, continues to be among the most productive specialty stores in America, generating outstanding cash flows. The White House/Black Market brand's revenue and profitability has shown improvement every year since we acquired the business in 2003. We maintain our confidence in the expansion of this brand as a significant contributor to our Company's future growth and profitability. The Soma Intimates brand is improving every day, and once a customer discovers the brand, she is very loyal. When we look at the action we've taken over the past year, the loyalty of our customers, the strength of our Board and executive team, the passion of our 14,500 Company associates, our extremely impressive balance sheet, and most importantly, our three unique brands, we firmly believe we are in a position to once again be the premier specialty retailer in America. Now I'm going to turn it over to Charlie for the financial update.

Thanks, Scott. And good morning, everyone, and welcome to our second quarter conference call for fiscal 2007. The second quarter of this year was certainly a challenge for most of the apparel industry and for Chico's, as well, as we continue our investment in larger stores, we continue our investment in improving store service, and we adjust our mix of styles to a generally lower retail price point, which has negatively -- has been negatively affecting our same-store sales for most of the year. During this time, we've been focused on improving the newness and assortment of our fall product offerings, including an improvement in the average unit retail, and we are just now entering this exciting season.

As you can see from the press release the quarter saw an overall mid single-digit decline in same-store sales, with a mid single-digit decline for the Chico's brand, and a low single-digit decline at the White House/Black Market brand. The mid single-digit decline in Chico's in same-store sales was in spite of a 10%- plus decline in the average unit retail, while the low single-digit decline at the White House/Black Market brand same-store sales was in spite of a 7%-plus decline in the average unit retail at that brand. I bring all of this up to show that during the first half, we saw strong average store transaction levels at both brands, and that helped us offset some of this decline in the average unit retail. During August, we have seen some continuing declines in the average unit retail, with declines in the number of transactions in-store, as well, thus the continuing decline in the same-store sales results. Looking to the future, our receipts indicate that we should see improved average unit retails for the fall at the Chico's brand, and flattish average unit retails for White House/Black Market this fall, subject to improved markdowns year-over-year at both brands.

Turning to inventories, our inventories are again somewhat below plan at the end of the quarter as we pursue a more conservative open to buy, and we aggressively cleared our spring and summer product through June and July. With that said, we were pleased to end the second quarter with a relatively clean inventory at $58 per square foot versus last year's $68 per foot. Year-over-year inventories are up about 11% on about a 12% sales increase for the first six months. We expect to see inventories per foot increasing from the $58 per foot as we move through fall, although they are again, likely to be down on a per square foot basis at the end of the third quarter. The large store opening program in last year's October and November time frame distorted our inventory per foot last year at the end of the third quarter, as we ended up at a $77 per foot level, principally to support the new and relocated store programs. Inventory levels at the end of the third quarter are traditionally our highest, but generally that is likely to be in the high $60s or low $70s per foot, and that's where we expect it this year.

From this discussion on the inventories, let's move to gross margins next. As the press release indicates, the Chico's and White House/Black Market brands both experienced declines in their merchandise margins, with White House/Black Market down by 360 basis points and Chico's off by 120 basis points. White House/Black Market, as we mentioned last quarter, was up against its highest ever merchandise margin, with last year's record second quarter merchandise margins. During the second quarter this year, we experienced higher than planned markdowns due to the sales softness throughout the quarter, and this put pressure on June and July margins at both White House/Black Market and Chico's. The Chico's brand was also up against near record merchandise margins last year and through conservative buying, we managed to keep inventory clean, with only a 120 basis points decline in merchandise margins for the quarter, in spite of the softness in sales beyond our expectations.

Looking to the third quarter, we expect merchandise margins to be slightly down, or in the range of last year's merchandise margins for each of the brands assuming we see a turnaround in the comp to slightly positive. Remember, though, that even with all three brands in the range of last year's merchandise margins, we would still expect to see overall decline in gross margins largely due to the mix effect we've discussed in many previous quarters, as the White House/Black Market and Soma front line stores continue to gain share in the overall sales. As you can see from the press release, White House/Black Market is now 25% of the overall pie of sales versus approximately 22% in last year's second quarter.

Other items affecting the 57.7% overall financial gross margin includes our continuing investment in our product development and merchandising departments as a percent of sales, as we are intent on getting back to leading the missy sector in product innovation. The investment in this area, principally in head count and depreciation of the SAP software investments, decreased the overall gross margin by about 40 basis points for the quarter, and we anticipate this will continue at least at this level for the rest of this fiscal year.

Turning to SG&A, we kept our marketing expenses relatively the same as a percentage of sales, while we saw deleverage in both the stores and shared services cost areas. Scott's already discussed our intent to increase our marketing efforts for the back half of the year, so I won't spend much time on this area. On the stores front, the deleverage we saw in the second quarter is essentially the same story as in the the first quarter, although the larger decline of same-store sales in the second quarter aggravated the deleverage somewhat more than we experienced in the first quarter. At the end of the first quarter, we indicated that the stores deleverage was principally due to the larger stores and the investment in store service. As we anticipated, that has continued into the second quarter. We expect to continue to experience deleverage in the third quarter due to the larger size stores, although we believe this will lessen as we enter the fourth quarter, where we anniversary the large number of stores opened in last year's third and fourth quarters.

Regarding the investment in service levels, this October we will anniversary the initial increase in store payroll we implemented to address service levels in last year's third quarter, and we expect this area should become less of a drag on SG&A in both the third and fourth quarters. Speaking to the numbers in the occupancy and payroll areas for the quarter, we saw deleverage in the occupance area by almost 200 basis points, as well as deleverage in the store payroll area by about 130 basis points. Lastly, the shared services area showed a 100 basis points deleverage, principally revolving around relocation and recruitment costs associated with our extensive hiring in the merchandise, product, direct-to-consumer, marketing support and MIS areas. For future expectations, we expect moderating deleverage in both store operating expenses and shared services costs for the third quarter, with even more moderation and even leverage of these costs in the fourth quarter, depending on our same-store sales results.

Regarding store openings, we've opened a net number of 48 new stores, excluding the 10 Fitigues closures, during the first half of the year. These openings include 19 net new White House/Black Market stores, 17 net new Chico's stores, and 12 net new Soma Intimates stores. Beyond that, we've expanded or relocated 29 additional stores during the first six months. The rest of the year shakes out with approximately 55 to 60 or so net new store openings in the third quarter, and 25 to 30 net new stores in the fourth quarter, along with another 20 to 25 relos and expansions that are weighted toward the third quarter. This should leave us with -- for the year with 55 to 60 net new Chico's stores, 55 to 60 net new White House/Black Market stores, and approximately 18 Soma Intimates stores, for a total of 130 to 140 net new stores for fiscal 2007, with just north of about 50 relos and expansions. During the quarter we also sold 105 acres of land originally acquired for a new corporate headquarters for a small gain, and subsequent to the end of the second quarter, we realized a roughly $0.02 nonoperating income gain from the sale of our Lucy investment to VF Corp. As this point, we are no longer associated with the Lucy chain.

To wrap up, we've closed a challenging second quarter and we look forward to the fall selling seasons, and the new opportunities it brings. Our store opening program is on track. We are focused on improving our sales results of our core brands, improving our overall profitability, and improving our return on invested capital. We continue to build stronger and more innovative merchandising, marketing and direct-to-consumer teams to improve our newness and innovation in the merchandising arena and improve our branding to the customer. Thanks for being with us in the second quarter fiscal 2007 conference call, and now we'll take some questions. Operator?

(OPERATOR INSTRUCTIONS) Lauren Levitan, Cowen and Company

Scott, I was hoping you could give us a little bit more color on your thoughts on the higher hurdle rates and higher return on invested capital rates that you're looking for? And if you could apply that to where the square footage cuts are being contemplated? How should we think about the balance of that square footage growth in '08 and '09 across the different brands, particularly as it looks as though the incremental square footage this year has been substantially less productive? So any additional thoughts on that in terms of new (inaudible) expanded, where you're getting the best return would be very helpful. As then a follow-up, I'm wondering on the marketing if you're more focused on acquiring new customers or if you're going to be deploying those incremental marketing dollars to go back to the Passport members and Black Book members, and really try and re-engage them and increase their share of wallet. Thanks.

Lauren, it is obvious that the new store productivity is down, and that is one of the reasons why we feel like we really have to take a stronger look at ROIC, where we allocate dollars by brand, by new store, expansion, relocation. But the slowdown in '09, or the reduction in the percentage of growth on a square footage basis really only cuts out 30 to 50 units. We still will be opening a great number of stores, which in my opinion, is an attack on additional market share. As far as the breakout by brand, we haven't determined exactly what the impact on the the slowdown is going to be in '09 by brand. But we're looking, relevant to the ROIC comment, it is obvious where our ROIC has gone over the last several years, where three to five years ago when we were a single brand, we absolutely were in the textbooks at the universities it was so high, and everything we've done has sort of diluted that. And so we've really got to spend more time, I think as an organization, trying to make that turn, and that's relevant to everything we do, not just real estate. I mean, where we deploy our dollars, whether it is SAP, shopper track, real estate, stores, expansions, relos, HQ expansion, every initiative, I think we need to do a much better job in scrubbing the return. And it is across the board, not just on the real estate, Michael do you want to hit the -- ?

Sure. Lauren, hi. It is Michael Leedy. To answer your question about the increased marketing spend, both. We want to acquire new customers and we also want to Passport customers to engage more with the brand.

Can you give us a sense of how that will manifest itself? And then follow-up for you, Scott. Is there a component of the investments of the last twelve to eighteen months that, looking back, have been the biggest drag on those returns, whether it is relos or expansions or a certain type of investment that you would identify as being more problematic?

Lauren, hey, it is Michael. I am going to answer your marketing follow-up question first. I can't really get into the details of how the marketing program is going to manifest itself. But again, both Passport customers and new customers are important to us. And we're in a pretty competitive environment. We have some competitors that we know are out outspending us. And from our own research, and research that has been done independently, we know that from an overall brand awareness we have some gains we need to make. That's what we're focused on.

Lauren, I can take the the question regarding the last year and where we've seen declines in the the profitability. And we saw initially the Chico's brand, as it slowed down, the new stores slowed down faster than the existing stores, and we've recently seen the same is holding true at White House/Black Market. And this is a function of where we are with our product, where we are with our traffic, where we are with the macroeconomics. We see it as a short-term trend. We don't think the size of the stores is necessarily wrong at this point. But certainly, that has aggravated the problem. As you keep opening larger stores and the sales are slowing, that certainly aggravates the problem. So we're reassessing that. But I don't think there is any major change going on right now to that, because the size of the store is more of a long-term investment where we need to get petites or we need to get other brand extensions into the stores. And we haven't got there yet with that because we've been working on just getting the sales back to where they should be. We will get to that.

Great. Thank you and good luck.

Kimberly Greenberger, Citigroup.

Scott, you commented in the press release that you believe you've got exciting new product offerings this fall. I am wondering if you can talk to us a little about about what is giving you confidence that the merchandise in heading in the right direction, and any sort of color directionally on merchandising would be helpful. And then secondarily, you mentioned that in the second quarter, June in particular, you guys made the the decision not to send out a catalog, instead replacing it with a postcard. There have been a number of cases over the last twelve months where there have been adjustments to the historical marketing plan that have not panned out. How are you thinking about tweaking this marketing program going forward, and should we expect additional adjustments with the potential for bumps in the road as we go through the next 12 to 18 months? Thanks.

Kimberly, before I flip it over to Michele, who is on the call with us, I am not sure you were aware of that, I will tell you that as far as the marketing approach goes, just want to be very -- not trying to avoid the question by any stretch of the imagination, just want to be very careful with what we say about what we're going to do with our marketing. Obviously, not dropping the June catalog was just a bad decision we, as an executive team, made. We just didn't feel like the merchandise warranted the spend at the time, to tell you the truth. And so I don't want to get into detail about where we're going to drive additional traffic, how we're going to get -- acquire new customers. But regarding what's driving some of the optimism about the fall and the holiday season which leads us to want to spend more money driving traffic, I am going to flip that over to Michele and let her speak a little bit, with not too much detail, about some of the merchandise that is I guess driving our excitement, if you will. Michele.

Hi, Kimberly. Why are we excited? Really, the goods -- first fall goods landed in stores approximately two weeks ago, with a mailer dropping just last week. When those new goods landed, we saw some very strong performance in some key categories, and I am to remain somewhat guarded. I don't want to get into a lot of detail, but I will give you some headlines around what we're seeing, and Scott mentioned it in the press release, sweaters, denim and outerwear have been very, very strong performers. In addition, this mailer, and the product in this mailer, have also given us very strong indications of her response to the new product. I feel very optimistic going into September. We had a lot of opportunities that we learned from the first half of this year, primarily in the mix and the balance of the assortment that we've addressed for September. One of the other critical factors that we learned from the first half was the the penetration of fashion and novelty, where we saw a strong performance in the second quarter which we have gone after. And finally in the AUR mix, by mid-september we will be flat on an AUR year-over-year, which has been critical to the future success. All in all, again, we remain very optimistic. September is going to be a big month for us. We certainly still have work ahead of us, but really seeing some promising information.

Great. Thanks, Michele. Scott, just a follow-up on your comments regarding marketing. Certainly, not looking for a road map here over the next 12 to 18 months. It is just that every -- occasionally we pick up a press release and get surprised, and several times negatively, that you have made an adjustment by canceling a piece of the marketing program, it led to a large down draft in the sales line. And I am just wondering why you wouldn't test any sort of adjustments before you would run the risk of really disrupting your sales trends before engaging in a sort of -- in a more broad sweeping change of those marketing plans?

That's a very fair question.

That's a fair question. So Kimberly, just for the record, the only thing that happened, is we changed our plans once. That's the post postcard. So we had a mailer a year ago we moved to a sale postcard. Aside from that, we really have been anniversarying the marketing plan from a year ago, and we're going to continue to. Everything that we do, or we're planning to do in the second half of the year is going to be additive. And again, it is going to be focused on acquiring new customers, and re-engaging our Passport customers in a stronger way. So, but testing is a big part of what we do, and we're going to continue to test everything before we move to it. The postcard was a decision that we made based on actually testing, and testing doesn't always bear out when you actually roll out to it. And we thought that from an inventory standpoint, it was a better decision to go with a postcard than a full mailer. We didn't really feel like we could support a full mailer in that time period, and we learned from it. And that's part of the process. You learn, you adjust, and hopefully, you don't make those mistakes on a go-forward.

That's very helpful, Michael. I just -- the reason I think I had other events in mind, is that last year in August, if I recall, you also canceled a postcard. You actually sent out the catalog, you cancelled the postcard, and if I remember properly, it was either in week two or three of August, the comps in that week were down something like 10% to 13% because of the decision to cancel it. So that really pulled down your month last year in August, as well. So this was at least a second time that I can recall that something that was done in the prior year wasn't anniversaried, and then there was a surprise on the impact on sales. So that was the basis for my question, but your explanation was very helpful. Thanks.

Adrienne Tennant, Friedman, Billings, Ramsey.

A question on the inventory. I was wondering if you could actually help us how out by division at the end of the quarter, where we were with inventory? And then, Charlie, on the SG&A, sounds like the marketing plans are going up significantly, but you'll start to anniversary some of these increases over last year. So how should we think about that? Is the marketing going to eat up kind of the savings that you would have had as you anniversary the payroll bumps? And then where should we be thinking about kind of a break even comp for the back half of the year? Thank you.

First, we don't give the inventory by brands. We never have. We really don't want to go that route to start giving that kind of information out. There was no significant deviation by any of the brands, though, I can say that. They were all in the same range. But now on the marketing, that's going to depend. If the marketing is effective, it is going to leverage itself. There is tho doubt about that. And that's what we intend to do. We've already commented on what's going to happen with the shared services cost and with the store cost, and we're not at this point going to get into a break even as to where that is, because that's going to depend on comp and a whole lot of other factors.

Okay. And then lastly, when you're -- as you're slowing the CapEx spend on new stores into the next couple of years, what is your kind of the management and the Board's philosophy on a repurchase authorization?

Adrienne, as a part of just an ongoing part of running the business and meeting with the Board, there is not a Board meeting that comes up that we don't have that discussion.

Okay. All right. Great. Thank you.

Jennifer Black, Jennifer Black & Associates.

I've got two questions. And he first question would be for Scott or for Michele. I wondered if you could talk about how Michele's goods will flow into the stores? In other words, will we see 30% to 40% by Thanksgiving? Is it that much, or some kind of quantification? And then I am assuming there will be a correlation with her goods and your advertising? Thank you.

You know, it is hard to put a mathematical formula to it. When she was fortunate enough to land this role in March of '07, she really started turning the business inside out, trying to review everything she possibly could, affect Q3 as much as she could, Q4 as much as she could, and her full watch is certainly '08. But as we've said, Jennifer, the deeper we get into the back half, the more influence she's had over the merchandise. And as far as 30%, 40% in Q3, 70% to 80% in Q4, we've never really taken a line item approach like that.

Okay. So there's -- so by Q4, you can't give any quantification at all, not even a rough -- something rough like half or -- ?

I mean, we could just throw a number out there right now, but we've really never put paper to pencil on every item that's flowing through the stores. But holiday is certainly influenced a lot heavier than Q3.

Okay. And then, Scott, this is more of a macro question. I wondered if you believe there is a fundamental change in the way the boomer shops? Looking at last holiday and the July/August time frame, could it be that the boomer is spending more time with families, vacations, and September is when she goes back to shop? I wondered if you could give us your thoughts on that?

I don't think that I have seen anything, or we've seen anything that would indicate that her shopping patterns by season have changed. But I will tell you what we do think is that the [psycho-graphically] the customer has changed. And a 50-year-old today isn't looking for the same merchandise a 50-year-old was looking for 24 months ago and 36 months ago, and I think that's one of the reasons why we shot to negative comp a year ago, is that we didn't keep up with where she was going in her mind. And I think as you see our product unroll -- roll out over the next six to 12 months, I think you're going to see what we believe the 50-year-old is looking for today versus what our -- if you pull our catalog from 24, 36 months ago, I was thinking about it driving into work this morning, Jennifer, we went through a very similar period in '94 and '95, where we really had to retool the merchandise, and that's what put us on a nine-year run. And it is just hauntingly familiar right now, the process that we're going through in getting our merchandise back on track. So I think it is more about what she's thinking between her ears, versus when she is actually shopping.

Thanks a lot, and good luck.

Barbara Wyckoff, Buckingham Research.

A couple of questions. Michele, as you come around to your first anniversary, have you changed, or how have you changed your thoughts about what's need to do fix the core Chico's versus the initial impressions? Could you elaborate on that? And then I have another question.

Okay. So what are my -- my initial impressions of the brand and the opportunities remain the same. The core DNA of the brand remain the same as what put this brand on the map. For me, it is more about being as closely connected to the customer as this brand was in its past, and really understanding the needs of today. So that part is clearly evolving, as we're seeing the response to product, there is some really strong undercurrents to the business indicating the direction we're going is the right one. Other opportunities that I have seen as I approach my year anniversary is, Charlie mentioned it in the investment in talent and merchandising and product, absolutely critical to the success of our future. We certainly made strides on it already since I have been here, but there are a lot of opportunity in critical talent, as well as develop existing talent to really support our growth opportunities. Other than that, the way we do business has to evolve. We are a highly, highly complex business, regionally, size of store, demographics, all of it really requiring us to change the way we do the work here. And that piece of it we are currently underway in moving that forward, as well.

How are the new systems helping you, or are the new systems helping you manage some of those complexities?

Barbara, the new systems have really been across the Soma initiative, as well as we've done all of the implementation, integration of the financials on SAP. We've written the interface with PKMS in the distribution centers. All of that has been done for the Corporation. But as far as the SAP tools themselves, they've only been rolled out to the Soma brand, so she is working with the same software tools that she's been working with.

Okay. So that's my next question. What is the implementation for SAP for Chico's and White House, and what are you going to do to avoid some of the problems you experienced in summer with sort of the transition time?

Yes, what we're trying to do is, we're certainly not going to integrate both brands into the SAP software at the same time. We've yet to determine exactly which brand will go first, whether it is going to be White House or Chico's. But the first brand will integrate mid to back end of next year, and the second brand maybe as late as spring of '09.

And we've learned from what happened with summer. We now have very dedicated people for both brands that are working solely on this. We did not do that with Soma, and that was probably the only -- .

Yes, and I want to certainly demystify something about that SAP [investment] project. I know there are some SAP projects out there that are under a the lot of scrutiny, and we all know where they are. Us backing up the integration date of these brands is not about problems in the process. It is just the opposite. We want to make sure that we take our time so that we don't have the problems, which is why we've pushed one brand to mid to late next year. And we also want to make the timing around in between the strong spring selling season and the fall holiday season. So we are really looking at the timing, and as we push the integrations out, it is to mitigate issues, it is not because of issues.

Okay. Thanks.

Marni Shapiro, The Retail Tracker.

A couple of quick questions. The first is more housekeeping. The AUR declines that you saw in the second quarter, is that driven primarily by markdowns, or was it also a product mix? And if it was markdowns, is that why we could expect to see it start to flatten out and reverse in the third quarter? And then the other question, could you just talk quickly about White House and Soma? Over time, whether it is 18 months, 36 months, or further out than that, do you see it's possible for White House and Soma to achieve the same return on capital that you've seen at Chico's, given that particularly for White House you're in a much more competitive space? And then at Soma, I guess it is sort of a bigger picture question because there is more -- it appears to be there is more of a back end investment for the product at Soma for fit and product development. So if you could just address that issue there.

Marni, I'm going to pick -- it's Michele. I am going to pick up the AUR question first. It is really twofold. It is, as you stated, reflective of a more promotional cadence than anticipated. That is part of it. But the other part of it in the Chico's brand is really reflective of the lower pricing opportunities that we saw in key categories, like Ts and denim a year ago. So we're coming up on anniversarying that this fall. So it is really the mix of the two that have really dropped the AUR. So a less promotional cadence and a higher -- a different mix of inventory is going to allow us to get flat year-over-year as we enter September.

And I will take the White House side, and I'll let Scott do the Soma side. The White House side has been gaining ground since we bought them, other than the bump in the road that we've experienced now. So over the longer term, I don't know if I can say 18 months or what sort of time frame. Over the longer term, White House should certainly come much closer to the Chico's ROI than it has in the past, but that's over the longer term. Soma, I will let Scott speak to that.

The one caveat on the White House comment, Charlie, is I am not so sure that the Chico's ROIC wasn't inflated because we were not putting enough money back into resources, and that's something I have been highly sensitive to over the last couple of years. Regarding the Soma discussion, Marni, the only real model -- public model we have out there is VF's. And they're so big, it is hard to determine where incrementally -- what type of ROIC they were able to achieve over time incrementally. We're doing as much recon as we can with the people that we know that have worked at VF, the people that are on our Board of Directors and things like that. As far as having Soma achieve the same type of ROIC of Chico's, we've never thought it could be that high.

Great. Thank you. Just one quick follow-up on Lucy. I know the timing at the moment is not opportune with what's going on at your core businesses. But should opportunities like that arise in the future, would you guys entertain alternative investments like that?

Yes, pending Board approval.

Great. Thank you, guys. Good luck with the fall.

Margaret Mager, Goldman Sachs.

Could you talk about the changes at White House and what is it that's needed as far as skills on a go-forward basis at White House? You made it clear that you think the skill set is different for 0 to 500 versus 500 to a billion, so if you could describe that for me, that would be great. And do you anticipate any other changes will need to be made at White House? And how long will it take to get that business where it needs to be in terms of moving up again? Thanks.

Margaret, the -- Patricia was basically a co-founder, along with Rick (inaudible). Rick started the business and two stores later, Patricia joined the business. So I will commonly refer to her as a co-founder. And just like the (inaudible), I think she is an incredible visionary, highly entrepreneurial and delivered outstanding results for the business to a certain pont. Michele spoke about -- was answering a question earlier about anniversarying your first year, what's your viewpoint now versus then. And she spoke a lot about the complexity of how we do business, the processes that have to be implemented, and a lot of things along those lines. It is the same story at the White House/Black Market. As you surpass that $0.5 billion mark, I think the complexity of the business, when you start looking at stores regionally, sourcing initiatives around the world, a lot of things, processes, product lifecycle, management processes that have to be put in place, it is just a different game. And Donna has a lot of that scar tissue coming out of Ann Taylor, and we expect her to utilize that here at the Corporation. So it is just a different -- it is sort of a different ball game at this stage of the business today, with all due respect to everything that Patricia delivered for us. What was the back half of the question?

Any other changes, and how long -- ?

Well, when you have a new leader come into an organization, not unlike I guess what I just read this morning with Byron leaving Gap - I don't know if you saw that, Michele - Donna is in charge of the business. And she has got to get her arms around the business, the talent, everything there. And while we don't see anything in the immediate future, it is her call.

Okay. Thanks, Scott. Good luck, and we'll see you next week at the conference. Thanks.

We'll see you.

Lorraine Maikis, Merrill Lynch.

You mentioned the macro environment a few times during the call. Does your research show that your customer has, in fact, cut back on spending, or do you think she's going somewhere else?

It is Michael Leedy. We haven't seen that in our research. I think we're drawing that conclusion from really what we're seeing just in the environment in general, with what's happening economically with the country. So that's where we're pulling that from, but we have not seen that in our research.

So do you think that the baby boomer is, in fact, cutting back on spending? And do you have any regional differences in your comps that may show housing market impact?

Do you want to talk about -- ?

Well, we've certainly seen on the West Coast and the Southwest are down, and down significantly. And they've been driving it. As you know, some of our best stores are in the Southwest, and they've been down for quite some time now. We've seen ups and downs in Florida. In that area, there's been some months up and some months down, and certainly the economy is ravaging Florida, as we know. And we've seen the Northeast has just been chugging along. So I think our differences regionally have been a lot like what you expect to see from what you read around the country, but I don't think we've seen anything new in that arena.

20% of our store base is in the state of Florida and California, two of the hardest hit states in the country regarding foreclosures.

Did that help?

Operator, next question.

Jeff Black, Lehman Brothers.

Scott, just a more high-level question. You listen to your prepared comments, and we have to wonder what world you're living in. You're increasing marketing spend, you're building inventory on a thin read on comps so far. You think Soma is going to turn around in the second half. I mean, how do you respond to what would be our assertion that you're just managing this business too aggressively at this point? And what takes you to a place to stop some of the growth? What gets us to stop growth at White House for awhile, slow down growth at Soma, et cetera? Thanks.

Sure. Good question, Jeff. I would disagree with your assertion that I am managing too aggressively. And what would cause us to really slow down, is if we started to really dig into our cash, if we really started to see our earnings get down to where, like Talbot's is. We still had a 13% operating margin. We're still making a lot of money. And we're not going to give up market share and slow down our growth initiatives until we see a more dire situation.

Let's say comps are where they are in 3Q right now. I mean, at that point do you look at yourself and just say we're going too fast and we need to make more serious adjustments here?

Perhaps. But that's a little -- that's a little out over my headlights right now. And I would have to see, when you say comps are where they are six months from now, what do we do, there are a lot of things going on inside the business that you're not aware of. The cost savings that we're trying to achieve with shared services, some of the spending cuts that we're -- initiatives that we're taking. So we're just not going to cut into the the muscle right now. We made almost $40 million in 13 weeks, we have got a tremendous balance sheet, and we've got three great brands. We're just not going to overreact to the situation right now.

Okay. Fair enough. We wish you the best of luck, really.

Liz Dunn, Thomas Weisel Partners.

Two questions. My first question, the entire women's -- sort of mature women's segment is really struggling right now. You mentioned the macro. It is obvious that you're performing sort of in line with peers. Yet you've made a number of changes in management and marketing, footage growth, just really there have been a number of wholesale changes at the Company. Do you think that the changes that you're making could be aggravating your negative sales and earnings trends, or do you think they're helping? Can you provide some context there? And then my second question is sort of a bigger picture question. If we think about the advent of women in the work place, it really opened up a marketing opportunity for many companies, such as Chico's, to target that woman, because she was taking a more visible role in society, so she was buying more clothes. Now that the boomer woman, your customer, is really facing retirement, how do you think about her need her wardrobe needs? Thanks.

The second half of the question, we haven't seen a big change with the back end of that question. And as far as all the changes that we've made, I guess I would have to use the first person, I, have made as the CEO of the Company, over the last year. Each move that has been made, I have made -- I have seen as part of the solution, not as part of the problem. There is not one change that I can look look back on from an executive leadership in the last twelve months that I would change.

Okay. Thank you. Good luck.

Robin Murchison, SunTrust.

Wanted to ask you if you've -- in terms of changes for the the women's, or for the Chico's in the foreseeable future. I mean, Ann Taylor is talking about a modern boomer, and you guys are talking about changing the assortment, that she's changed psycho-graphically. I am wondering if you are foreseeing any change in the women's fit or how this might come about? Is this woman in fact taking better care of herself and she doesn't need to be covered up as much? And Michele, that's probably for you.

In terms of fit, we are not seeing any real change, or anticipating any real change to our current fit. The target remains the same. The opportunity that you will see us expand on are women in this area that have different body types and different needs. So you're going to see us, for example, in bottoms take an approach to really finding alternative fits than the single focus we've had historically. But overall, the general fit of our brand is not changing currently.

Just also, you had mentioned -- or sweaters and outerwear were mentioned as positive response categories in the new catalog. Is that in just certain geographical regions? Certainly, in the Southeast it has been extremely hot. Are you getting good reads there?

We're getting good reads across the country.

And do you carry on dialogues with your customer to help you define this future course?

It is Michael Leedy. Yes, we definitely do. And not only are we doing research where we have a dialogue with the customer, particularly on fits in bottoms, but have you to remember, we have an incredible team out in the field that has a great one-on-one relationship with their clientele, so we get a constant feed of information daily.

Great. And then just one last one if I can. What if -- another Florida-based company indicated recently that their same-store sales trends in Florida were three times as bad as the chain in total. Wondering if you are seeing a similar trend?

Robin, we're not seeing that trend. And the way I have answered that to internally is, I just think the customer is not spending as much money down here as she would. But she is still spending down there. But we're not seeing any type of trend like that. But I do believe that if you didn't see the housing situation down here the way it is, that we would see stronger results in Florida. But they're not that dramatically different.

Until this housing trend started, Florida was leading the nation most of the time. Now they're sort of even with the nation. They are certainly not down anywheres near even twice as much as the rest of the nation. Florida is not as bad from our perspective as we're hearing it is.

And interestingly enough, I just read in the paper yesterday that the international airport here has had 13 straight months of record traffic. So there they're still coming down.

Good luck, guys. Thank you very much.

Crystal Kallik, D.A. Davidson.

Scott, I was hoping you could tell us, you've certainly been working aggressively on managing the inventory. What new parameters or systems do you have in place that are really helping you manage that inventory control going into the second half? And what's coming down the road as far as inventory control?

We don't have any -- we don't have any new software at all at any brand other than the Soma brand, which is SAP. The disciplined inventory approach is led by each of the chief merchants over the brands. Obviously Michele, Donna, and Terri Meichner at Soma. It is really just, as we're maneuvering through this period of time, we just want to be very diligent. If she doesn't like it, we want to get out of it. And we want to be cautious about our inventory planning based on current trends. But there is no new software in place today relevant to over the last several years, other than in Soma.

Okay. So it sounds like then when SAP rolls out later next year and in '09, that would be the next major implementation as far as a change of processes for managing?

Correct.

Okay. Okay. Great. And then could you also just talk about expense control going on beyond head count?

Again, it is across the board. It is everything from store supplies to freight to travel. There is nothing that we're not looking at.

Thanks very much and good luck.

Across the board.

Neely Tamminga, Piper Jaffray.

I was wondering if Michele could talk just a little bit more about the changes in merchandise as you're looking at the whole assortment for fall next year, as well as the fourth quarter? Just are you rebalancing the assortment? Do you think that the assortment was out of whack in terms of its -- the bottoms and tops? Or is it the product offering itself with color silhouette, pattern? Is it that we're lacking some innovation in categories overall, and you've been adding that back into the space? And then following up on an earlier question, as I am hearing Scott talk about psycho-graphic changes, I don't think she is psycho-graphically putting herself older, she is probably putting herself younger, which would, in fact, maybe call for you guys to improve your technical -- not so much your technical fit, but your fit attributes, adding more tailored fits, which would be more sizes per style and more inventory investment. Can you just help us walk through exactly pairing what Scott was saying with what you're doing, and how we should be looking at some of these changes in the assortment?

Okay. So that's a mouthful. But let me start at the top and sort of address a couple of things. So under many of the things you listed, primarily mix and balance, and that really for me goes to -- coming out of the first half, we were skewed so casually, we left a lot of business in my opinion, on the table, in the whole dressy/occasion piece of the business. So as we got into fall, primarily September, you are going to see that balance be corrected, where we're really addressing all parts of her closet. That was the first issue. The other issue is, as we grew categories like Ts at lower AURs and didn't -- and again dropped the dressy part of the business, we threw the AUR mix out. So those are being corrected. Innovation, I have been talking about since I came to this brand. The biggest callout before I got here and as I got here was that we didn't move the brand forward enough fast enough. So innovation is top of my list in many, many categories. So my third point would be really around there are categories of business that were underpenetrated and really were great growth opportunities. Then there are categories of business that have been very strong performers for this brand that need to be reinvigorated and moved forward. And then there is opportunities that we're not in today that we're looking at. So it is a lot, coupled with regional variances and store size opportunities is the other big one that we're looking at right now, and testing some new ideas. Does that help?

It does. Thanks. Good luck.

Operator, why don't we take one more question.

Dana Telsey, Telsey Advisory Group.

Given that you've talked about increasing the size of the stores, whether it is Soma or whether it is core Chico's, what categories do you see being put in there in order to generate higher margins? Or how do you see the average transaction yielding from the higher stores and what you're putting in? Thank you.

Yes, do you want to take it on the Chico's, because we haven't said anything about increasing the size of the Soma stores, really.

So Dana, just in terms of store size, as you know, we go from 1,800 to 7,200 square feet currently. So big variation in terms of size and what opportunities we might have will obviously be expressed in the largest of our square footage stores. We see categories of business that could be overemphasized that we are currently working on right now. And we see new opportunities, as well as presentation of goods and expanding certain presentations to really give a very strong clear message in some of our larger square footage stores. So that's what we're currently looking at.

And when will that -- when do you see that coming into play? Is that a 2008 initiative?

A little bit now. As Scott opened up, we tested a visual presentation that we'll be able to roll out to a certain number of test stores that we're working on right now to get out there as quickly as possible in the next -- definitely by Q4. In '08 you will see some new product opportunities that we will be venturing into.

And is this also applicable to White House/Black Market?

No. Not yet. Donna's third week, so she has got to get her arms around the business, Dana, and take it from there.

Those stores we've just brought up to the size that they should have been in the first place. 2,600 feet is very -- that's a very small store in any event. It is all about visual presentation right now for White House/Black Market.

Thank you.

Okay. And thank you very much for attending our second quarter conference call. And we'll see you in about three months for the next third quarter conference call. Thank you very much.

Ladies and gentlemen, this does conclude this morning's Chico's second quarter earnings results conference call. You may now disconnect.