Chico's FAS Inc (CHS) 2007 Q3 法說會逐字稿

Good morning. My name is Rhonda and I will be your conference operator today. At this time, I would like to welcome everyone to the Chico's third 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) Thank you.

Mr. Smith, you may begin your conference.

Good morning. Welcome to Chico's FAS, Inc. 2007 third quarter earnings call.

Today we will have our Chairman and CEO, Scott Edmonds and our former CFO, Charlie Kleman, giving prepared statements on the business. This will be followed by Q&A session.

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

Such forward-looking statements involve known or unknown risks including but not limited to general economic and business conditions, and conditions in the specialty retail industry. There can be no assurance that the actual future results, performance or achievements expressed or implied by such forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the Company's latest annual report on Form 10-K, its filing on Form 10-Q, management's 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.

Thank you. And I would now like to turn the call over to Scott Edmonds.

Thanks. Michael, and thanks to everyone for attending our third quarter fiscal 2007 conference call.

With me on the call today are Kent Kleeberger, our new Chief Financial Officer and Charlie Kleman. Michele Cloutier, Chico's Brand President, will join us during the Q&A portion of today's call.

Net sales for the third quarter ended November 3, 2007 increased 3.4% to $416 million from $402 million for the fiscal 2006 third quarter ended October 28, 2006. Income from continuing operations for the fiscal 2007 third quarter was $24 million, or $0.13 a diluted share, which includes an approximately $0.025 gain for the Lucy transaction compared to income from continuing operations of $43 million, or $0.24 per diluted share in the prior year's third quarter.

As previously reported, comparable store sales decreased 9.3% for the 13-week period ended November 3, 2007 compared to the comparable 13-week period last year ended November 4, 2006. The Chico's brand same-store sales decreased by approximately 8% and the White House/Black Market brand same-store sales decreased by approximately 13%.

We're greatly disappointed with our performance to date. Numerous challenges continue to affect the entire retail sector. More specifically, it appears the missy customer continues to pull back her spending more dramatically than other consumers.

We are currently focused on executing our holiday strategy, providing our customers with the outstanding personal service we are known for and capturing as much of her holiday spending as possible. We intend to end the season with clean inventory levels and are aggressively moving to control many other expenditures including capital expenditures both presently and for 2008.

To that end, we are taking a more conservative approach to our fiscal 2008 growth and expansion plans than previously announced by reducing our square footage growth rate from 12 to 15% to approximately 10%, which will reduce the number of stores we plan to open to approximately 60 to 65 net new stores. Expansions and relocations should come in at the low end of previous guidance and we will continue to evaluate our 2009 growth and expansion plans as well.

In 2008, we will continue to focus on improving the performance of our existing stores, expanding our direct to consumer business, and investing in design and merchandising talent and other critical infrastructure needs. We believe these strategies, coupled with our strong financial condition, will position us to take full advantage of market opportunities when economic conditions improve.

Regarding our core brand, Chico's, third quarter performance, we indicated on the last three conference calls that Michele's impact on merchandise would begin to be seen in the third quarter. However, in looking at the Chico's results for Q3 and November, you may be wondering if it's Michele's merchandise that's driving the poor results.

On the contrary. We remain confident in the direction of the product based on how favorably the Chico's customer has responded to the newest product delivered. We need to stay focused on updating the balance of product in all categories in order to lift the entire business.

As most of you know, we generally do not give specific solid results by category on this call, however, with Michele's ever-increasing influence over the product, I thought we would share a few details by category. Although we are not satisfied with the total results, we have seen significant comp growth in pants, denim, novelty sweaters and outerwear. Although we delivered strong results in these categories, it was not enough to offset the misses in other key categories such as jackets, travelers and non-apparel.

We expect to see continued payback on our investment in pants and denim and we're on track to deliver increasing amounts of novelty and fashion across multiple product categories. We are pleased with our new spring product and believe based on what she's buying today that it will be well received by our customer.

Lastly, regarding the Chico's brand, Michele was names Brand President on October 31st and now has full authority over the creative execution for the Chico's brand. We believe that having one vision for the brand across all functions including merchandise, marketing, stores, and visual, will allow us to present a much clearer, crisper message to our customers across all three sales channels, stores, Web and catalog, beginning in 2008.

Turning now to the White House/Black Market brand, our third quarter performance continued to be disappointing. We had significant fashion misses and our assortment did not reflect the balance of newness and trend right product that our customer is responding to.

Our customer did not embrace dressy for day and the product offering was too heavily positioned in dressy and embellished styles. The imbalance was compounded by a redundancy of old styling in the absence of newer fashion silhouettes. During the quarter, we walked away from our signature high contract, excuse me, our signature high contrast black and white color pallet and delivered a very dark and somber assortment that met with resistance from the customer.

In response to early third quarter performance, the categories of business that we were able to impact with more fashion right product showed positive full-price momentum in late Q3 and early Q4. The casual businesses built momentum in late third quarter, driven by fashion denim, knits and sweater jackets. The performance in these categories exceeded expectations and continues to resonate with our customer into fourth quarter.

Remember, Donna Noce has only been with White House/Black Market since August 8th and was not able to have much impact on the third or fourth quarters. Most of Donna's focus has been on 2008.

Spring 2008 will be a steady progression in the evolution of the White House/Black Market brand. The spring, summer collections will begin to project the future positioning of White House as an elevated, more sophisticated fashion brand.

The focus is on upgrading the quality and diversity of our product, our fabrications and our assortment. There should be steady improvement through spring and summer, however, the full impact will not be seen until fall 2008.

A more intricate and disciplined approach to creating a balanced, versatile assortment that is easily outfitted and represents the appropriate fashion trends of the season, clear delineation of seasonal and monthly collection will be evident through the unique usage of print, fabric and silhouette that stays true to the DNA of White House/Black Market, diversified fabric and yarn with a concentration on elevating the quality, consistent fit will begin to be evident in summer but will have its greatest impact in fall.

Lastly, as brand President, Donna has full authority over the creative execution for the White House/Black Market brand. Again, we believe that having one vision for the brand will allow us to present a much clearer, crisper message to the White House customer.

Turning to Soma. Today the Soma Intimates business has 70 frontline stores and one outlet store. As discussed on the second quarter conference call, we were planning several exciting product launches for the second half of 2007. I further commented that we expected to see an improvement in the Soma Intimates brand in the second half of 2007 and I'm pleased to say that indeed we did see a nice improvement in the Soma Intimates business in the third quarter.

We executed a major new product launch in October, supported by aggressive marketing including television advertising in four markets. This big idea, new product launch employed the type of consumer directed marketing used by our major intimate apparel competitors to drive store traffic and trial. Results of this program have exceeded expectations and have been exceptional in the television markets.

The buzz around this new technology product is clearly bringing new customers to the store and boosting sales of all products. The positive results are being experienced in all major product categories and our data shows growth in new customers as well as repeat purchases from our current customer base.

Our Soma Internet business is experiencing high double-digit growth rates and is approaching 20% of the frontline store sales volume. We continue to put significant focus behind Soma e-commerce as it allows us to develop a national customer base ahead of store expansion.

While we are encouraged by Soma's performance in the fall season, this brand remains a work in progress and it will need to demonstrate several successive quarters of positive momentum before we will consider accelerating store expansion beyond our current conservative plan.

Direct to consumer. We continue to be very excited about the growth of our direct to consumer business. With third quarter revenue increase of 44% and Web traffic up 136% 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, headcount and added infrastructure.

We're pleased to have our new CFO, Kent Kleeberger, with us on the call today. Kent has only been with us for a very short time so Charlie will be fielding today's financial questions.

Today will be Charlie's final quarterly earnings call. I would like to thank you, Charlie, for your 19 years of service as Chief Financial Officer. Your contributions and impact on Chico's will forever be appreciated.

To summarize, Chico's FAS, Inc. has been the most productive specialty apparel store in the industry over the last decade. When we look at our three unique brands, the loyalty of our customers, the strength of our Board and executive team and, most importantly, the passion of our company associates, we continue to have a very high level of confidence in the long-term growth and success of our business.

Now, for the last time I'll turn it over to Charlie.

Thanks, Scott, and good morning, everyone, and welcome to our third quarter conference call for fiscal 2007.

During this quarter, I'm pleased to announce that we opened our 1,000th store in the Chico's family of brands and this brings our total selling square footage to almost 2.3 million square feet of selling space versus approximately 1.95 million at the start of the year.

The third quarter of this year certainly provided an environment that was challenging from an economic and weather aspect, pretty much throughout the whole third quarter. And as you can see, this environment has continued so far into the start of the fourth quarter.

Moving to the financials, let's first look at sales for the quarter. As you can see from the press release, the quarter saw an overall high single-digit decline in same-store sales, with a high single-digit decline for the Chico's brand and a low double-digit decline at the White House/Black Market brand. The high single-digit decline in same-store sales at Chico's was driven by both a high single-digit decline in the average transaction size and a mid single-digit decline in the number of transactions per store for the quarter.

The low double-digit decline in the White House/Black Market same-store sales was much more transaction driven as the average number of transactions per store declined in the low double-digit area with the average transaction size down in the mid single-digit area.

Because of the declines in average number of transactions per store and the declines in the average transaction size are greater than our comp store sales decline, this suggests that our new stores are underperforming the chain at this time. This gives us all the more reason to slow the number of new store openings until we can either improve our capture rate of new customers or drive more existing customers into our new stores.

Looking beyond the third quarter, future receipts indicate that we are bringing in an average unit retail for the holiday season this year that is higher than last year, and that the average price point will only decline year-over-year if we experience a higher markdown rate than last year. During November, and on a shifted or adjusted basis, we experienced a flattish average unit retail with a double-digit drop in the number of transactions per store, thus the substantial decline in same-store sales for the month of November.

Turning to our quarter end inventories. At $73 per square foot and down 5% from last year's $77 per square foot, our inventory levels came in within plan, although near the high end. It should be noted, though, that at the end of both this year and last year's third quarter, we had inventory on hand for a substantial number of stores opening in fiscal November that do distort this number somewhat.

During this fiscal November, we opened 33 new stores, while last year we opened 30 new stores in fiscal November. As last year, we are committed to ending this fiscal year with little carry-over into fiscal 2008, although I expect our inventory per square foot at year-end is likely to be up on a year-over-year basis as we were somewhat light on inventory entering this year.

Moving to gross margins next. The 160 basis point decrease in gross margin resulted primarily from an approximate 140 basis point decline in the Company's overall merchandise margins, largely caused by a 100 basis point decline in the Chico's merchandise margins, offset somewhat by a 70 basis point increase in the White House/Black Market merchandise margins.

During the quarter, we also experienced a substantial decline in our outlet merchandise margins, and a planned decrease in our direct merchandise margins as we have increased the amount of sale merchandise offered on the Web.

Lastly, in this area for the quarter, our continuing investment in the product development and merchandising areas resulted in deleverage of approximately 50 basis points. We expect this investment will continue into fiscal 2008. Looking to the fourth quarter, we expect merchandise margins to be down year-over-year in the same range as we experienced in this year's third quarter.

Turning to SG&A, we ramped up our marketing efforts, as we were indicated we were going to do previously, resulting in a 240 basis point increase in this area, as well as a 60 basis point increase in our in-store promotions. Beyond this increase in in-store promotions, the stores also saw deleverage in store payroll and fringes of approximately 190 basis points as we continued our investment in improving our service levels and we deleveraged some due to the negative same-store sales.

Our store occupancy deleveraged by approximately 220 basis points, largely from the decline in same-store sales combined with the larger stores we've been opening to support the future growth.

Lastly, shared services costs deleveraged by 80 basis points, largely due to increased personnel relocation and recruitment costs as well as deleverage on our fixed costs in this declining same-store sales environment. Considering the increase in our same-store sales declines so far in the fourth quarter, and the loss of the 53rd week this year, we expect to experience deleverage in the fourth quarter in the stores and shared services areas to be somewhat less but near the same level as the third quarter.

Our marketing spend will likely be slightly higher than last year as a percentage of sales, but should be less than 100 basis point increase. As a reference point, the 53rd week last year produced sales in the neighborhood of $23 million and likely added $0.03 to $0.04 to last year's earnings.

Regarding store openings, we've opened a net number of 94 new stores, excluding the 10 Fitigues closures through the first three quarters of this year. These openings include 39 net new Chico's stores, 39 net new White House/Black Market stores and 16 net new Soma Intimates stores.

Beyond that we've expanded or relocated an additional 46 stores which includes 34 Chico's stores and 12 White House/Black Market stores. During the month of November, we've also opened, as I said before, an additional 33 stores to bring our year-to-date total to 127 net new stores.

To keep this call short, as you've asked us, I'd like to close with a thought. We certainly are not having the year we envisioned as we entered fiscal 2007 and we place this blame squarely on our shoulders, even considering the economic challenges we've seen, particularly in the second half of this year. We continue to diligently work on recruiting talent to help us address our shortfalls and we continue to build an infrastructure and team that will be able to take advantage of the opportunities that will arise as we get our merchandise on track and the economy becomes more of a tailwind instead of the headwind it is right now.

We still expect to report sales per square foot levels at or near $800 per selling foot for each of the Chico's and White House/Black Market brands, we still expect to end the fiscal year with north of $275 million in cash and no debt and we still expect to run strong, positive free cash flows for this and future years. Chico's is in the middle of a transition that will ultimately result in a stronger company with an infrastructure that will support solid future growth.

Thanks for being with us on the third quarter fiscal 2007 conference call.

And finally, before we take some questions, I'd like to thank you, our investors, our diligent directors, our great management team and especially all of our wonderful employees for allowing me to serve as your CFO for the last 19 years, 15 of which have been as a public company. It has been an honor to serve you all.

To wrap up this 58th conference call since going public that I've been privileged to be part of, I'd like to introduce our new CFO, Kent Kleeberger, for a few words. Kent?

Thanks, Charlie. It's good to be here.

While I've been on board for only a about week and-a-half, I'm encouraged by the amount of vast opportunities that's presented for each of the businesses. More importantly, as business remains challenging, I'm encouraged by the high level of can-do spirit by many of the people I've met in the short while since I've been here.

Operator, with that, I'd like to turn it over for Q&A.

[OPERATOR INSTRUCTIONS]. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Kimberly Greenberger with Citi.

Great. Thank you.

I know you're really focused on improving the merchandising execution but what strikes me at a high level looking at your results, is that the merchandise margin and the gross margin line has not really been the problem. And normally when merchandise is the very, very singular issue we see substantially greater contraction in gross margin.

Instead what we're seeing is substantial increases in your SG&A rate and yet I didn't hear anything on the call today that would indicate that you're at all focused on controlling that SG&A number and I'm just wondering if you can address that for us. Thanks.

Kimberly, the fact that I didn't suggest that we were addressing SG&A is because, quite honestly, I would think that people would assume that we're addressing SG&A. We have been, really since mid-year, focused primarily on headcount. That has been -- when you're growing, I mean we opened 33 stores in the month of November, half of what we're planning on opening next year.

You know, we've built a machine that is set up to open stores and to accommodate strong growth and we've got to dial that back somewhat. So we've really been focused on the headcount.

We've really been focused on everything from the landscaping cost to, you know, to incoming freight cost to anything that's going on at the stores, whether it's -- we want to walk that fine line between payroll. We want to walk that fine line between sort of outreach expense at the store level. We've been looking just about at every single thing you can look at as this business has continued to underperform.

So just by not calling it out, I think I spent more time talking about Cap Ex, because I believe that that's something that's a little bit newer as we start to dial back to 10%, as well as on a Cap Ex line, you know, we've been undergoing a headquarters planning process here for about the last several years. First we went out and about that 105 acres, thank goodness we sold that when we did with what's going on in South Florida.

We bought the adjacent property and we were looking at a significant Cap Ex for 2008 there. We've dialed that back dramatically by tens of millions of dollars.

We've, through some work with KSA we figured out how to slow down additional required square footage for our distribution center in Winder, Georgia. So I decided to speak a little bit more about Cap Ex on this call but don't for a second think that we haven't been highly focused on SG&A as well.

Can I just ask Charlie a follow-up question on the 53rd week? You said $23 million in revenue. Charlie, is that for the fifth week in January or the first week in November?

That's for the fifth week of January. Last year's. That's what it added to the income in the fourth quarter in sales.

Okay. But this year we're losing the first week of November?

We're just moving it into a different month but it's still within the year.

Right.

We're just moving it around month to month.

In order to adjust fourth quarter revenue, wouldn't we need to be able to reduce revenue in 4Q by the first week of November that now falls into the third quarter this year?

The difference between those two months isn't that great. There's a big difference in January. But the difference between those two weeks is not significant, I don't think.

Okay. So we could use the fifth week of January as a proxy for the first week of November last year?

Yes, yes.

Okay. Thanks, Charlie.

Thank you. Your next question comes from the line of Lauren Levitan with Cowen.

Thanks. Good morning and Charlie, you will be missed in this role and welcome Kent.

Scott, I was hoping you could elaborate a little bit more on the trends you were talking about in core Chico's because the underlying transaction volume is still so disappointing but you called out a lot of significant categories where you're pleased with the trend.

So I'm wondering if you could give us any sense of who is responding to the newness that's been brought in. Are you seeing an incremental customer or is this your core customer simply shifting her spending out of travelers and other categories into some of the categories like bottoms where there is more newness? Thanks.

Hey, Lauren.

We're not seeing a real shift in the customer as far as from an overall standpoint. I do believe that we're giving up a little bit at the very higher end, the oldest of our customers, if you will, and I believe that we need to do that.

As far as the category question, I'm going to flip it over to Michele, who is on the call with us for a second to talk a little bit about, you know, what she's seen the customer respond to and the newness in the categories that I called out.

So as Scott opened up, clearly, we are not where we hoped to be at this point, however, there are some significant underlying currents and the categories that Scott quoted drove a significant amount of business in the third quarter. The big categories, and really some the cornerstones of the Chico's brands being travelers and jackets are big businesses.

And although there are items within those categories that are performing extremely well, those businesses did not move far enough ahead in my opinion and we did not make as much progress in those areas. The other significant impact was non-apparel.

So we deliver over 350 choices a month every month and that's just in apparel. You can almost double that when you get to non-apparel. So it's a significant amount of product.

We are not going to make excuses. I've got a lot of work ahead of me in terms of turning this thing but there is some really encouraging news about where she's responding and in my opinion we have underestimated her appetite for fashion and we are going to continue to move aggressively forward and I am very pleased where spring is sitting right now and every day continue to re-evaluate the assortment.

Michele, I mean it's fair to comment, excuse me, Lauren, it's fair to make a comment that the categories that we have seen the improvement in is the categories that Michele has made the biggest difference in. The travelers business, you know, at one time, Charlie, what's the highest that was?

It got up to 40% of our sales back in 1998.

I mean think about that. Now it's substantial. It's less than half of that today. But it's a category that's underperforming for us and we've got, you know, we have to offset that, you know, with something new and that's a challenge for us right now.

Can I ask a follow-up to that, then?

Does the fact that some of those significant legacy important categories like travelers are lagging, does that suggest that you're attracting a newer customer at a slower rate than you might be losing some of those older legacy customers that you reference? And if so, what are the marketing plans, what the marketing strategies to address that and how does that foot with your strategy to be more controlled on the expense line? How should we think about marketing and the push to bring in this new customer over time?

Well, I'd suggest a couple of things. First off, our current customer has been buying this travelers for 10 years now. So she only needs, and she certainly don't need another new, you know, (inaudible) pant.

I mean what she is buying in that category is anything that's fresh and new. So we haven't totally lost that customer by any stretch of the imagination. It's just a category that's trending down for us.

As far as new customer acquisition at the size of our database today, certainly, the new customer acquisition has slowed down. With that being said, year-over-year, quarter-over-quarter, we still are seeing substantial increases in new customers.

We're right in the middle right now in formulating our 2008 budget and our new customer acquisition strategy for next year and I think we'll talk a little bit more in the 10-K about what we're going to spend relevant to marketing, but I don't see it being a substantial change in what we've spent in the past. But new customer acquisition is a major part of where our dollar has to be spent next year.

Thank you and good luck.

Your next question comes from the line of Adrienne Tennant with Friedman, Billings, Ramsey.

Good morning and congratulations and welcome to Kent and Charlie, thank you for all your hard work. It's been great working with you as CFO.

My first question is about the AUR strategy at the Chico's division and it sounds like you're planning for it to be higher for holiday. Can you give us any color about is that a permanent strategy kind of going into 2008?

No. It's Michele. I'll answer that one again.

The AUR strategy, we are flat now and that's where we anticipate being. This month was the first month we have anniversaried all the price reductions we took last year in some key categories. So we are past that now. We have no intention of growing that. We're going to stay flat.

Okay. Great.

And then can you talk a little bit, maybe Charlie, about kind of what happened over Black Friday? We noticed some nice early bird specials that you hadn't done the prior year and yet it didn't look like it translated into the comp. Can you just kind of help us out there?

I'll take that one, actually.

We were very pleased with the performance of all three of the brands on that Friday. Post that Friday, we were not pleased but we had a lot of enthusiasm, you know, at midnight that Friday. We felt like we really positioned all three brands very competitively.

The hours that we gave the stores leading up to that, everything to really capture as much of her spending for that Friday as we possibly could capture, we were pleased with the effort and the result for the Friday. After that, it started to go down.

And was that more of a traffic issue, you think?

Well, we certainly think so. We're in the middle of deploying traffic counters chain-wide right now and we only have, gosh, about 20 that have been in for the full-year.

Now, those 20 traffic counters are supporting exactly what we're hearing all of our competition saying as far as traffic being down high single-digit, low double-digit, those 20, with that being said, yes. You know, we continue to focus on conversion. It's tough to calculate conversion when you don't have traffic counters but we're focused on conversion and post that Friday, we think that we certainly were suffering from traffic issues.

Okay.

And then my final question really is since Michael [Wiess'] departure, obviously, you're moving all the marketing up to the brand Presidents. In the past we've seen a very consistent performance and almost a regularity when you dropped the catalogs. What's happened over the past, call it, 18 months to kind of change that regularity and can you get it back?

Can you get a little more granular on what regularity you're talking about?

To the extent that when you dropped the catalog in past years, you know, you would get this big uptick in the store level traffic that was fairly predictable, it seemed. So you could almost see as the weeks went on, you dropped the catalog and you got a big boost in the comps for that week.

And it seems like when we've been looking, and know that there's been the 53rd week shift issue, but even compensating for that, it seems that we've lost or you've lost a little bit of that kind of a, you know, light switch effect for lack of a better term, but the ability to drive her into the stores. And I'm just wondering, you know, is there -- have you noticed that and is there a strategy to try to capture some of that back?

Yes, I mean, it's a complicated answer. I wish that we could just -- there was definitive, clear and easy but unfortunately it's not.

I think earlier, certainly, when we were really in the early stages of customer acquisition for the core brand, when we first started marketing for Chico's, we saw those huge pops. When we first started marketing for White House we'd see those huge pops.

I think the bigger we got into, the our database got, the newer customer, the percent of customers receiving the catalog that were new was less and we weren't, I think, that drove a little bit as to why we weren't getting the pop. I think later on I think it was due to, again, staleness in the merchandise and staleness in the marketing effort.

I think today our Chico's core brand catalog does not clearly reflect the progress we've made in our merchandise. I don't think that the creative execution of the catalog calls out the difference in the merchandise today enough in the catalog to cause her to jump up and run to the store.

And I think that moving the creative execution over to the brand Presidents will bring that clarity through the creative execution, whether it's catalog, Web, in-store visual that really speaks to the merchandise. Now will we ever get back to seeing the huge pops in response? I don't know that we'll ever get back to that, to tell you the truth. That was a different time in Chico's life cycle.

We may get -- I would expect we could get back to it with Soma as we're very early on in the customer acquisition. And I think that we could possibly get back to it with the White House brand with short of 300 stores. But when you're in the 700-store range and your customer database has been out there for a long time, I think unless you really put an incredible item on the front of the book or somewhere in there or an incredible offer, I don't know that you're going to just cause her to jump up off the couch and run in as she did in the old days.

Okay. Great. Thank you very much, Scott, for that answer. Good luck.

Thanks.

Your next question comes from the line of Barbara Wyckoff with Buckingham Research.

Hi, everyone. Good morning.

Good morning.

You've been adding in merchandising ranks for some time. Where are you looking to fill in? You said you're looking to add headcount in design and merchandising.

Second, could you talk about the increase in marketing dollars? Looks like you tried a lot of new things. What's been working, what hasn't worked? And outside of the Soma TV, where do you expect to add going forward and how should we be planning marketing going forward?

And then the last question is, could you bring us up to date on your plans for the SAP implementation? Thanks.

Sure. I'm almost taken backwards. SAP implementation, nothing's changed since the last call. We're still looking at, you know, sometime in late '08 integrating one brand and then in '09 integrating the other brand. So we're tracking towards that and we're comfortable with everything that's going on relevant to SAP.

As far as the marketing question, Barbara, again, we're right -- we're closing in on our 2008 budget we presented December 17th to our Board. I'm not going to get into details about where we're going to spend the money next year, but as far as the percent of sales, that's going to be very close to what we've been spending historically over the last three to five years.

And then the first -- the headcount on merchandising, you know, what's happened really is with both of these new executives joining the business, Michele now for about 15 months, Donna every bit of four months, you know, they've had to come into the business and assess the talent. So it's not necessarily adding new headcount but we need to make sure that we have the talent in place to continue to grow these businesses.

Currently, you know, we're, I think today we have a Senior Vice President of Production joining the business. Today is his first day.

We have some searches out for some key hires for both brands and those are public searches, both of them, and that's a GMM for both brands and that comes under the heading of succession planning and really trying to have the bench strength in the business that you need at the size of Chico's and where we're taking White House. These ladies can't do it by themselves and in the past, that's sort of how we've been structured.

We're out there right now, doing a lot of interviewing for a key number two person from a merchandise standpoint, for both Michele and Donna, and we've seen a lot of solid candidates and I believe that we're going to land some very solid players sometime in early '08 for both brands.

Okay. Thanks. Good luck.

Your next question comes from the line of Neely Tamminga with Piper Jeffrey.

Scott, could you talk a little bit about [forcing]? Clearly, on Asia, it's very clear to me that pricing across the board is going to be going up. You guys do a ton of product over in China. Clearly, the opportunity to sell at full-price would far outweigh any sort of pricing increases.

But just wondering kind of what you guys are hearing over there, how are you able to kind of maybe shift some production around and just give us a sense of what you're doing there.

Well, first off, again, we just hired, we just brought on a new Senior Vice President of Production who is a very seasoned executive. His first trip post-Christmas is almost a month in the Far East meeting with all of our current vendor base and then we will be looking at where we need to move any of our production relevant to the scalability of those vendors and their ability to provide everything that we need from a costing standpoint to the delivery on a timely basis where we can get it out of the air and get it onto the ocean and realize some freight savings there.

So the whole product, excuse me, production process at Chico's, again, the core brand is under review with Ron Shulman, who's just joined our business and at the same time, as he goes to the Far East, he will be doing a little bit of recon for the White House brand but we eventually have to have someone of Ron's stature at the White House business.

So really, the entire production process is under review, not just pricing relevant to current -- currently what's happening in the Far East, you know, relevant to the weakness in the U.S. dollar on and on. I mean, it's a full court press from a production standpoint with this new executive.

Thanks and congrats to Kent and best of luck to Charlie.

Your next question comes from the line of Jeff Black with Lehman Brothers.

Hey, good morning, everybody. I just had a couple of questions.

One, I guess, Scott, we've heard from one of your competitors on a little bit of discomfort around the levels of inventory that are coming their way in spring. How comfortable do you feel about your own inventory levels when you look ahead to spring just in terms of amount given where the business trends are?

And secondly, when you look at next year and we're talking about lower square footage, you know, when you balance that against the DC spend and Soma and IT, what do we really get in terms of year-over-year SG&A growth? Are we talking flattish? Higher? Meaningfully lower? Could you just give us some color around that? Thanks.

Thanks. I'll take the SG&A.

That's going to depend upon our same store sales, a lot of that. We're scaling back everywhere we can, the new stores are going to help ease off some of the pressure on the SG&A as we do it. But if our same-store sales stay in this trend, it's going to deleverage it.

If we can get it flattening out, we should see more flattening SG&A trends as we move through there. So we really are going to have to see a change in our traffic which is what happened in November.

I'll let Michele answer the one on--

Inventory.

On inventory.

Well, and you also know what Donna's doing.

Yes, so I can represent both brands on this. We're really approaching the first half of next year fairly conservatively, although positioned in key trending categories. When we are going to be ready, as this economy shifts, which we believe it will, the business will be there for the customer when she responds. But again, managing conservatively, we are not going to overestimate what's happening now but ready for the turn.

Thanks.

And Charlie, can I take you to mean that you can get some leverage on a flattish comp? Was that the --

No, no, you cannot take that. We're still experiencing the 100 plus stores this year are not built into the base as of right now. So no, it's in the 3 to 5% range that you would see leverage or breakeven.

Okay. Great. Thanks for the clarity. Appreciate it and good luck, everybody. Really. Thanks.

Your next question comes from the line of Lorraine Maikis with Merrill Lynch.

Thank you. Good morning.

Sounded like you're making some pretty good progress on Soma. Can you just talk about exactly what metrics you would need to see before you did consider rolling that out a little faster and if you were able to garner any learnings from Soma or from the traffic trends that you could maybe apply to the core Chico's brand? Thank you.

Well, as far as, Lorraine, as far as the traffic trends, you know, it makes me wonder how the business would be performing if traffic were better, although it's a different category. The key performing indicator that we need for Soma is sales per store. We can -- that is the key performing indicator because we're building the model around a sales volume.

We made, and I won't take the next hour telling you all the mistakes we made launching this brand. First, we went into the highest priced real estate in America. That was a mistake. We were very naive.

We've really been working on the Soma model and that is where should a Soma store be. What are the best co-tenants? What do we need in sales per store? You know, and that really is the essence of where we are.

That's why we really don't believe that we need to open more stores to prove the model. We could go out and open more stores. There are, and I would tell you today that if there is a fantastic location in the right center with the right co-tenants that we would open that store, but we're not on an aggressive store opening.

So the real key performing indicator for us is top line sales per store. We believe that we're getting a lot closer on what the right financial model is.

And when you carve out the real estate mistakes and carve out the issues that, the collar we put around this brand, launching SAP in the first half of this year, and you add in the excitement of the new product launch and what the television did in the markets to lift the business, and some of the margins we're seeing on the sell-throughs of some of these products, it's the strongest indication that we're tracking -- that we're on the right track with this business that we've seen to date with the business.

Your next question comes from the line of Liz Dunn with Thomas Weisel.

Hi. Good morning.

Is there any color you can share on where the change in the store count is coming from, like by concept?

And then related to the remodels and expansions, should we take your decision to slow the pace of the remodels as sort of a rethinking of that strategy and can you address how many -- what percentage of the stores are in the sort of larger format now?

Well, we'll start in the 10-Q which we filed last night we've got a breakdown of the stores by brand in there. It leans a little bit toward White House from Chico's and there's only a few Somas coming and that's broken down in our 10-Q so you can get that right out of there.

Now, the second one was--

Expansion and relos model.

Yes, the expansion and relos we didn't slow down the bottom end of that it's just that there's not as many opportunities for '08 as we thought. We said 30 to 50. We're 30 to 35 I think now. That's also in the 10-Q. And we're not really slowing that down, we're just not getting as many opportunities as we can.

Regarding the larger size stores, it really depends upon the size of the store you're talking about but we have a number of stores above 3,000 square feet. There are still in the neighborhood of 30 to 40% of the stores that need an expansion of some sort and we're aggressively looking at it but if we don't get the right space in the right 50-yard line we're not going to take it nowadays.

We're much more picky about where we're going to put these expanded stores and whether or not they're in the right spot and that's really looking at the stores and some of the relos we've made that haven't worked out as well as some of the others. So we're just more picky where we're doing it but we're not going to slow that process down because we need more space for the future growth of these brands and the brand extensions we expect to see at some point in the future.

Okay.

But can you just help us understand, you know, why is that the right strategy if the stores are currently becoming less productive? What leads you to believe that you need more space?

Well, how many stores, Charlie, do we currently having doing over $1,000 a foot? How many do we have doing--

It's about 30% of the chain.

Yes, we still have 30 stores doing over $1,000 a square foot and when you're doing over $1,000 a foot, there is no room to add any category, there's no room to do anything. It's -- you're elbow to elbow with the merchandise and the customer.

So even though the comp performance as a chain has been poor, there are still, you know, we're still incredibly productive in probably 40 to 45% of our stores. You know, some of our stores are still doing $1500 and $2,000 a foot, we just can't find an opportunity to relo or expand them. So there's still a strong argument that expanding or relocating these top performing stores should be done.

And at the time that we started these expansions and the relocations we said that our goal was to bring it down to $600 a foot for these larger stores and that's about where they're coming in after we expand them.

I mean it's very tough to comp a store that's doing $2,000 a foot.

Okay. One last question, if I may.

Can you update us on your thoughts on ultimate margin potential for the business?

No, we're not going to talk to that right now. We're going to look at our budget process for year-end and we're going to talk on our year-end conference call about where we expect to be for FY'08 and at that time we may or may not talk about the ultimate where we can be with this. Right now we're struggling to maintain our own margins.

Okay. Great. Thank you.

Your next question comes from the line of Janet Kloppenburg with JJK Research.

Hi, everybody.

Hey, Scott, sometimes when companies have a slow-up in comp store sales growth and traffic levels, they determine that perhaps they need to work harder on the product and I think maybe you've talked a little bit about that, Michele as well. And in an effort to save profitability there's generally a cutback in times of reduced traffic on payroll and on marketing and I'm not really hearing that at Chico's and I'm wondering if you would consider that if the traffic levels continue to deteriorate?

And with respect to Soma, I'm just wondering if you look at the model with the TV spending added in, what influence that would have on the model for the business? Thanks.

Well, obviously, it's a huge cost in a deleverage for the brand today but we're trying to prove a model and improve out the fact that we have a great long-term growth opportunity, so we can't really, you can't just allocate 4% of Soma sales to marketing for Soma. I mean, it's double-digit. It's strong. A lot of what we spent in the last quarter went after the Soma business.

As far as looking at payroll and looking at marketing, you know, on the last call one of the analysts sort of asked me what world I was living in relevant to when -- should we slow down stores even more and my response then was, you know, when we feel that it's the right decision to slow stores, we will. Well, we made that decision. And when we think it's the right time to start cutting back marketing and to start cutting back payroll, which we're already doing, I addressed payroll earlier in the call.

We dramatically slowed headcount in the shared services divisions here at headquarters and, certainly, when you grow in your store base to 60 to 65 net versus 130 to 135 net, you're not going to need to add as many sales audit people. You're not going to need to add as many construction workers. You're not going to need to add, so there are certain consequences to slowing down the growth to payroll.

But depending on the market conditions, we're going to make whatever decisions we need to make across the board, whether it's payroll, marketing, or whatever, as it comes at us.

Right. But, I mean, if you consider the hike in the marketing in the third quarter and then again here in the fourth quarter, I'm just wondering if you think you're going to get a payback on that given that there is still a transition going on in the product assortments?

The Q3 was quite a hike. Q4 is only, I think Charlie said, 100 basis points. Q3, again, we had already committed a national print campaign which was much bigger than last year and we had -- we knew that we were going to throw a lot of dollars at this Soma launch, which, again, we believe played out properly, even though it deleveraged the marketing spend as a whole.

So it's something you're going to keep going with for a while.

Well, no, again, we're in the middle of looking at, we're almost concluding the '08 budget process. We presented the December Board meeting to our Board members and I think we'll have a little more detail on what we're going to spend in the K when Charlie files that, or Kent files that, that'll be a habit I'll need to get out of, when Kent files that very shortly.

Okay.

And then Michele, I was just wondering, given some of the successes you've had in pants and denim, (inaudible) if you now understand what the customer wants, if you have a vision for how the assortment should be shaped or if there is still some testing and defining to go on before you understand exactly how the repositioning of this brand should evolve?

I am very clear on what she's responding to and where the assortments need to go. We got a lot of validation, although the top line numbers do not indicate, we got a lot of validation about where this brand can go. So on that front, I feel very confident directionally with the product.

Travelers, again, big, big change in the performance of travelers and really, you know, it's still a big business for us. We need to get it back to the right contribution to the brand. But other than that, in all the other categories we feel very clear on where we need to go and it's as fast as we can move the entire assortment forward.

So we moved significant categories but it is clear that we need to move the entire product assortment forward at the same pace to really lift the top line sales in this type of competitive environment.

And given your lead times, when, you know, obviously, you've already booked first, I think, and second quarter product. So do you think that those reflect this vision that you hold or will it be until the fall that we have to wait until we see the collection framed the way you envision it?

I feel like we are going to, and as I've committed to, we are going to continue to improve the assortment. It's a huge assortment and we have to tackle it category by category. But, yes, you're going to continue to see, as we've said, movement forward by spring absolutely across more categories.

The travelers to be is the one that we've got to do a deeper dive on right now and really figure out the right penetration on how to evolve that business. In all the other categories I feel very confident that we're moving them forward.

Non-apparel is the other one that I really have to get some key talent in there. I feel very confident in the direction that we're going. I need more movement and I need some key talent hires and we are on the cusp of making some critical hires right now that will allow us to do what we need to do.

Okay. Good luck to you all.

Thank you, Janet.

Your next question comes from the line of Robin Murchison with SunTrust Robinson.

Good morning. Thanks very much. Charlie, let me add my best wishes to you. You've been very easy to work with.

Thanks.

Just a couple housekeeping. One, the tax rate in the third quarter, should we -- we should go back to the 36% or so in Q4?

No, we're down somewhat because our pretax income is lower as a percent compared to our permanent differences, so we're down. The third quarter was down lower than it would normally be.

Right.

But you could drop it down to about 35 for an annualized basis and that's largely a function of all the permanent changes to the taxable income, for example, charitable deductions, tax free interest we have, that kind of stuff are now a much larger percentage of our pretax income than they have been in the past and that's affecting our tax rate.

I got you. Yes. Okay. Thank you for that.

And then also, just a couple of more. I want to ask you about if lead times are still the same, if you're pretty consistent in terms of shipping?

I also want to ask about the lowered threshold spends to draw the customer in, do you feel like you can go back to your historical threshold spends? Example, you know, spend $100, get $25 off, go back to the historical ones because you have sort of lowered the thresholds of late.

And then lastly, if I could just ask about, with the departure of Michael Leedy, what -- do the divisional Presidents, do Donna and Michele have, I presume they still have the structure of the marketing group behind them to help them. Obviously, they've got a lot on their plate to deal with and I'm just thinking about time constraints. Thank you very much and good luck with 4Q.

Thank you.

As far as lead times have not changed really in any brands. Now, what we are doing is for each of the brand Presidents, we are hiring a Senior Vice President of Marketing, which is a new role. Currently, the creative leads of each of the brands reports directly into the brand Presidents.

And while they are incredibly busy, we all are, and we believe that the time they spend and dedicate to the marketing as far as having a cohesive creative execution message across the brands is going to be very powerful. And it's a process that we've been working on for quite some time and so the two key hires that we have to make per each brand is a Senior Vice President of Marketing.

We're very close on one brand, doing a lot of interviews on another and using a little bit of outside agency at the White House to fill in some gaps right now.

Your next question comes from the line of Tracy Kogan with Credit Suisse.

Thanks.

Can you guys first just give us a general idea of what you expect Cap Ex to be next year and how that breaks out between store growth, IT and other? And then can you give us any more detail on the timing and the cost of the DC and when those costs will fall?

And then lastly for Michele, what do you make of the non-apparel weakness? Do you feel like you've missed the trends in those categories or is your customer just cutting back on these add-on items? Thanks.

We haven't finalized our Cap Ex budget yet for last year. We have postponed most of the distribution center expense, the Cap Ex for the distribution center and you can read about that in our 10-Q, again, but we've postponed most of it from 2008 to 2009.

The MIS spend is not much different than it was in the past that we've talked about.

So the real savings will be in the stores.

And the HQ. We've cut back dramatically on HQ expenses. There'll still be a substantial Cap Ex spend here as we need to get more room for the people here, but it'll be much less than we originally thought.

The DC essentially is going to be very minimal. The MIS will stay in the same range that we talked about.

And the new stores, of course, you can multiply that off, right off our store economics and it's been cut in half almost, so Cap Ex is going to be dramatically down from the original 200 to 215 that we thought. It'll be dramatically lower than that. We're still finalizing it so I don't want to throw a number out there that would be premature.

We're still trying to reduce it.

I don't think it's about our consumer cutting back. I absolutely believe to my core that it is we have not moved that product -- it's the furthest behind, if you will.

So when, just like in apparel, when the new product came in and the customer responded as well, the old product got older that much faster. I believe that the non-apparel was not in line with where the product was going necessarily.

Now, underneath all that, again, like in many of the non-trending categories like jackets, I've got incredibly performing subcategories and items. It's just the whole jewelry piece of the business and in the other accessory businesses that we need to move rapidly forward.

We've made significant progress going to spring. We have more to make. But I don't believe it's about her cutting back on those additional items.

Thanks.

Your last question comes from the line of Jennifer Black with Jennifer Black & Associates.

Good morning and Charlie, you will be missed and Kent, welcome.

I wanted to know -- I think this question might be for Michele. You narrowed the breadth of the assortment, I think, in fall by about 30% and I wondered if you can talk about where you are now as far as the breadth and the depth and are there changes in the way you're flowing goods? And then I just have a follow-up question.

Okay.

So yes, you're absolutely right. We did reduce it by 30%. I believe that there's still more room to go on slightly reducing the assortments and it's more about the small square footage stores than it's about the large square footage stores, so more opportunity.

However, what we did do was push a higher percent of novelty down to those smaller square footage stores and it performed very, very well. So we have to get the assortment reduced but not necessarily the novelty reduced.

So that was the assortment question. What was the other one, Jennifer?

Changes the way you're flowing goods.

The interesting thing about Chico's is that something new every day was literally true. And we weren't getting paid for a lot of the new items that were flowing in because it would flow into the color banks, et cetera. What we're really looking to do is flow newness, but flow entire shops of newness.

So we're really looking at how can we really engage our customer consistently with a real change to the front of the store, the windows, the tables, on a more strategic basis than dropping in new items every day. So I think you'll see that from us in spring of '08.

Great. And then just a follow-up question.

I know you talked about the accessory business and the great opportunity. It seems like scarves would be a really great opportunity. I don't think I've seen any in the -- for some time and then I wondered about shoes.

Scarves, not a question in my mind, particularly regionally. We have more stores in the North and in the South, huge opportunity for us.

Shoes, not in the bandwidth right now. Think it's an opportunity, absolutely. Need to correct the core businesses first before I take on new ones but see it down the road, yes.

Great answer. Good luck.

Thank you.

Thank you. I would now like to turn the call back over to Mr. Edmonds for any closing remarks.

Thank you all for attending and we'll talk to you in 2008.

Thank you. This concludes today's Chico's third quarter earnings results conference call. You may now disconnect.