Chico's FAS Inc (CHS) 2007 Q4 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 fourth quarter 2007 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) If you would like to withdraw your question press the pound key. I will now turn the call other to Mr. Michael Smith, Vice President of Investor and Community Relations. Please go ahead, sir.

Good morning. And Welcome to Chico's FAS fourth quarter and year-end earnings call. Today we will have our Chairman and CEO Scott Edmonds and our CFO Kent Kleeberger, giving prepared statements on the business. This will be followed by a question-and-answer session. Before we start, I would like to read our safe harbor statement. Certain statements contained here in, 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 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 operations and financial conditions. The company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized. Thank you. And I will now turn the call over to Scott Edmonds.

Thanks, Michael. And thanks to everyone for attending our fourth quarter fiscal 2007 conference call. With me on the call today is Kent Kleeberger, our Chief Financial Officer, Michele Cloutier, Chico's brand President will join us during the Q and A portion of today's call. Net sales for the 13 week period ended February 2, 2008, decreased 7.9% to $409 million from $444 million reported for the 14 week period ended February 3, 2007. Net loss for the fiscal 2007 fourth quarter, which consisted of 13 weeks, was $20.5 million or $0.12 per diluted share, compared to net income of $18.2 million or $0.10 per diluted share in the prior year's fourth quarter which consisted of 14 weeks. As previously reported, comparable store sales decreased 15.7% for the 13 week period ended February 2, 2008, compared to the comparable 13 week period last year ended February 3, 2007. The Chico's brand same-store sales decrease being approximately 16% in the White House Black Market brand same-store sales decrease being approximately 17%.

Our financial results for the fourth quarter of 2007 were certainly disappointing. While we attribute much of our under performance to last year's merchandising issues, some of the corrective measures we have taken are being masked by the slowdown in retail overall and in the missy sector in particular. We further anticipate the women's sector will continue to face major challenges this Spring. Accordingly, we have pulled back our inventory commitments for much of 2008 and continue to attack all elements of our expense structure. I am pleased to report that we are seeing improving comp trends in the White House Black Market brand and continuing strong top-line performance for the Soma Intimates brand. The Chico's brand is on a slower path to recovery but is making progress. We are actively addressing issues in our accessory's division and travelers collection and recently added a senior level merchant to each of these areas. We expect to see improvement in these categories later in the year. We are currently forecasting negative comparable store sales for the first half of 2008 and expect to have lower earnings than the first half of 2007. Our current expectations are to return to positive comparable store sales increase in the second half of 2008, resulting in overall earnings growth during this time frame.

We have also significantly lowered our capital expenditures plan for 2008. Our total capital expenditures plan for 2008 ranges from approximately $120 to $125 million compared to approximately $202 million of capital expenditures in 2007. We have also pulled back our real estate growth targets for 2008 and 2009, and we do not intend to increase the number of new stores beyond current commitments until we see improvements in the economy and our own performance. Despite the current challenges, we continue to have confidence in our long-term strategies and remain optimistic about our future. We have assembled a strong management team and continue to attract world-class talent in key areas such as merchandising, production, and marketing. As I have previously stated, we are steadfastly committed to protecting our free cash flow and our strong balance sheet that includes approximately $275 million in cash and marketable securities and no debt. This should position us to take advantage of any market opportunities when overall economic conditions improve. Regarding the fourth quarter performance of our core brand Chico's, an aggressive and competitive environment combined with sluggish demand, necessitated deeper discounts in order to maintain sales productivity. Average unit selling retail was down across the quarter, accelerating unit movement but not to a level sufficient to offset AUR erosion and maintain top-line sales. As a result we saw declines in average dollar transactions each month of the quarter. ADS, or average daily sales, was down approximately 10% for the quarter. Deep declines in customer traffic across the quarter contributed to the balance of our miss for the quarter. Transactions were down each month with the exception of December when deep promotional pricing offset the decline and brought us flat to last year. Transactions in our comp stores declined approximately 7% for the quarter. We did end the season with less Fall holiday carry-over than last year and a greater percentage of our inventory owned in go-forward full-price goods.

Moving on to February, the first week of the month was stronger due to an earlier mailer drop that was shifted to account for Easter falling in week four of March this year. Although the sales related to this mailer did improve our trend, the momentum did not carry through the balance of the month. For the month of February we saw overall transactions decline by approximately 17%. We navigated the month by effectively managing markdowns and driving volume in several key areas such as jackets, outer wear, denim, and pants. Unfortunately this volume was not enough to offset the misses in other key categories like travelers and non apparel. We are highly focused on evolving these two categories. We remain confident in the direction of the product. It is the product categories that have not evolved over the last six to 12 months that are the poorest performing categories. We also continue to invest in the executive talent necessary to evolve the product in all categories in order to lift the entire business. During the fourth quarter we hired Judd Harner from Desgrippes Gobe, as the new marketing executive for the Chico's. Judd has worked with Michele over the last 18 months on the brand positioning and strategy. We are making steady progress in aligning the merchandise and marketing for the Chico's brand. We continue to fully anniversary all of last year's marketing activity to minimize the risk of sales misses due to lack of external promotion.

Turning now to the White House Black Market brand, overall performance in fourth quarter was extremely disappointing. The holiday product assortment was not well received by our customer and resulted in high level of promotional activity. We continue to be plagued with over assortments and heavy penetrations of dressy product that resulted in aggressive markdowns to liquidate inventory throughout the quarter. However, our December and January resort collections, which reflected some of our new merchandising efforts, performed very well. Casual sweaters, knits and denim were the standouts and overall the full price performance was stronger than we had experienced in earlier deliveries. As we shared on the last conference call, we expect Spring 2008, to be a steady progression in the White House Black Market business. We have been focused on elevating the product and aligning the marketing and in-store experience to restore White House Black Market to a premier fashion brand. Our customer has responded positively to the February collection and marketing campaign. The full-price performance continues to improve, and we experienced higher than planned performance on the merchandise featured in our February direct mail campaign. Fashion is driving our full-price sales, particularly in dresses, woven tops, jackets, and denim. The metrics showed positive traction throughout the month and while we continue to see a decline in transactions to last year, our average unit retail and average dollar sales continue to show improvement over last year. We are pleased with the progress we've seen in the White House Black Market brand. Our merchandising and marketing are now aligned in the new positioning is being well received by our customer.

Today the Soma Intimates has 68 frontline and one outward store. I am pleased to report that the Soma Intimates business continues to see nice improvements across all major product categories resulting in growth in new customers and repeat purchases from existing customers. The Soma brand continues to be propelled by fresh, innovative, and new products, continuous improvement in the quality and content of our consumer-directed marketing, improved store operations, and accelerating direct to consumer sales growth as evidenced by the 93% increase in sales in February '08 over February '07. We expect the strong initiatives plan for 2008 to continue to build a broader awareness of the Soma brand. While we are encouraged by Soma's performance, especially in this economic environment, we continue to refine the financial model. Soma will need to continue to demonstrate several successful quarters of positive momentum before we will consider accelerating the current conservative store expansion plan.

On the direct to consumer front we continue to be very excited about the growth of our direct to consumer business with a fourth quarter revenue increase of 26% and web traffic up 78% over the same period last year. We continue to take market share from our competitors through this channel. We see this area as a tremendous growth opportunity for all three of our brands. In closing my comments, 2008 will be an extremely challenging year and we're planning our business conservatively. We are committed to reducing our capital expenditures, slowing additional headcount to a minimum and attacking expenses in all areas of the company. Our focus for 2008 is to maintain our financial discipline, continue to make progress on improving our product offerings across all three brands, continue to evolve our marketing and customer loyalty programs, continue to provide our customers with our most amazing personal service across all three channels of distribution, stores, internet, and catalog, continue to fund the headcount growth in the key merchandising areas that will provide the necessary bench strength to grow the business, and I firmly believe that when the economy begins to improve, Chico's FAS, Inc., will emerge once again as a leader in the Missy's specialty store sector. Now I will turn it over to Kent.

Thanks Scott. Obviously we're all disappointed with fourth quarter results. We continue to face both internal and external challenges as we went through not only the quarter but the entire year. We worked hard to strengthen the management team as well as improve our processes and procedures. While these changes have had some impact, there remains much work to be done which I will address later. Overall sales for the fourth quarter were $409.3 million, down 7.9% versus last year. Last year's results include the infamous 53rd week for those of us that follow the retail calendar, which amounted to approximately $24 million in sales. So, backing that amount out of last year's top line, our overall sales would still have been down but only in the 2.5% range. Both the Chico's and White House Black Market brands faced major challenges with new leaders focusing on improving product and assortments during this tough economic environment. Same-store sales for the quarter decreased in the mid teens for Chico's and White House Black Market which was nowhere close where we wanted them to be. It is, however, important to note that when we deliver positive comps for both brands our productivity reaches over $800 per square foot which is among the highest in retail, and at these levels these brands have the potential to be huge cash drivers. Reflecting back on the quarter, in December we faced challenging traffic and sales. By the second week of the month we made a decision to significantly reduce our carry-over going into the end of the year. This led us to be much more aggressive in markdowns, particular at Chico's and drove our AUR down as much as $10 from November and probably moved about $10 million out of sales out of January into December. In hindsight, we should have not been so aggressive on price, booked a little more margin dollars in December and carried a few more items into January for the clearance customer. Our overall gross profit rate came in at 47.7% for the fourth quarter, 660 basis points below last year's rate. The biggest drop in merchandise margin rate was Chico's front-line stores down 600 -- 680 basis points versus last year. This decrease in rate was driven primarily by higher markdowns and to a lesser extent continued investment in product development and merchandise infrastructure, along with higher cancellation charges as a result of trimming our investments in Spring deliveries. Because we took an aggressive posture with promotions we were able to end the year with overall inventory at $60 per square foot.

A small increase over last year's $57 per square foot but below the $64 per square foot from the year before. As previously mentioned, we ended year with less Fall carryover per store. The small increase in inventory per square foot at year end is largely attributable to deliveries associated with an earlier Easter and an earlier catalog drop compared to last year. Reviewing further down the P&L, our SG&A expense during the fourth quarter approached $229.3 million and for the year $847.6 million, an increase of 960 basis points and 650 basis points in rate respectively. That's increases were primarily driven by increased store operating expenses including field management positions, increased marketing spending, higher recruiting and relocation costs, and the de-leveraging associated with the negative comparable store sales. As a call-out to marketing we spent more money in the second half of 2007 and did not get paid for our work in Chico's and White House Black Market. As a result, and in concert with recognizing efficiencies to be gained in our direct marketing efforts we'll be spending fewer dollars in marketing in 2008. So, in summary we lost $0.12 in diluted earnings per share for the quarter, which brought down our annual diluted EPS for the year to $0.50, representing a 46% decrease from last year. Though the numbers are weak, there were bright spots.

We saw continued improvement in wear-now fashion, sweaters, and the bottoms area. We also began to see a dramatic change take place in the creative area of marketing for all three businesses, but more so at Chico's and White House Black Market as we began to launch resort and spring transition product through our direct marketing efforts. We should also mention that the small investment in television for Soma significantly boosted trend in those markets both during and after the ads ran. And the other call-out to the Soma business as we remain optimistic as our top line continues to improve even in this challenging retail environment. While not disclosed separately, some of you with good analytical skills can estimate Soma's impact on our consolidated same-store sales. Also, having worked with another company some years ago that grew a national retail and direct to consumer intimate apparel business I remember the hurdles that Soma faces in its relative infancy stage of business, but I can also appreciate the potential financial reward on our investment. We also see continued growth in our direct to consumer business which grew 36% over the prior year and represented 4.2% of our overall sales mix. This continues to be an opportunity for all three businesses and could grow from 10% to 15% of our total business over the longer term.

As to the cadence of changes in our fleet of stores during the fourth quarter we opened 40 new stores and closed six. We also expanded our or relocated six additional stores. That puts our final number for the fiscal year at 143 new stores opened. During the year we closed an aggregate 15 locations for our three brands as well as an additional 10 petite stores. We also reacquired 13 franchise stores and expanded or relocated 52 existing locations. For the year, that leaves us with a total square footage growth rate of 23% in 2007. This is also a good segue into our thoughts about 2008 starting with real estate. Since we are in a merchandising fix mode, and while it appears the economic outlook for at least the first half of 2008 appears challenging, we have slowed our 2008 and 2009 store growth plans. We are currently calling for 60 new or 45 net new stores which takes into account 15 closures. We're planning on relocating and expanding another 30 or so stores. This will result in a real estate growth rate of approximately 10% for 2008. Currently we see the real estate growth rate for 2009 slowing down further as we have committed to only about 10 new stores. Not only have we slowed our real estate growth rate but we have also scaled back our capital expenditures beyond just stores. We have both eliminated some expenditures and delayed plans for our home office and DC expansions. We have also delayed parts of the SAP integration for White House Black Market and Chico's until 2009. These events, along with trimming back other capital projects will reduce our CapEx spending next year to under $125 million versus over $200 million for the previous two years. And if we were to consider tenant allowances from developers or landlords on new stores, our net spend would be under 100 million which, by the way is a tad higher than our estimated depreciation for 2008. Our commitment to higher cash balances and free cash flow does not stop at the CapEx line. We will be managing our inventory investments judiciously by eliminating extra or friend's choice and managing to overall inventory levels closer to the trend of the business until we see a convincing opportunity to break trend. We'll also employ approved balance sheet management by increased payables leverage along with monetizing non essential assets such as store supplies and other assets.

While maximizing cash sounds really good, we would not be doing our jobs if we did not attack our gross margin and expense structures. We recently concluded our 2008 budget process which surfaced many opportunities to both increase margin and reduce expenses. The following is just a sample of opportunities we expect to seek out in the months ahead. Increase the ocean delivery portion of the mix in our inbound freight, changing the penetration or mix of our offshore suppliers, reducing the number of periods in which promotions overlap in our businesses throughout the year. Eliminate overnight shipments of inventory and communications to stores. Better balancing of our store payroll mix between full and part-time associates, and lowering page count in circulation and select direct-mail pieces. All of these have the potential to save hundreds of thousands or even a few million dollars, so stay tuned.

In summary, I joined the company on a full-time basis only 100 days ago. I knew there would be some major challenges but I believe we have the talent, the commitment, the financial resources, the loyal customer base and the potential to turn this business back into a hugely successful earnings and cash-driven franchise that will generate significant rewards to our shareholders and our associates. And with that we can now begun the Q and A portion of our call.

(OPERATOR INSTRUCTIONS) And our first question will come from the line of Jennifer Black with Jennifer Black & Associates.

Good morning, and congratulations on making -- I can see total progress with your product.

Thanks.

My question really has to do -- it's a two-part question. One, your marketing campaign at White House Black Market looks much better, and I wondered if -- how many of the extra large glossy books you sent out with Donna's letter. That's my first question.

That was 130,000 to the top 130,000 customers.

Okay, that was beautiful book.

Thank you.

And then I wondered if you have any plans to incentivize the sales associates at the stores level to better utilize the Internet to bring -- to be able to give better he service to the customer as well as consummate the sale.

That's a great question, Jennifer. It's something that we're certainly aware of and looking at, but we currently don't have an initiative in the pipeline, but when you look at, I think Kent said 4.2% of our volume came out of the direct business, we have analyzed it, and there is concern at the storefront on the returns portion because they don't get bonus on the sale but they get nicked on the return. We've done some analytics. It's not quite as damaging as some of the store associates thought it was but in the long run we have to have the stores and the web and the catalog all aligned and the store staff have to be incentivize to push people to the web. There's no question. Just with everything else we're dealing with right now it's not one of the key initiatives in the pipeline.

Got it, alright, thanks a lot and good luck.

Thanks.

Your next question will come from the line of Kimberly Greenberger with Citi.

Great thank you, good morning.

Good morning.

Scott, could you talk about how you are managing inventory here through 2008? Should we look for inventory to be down in the first half if you're looking for in-store sales to be down? And then secondarily, on SG&A, you commented that you really attacked SG&A in the fourth quarter. And I was just wondering if you could describe some of the areas where you made progress and it may not be readily apparent in the fourth quarter results. Thanks.

Kimberly, this is Kent. I will take both of those questions. Managing inventory is near and dear to my heart. I have been working with Michele and Donna for some time now, and I think what we've been able to do, at least as it relates to beginning of month August, or the end of second quarter, inventory levels are closer to flat and perhaps with the idea maybe getting slightly down if we can manage the fallout which represents a portion of the receipt plan that we canceled due to late deliveries or quality issues. So, that's at least the game plan for now. Obviously when we started reducing inventory levels our work was pretty much cut out for us. We weren't able to significantly impact first quarter but it's certainly front of mind as we go forward. From the SG&A perspective, really quite honestly we weren't able to impact the fourth quarter significantly, but it was really more of a go forward basis in the 2008. We really had some big pockets of opportunities. I think the first one that comes to mind is we've looked at our store sales bonus plan and really got it closer aligned to what I would characterize as the total store performance, even though we still incent on high average dollar sales, but in some of the initiatives that we've done with respect to store bonus program, we've trimmed roughly about $6 million just in that area alone. We've also looked at how we can manage the rate better as far as the variables payroll associated with sales, selling payroll, and by doing -- changing the mix to have more hourly part-timers versus full-time is probably one of the levers that we can pull on a go-forward basis. Just another flavor of another in SG&A we've already started trimming page counts on a lot of the direct mail pieces, and we've become a little more select in some of the prospecting we do, either through the number of pages or how often these people get mailed on a go forward basis.

Okay, thanks, Kent.

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

Hi, I have a couple of questions, is Michele there?

I am.

Oh, hi Michele.

Hi.

I guess the first question is for you. What is the customer telling you? Are you doing (four) focus groups? I guess how are you viewing your task now versus when you first started? And could you comment on travelers? It's been weak for sometime. What is the problem here? I know you hired somebody but it's been weak for a very, very long time, the and what do you see it improving? And then I have a follow-up question for Scott.

Okay. First of all, are we doing customer research? The answer is yes. It is more of a go-forward strategy. As you know we hired Elaine Boltz to head consumer research, and she and I are actively working together to establish what we're tackling, and travelers is the first one I'm tackling in two weeks. In terms of what the customer is telling us or response to the product, and I'm certainly out in stores all the time, she is responding and continues to respond to the newness in the product. There is no question about it. We see it every single day, and we feel very strongly about really moving forward. As I said in the last call, I feel that we've underestimated her desire for new fashionable clothing, and we need to continue to move in that direction. On the travelers side, it has been diminishing. It's significantly impacted our business last year. It has continued to worsen. We need to stop the bleeding in that category, but more importantly, I need to evolve the product into other categories. I think the soft knit dressy element of our business is an important one. I think after nine years of running a fabric she's got a closet full of travelers but again I'm going to get real live information at focus groups, but from the business you would absolutely say we have to move more aggressively into growing other categories faster.

Okay. And then -- thank you. Scott, this is the question. Why are you still growing headcount in the merchandising area? It seems like you've been adding headcount for the last year. What exactly are the openings? Can you talk about that a little bit?

Yeah, I'll give you sort of a high-level answer. I'm not going to get into exactly what openings are there. As this business exploded in that nine-year period, quite frankly I think that I did a poor job on insisting that we allocate resources to the merchandise departments. The leadership over those businesses felt comfortable with the way the departments were structured, if you will, with the level of bench strength that we were running with, and we were posting huge numbers. So why get in there and mix it up? In retrospect, and it's always a lot clearer in the rear view, I should have insisted that we take some of those huge operating margin points and pour it back into the structure of the business. People, processes, we have a lot of opportunity and sourcing and design. When Michele joined the business we had one person reporting in to her over a billion dollars worth of business. So, it's really been trying to bring both the Chico's business and the White House business sort of to parity to have the bench strength to have a solid foundation to grow the business over the long run versus I think the mistake we made is we were protecting that tremendous operating margin. So, from a macro -- or from a high level viewpoint, that's why we continued to deploy resources in the merchandise arenas. That is the key area that we're adding headcount, other than in the direct to consumer business which is a great vehicle for us, there's very little headcount being added other than merchandising, production, sourcing, and direct to consumer.

Okay thanks.

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

Hey, thanks. Good morning, everyone. Couple questions, I guess. On the inventory side, just to clarify, how much did the carryover, or cutting the carryover impact the rate in Q4? And if you look at your inventory levels now, especially in accessories and travelers, are they down year-over-year? How does that compare with the overall rest of the inventory levels? And the final question relates to the G&A side. Kent, if you look at year-over-year growth in SG&A, how are we supposed to understand that? Is that growing in line with the unit growth at like 10% for the year? Or given all the things that you're doing might we see a rate meaningfully lower than that? Thanks.

Kent, why don't you take the SG&A first.

Well, I think at least what I am able to observe on the growth and G&A it's somewhat in line with the unit growth. Part of our issue that when we compare our G&A rate to other retailers some people have the occupancy rate up in gross margin. We have it in G&A which sort of exacerbates some of the comparison. The occupancy rate is probably roughly around 13% in a de-leveraged type of environment. And so when you throw out negative comps it sort of sticks out like a sore thumb. But obviously since we grew square footage 23% last year obviously, that was a big, big player in the growth in our G&A rate. I think on a go forward basis what we're attempting to do by not only scaling back the real estate growth, I think we're getting a little bit smarter in store size and I think we're going to be a little bit more aggressively managing our relationships when it comes to rent and common area maintenance, among other things. And we also have some cost savings opportunity on occupancy, but it's just not about occupancy and G&A. I think we spoke to the opportunity that we've already seized upon in store payroll from a bonus perspective. We're actually working through some testing of payroll matrices in the Spring season, as well as trying to get some rate reduction in the overall payroll rates. Our marketing dollars are going to be actually down in '08 versus '07. That's going to help our rate. And by the fact that we've all but frozen the headcount in the shared services of the back office portion of our business, I would say that our home office or shared services will see an actual decrease in rate on a go forward basis. So, that's just a flavor for the G&A.

before I flip it over the Michele to talk about carryover and travelers, accessories, the carry over for the White House Black Market business -- Jeff, Fall holiday carryover last year was approximately 18%, this year was approximately 11%. Michele do you want to -- ?

And then the Chico's, as you saw, we carried over 26% last year. We carried over 16% this year.

And then the --

And then on the travelers and accessories inventory question, travelers what's planned down. It is obviously further down than anticipated, but we can course-correct that pretty quickly because of the rolling commitment we have on travelers fabric. On the accessories business it was not planned down, it was planned flat, but as you know accessories is a much shorter lead time than apparel. And again, we can control that inventory go forward.

Alright, thanks, guys. Good luck.

Thanks.

Your next question will come from the line of Neely Tamminga with Piper Jaffray.

Okay, great, good morning, just two questions. Conceptually on guidance, I can appreciate having so many different facets going on with the business and you coming into this fresh. And the street is already at $0.30 for the first half versus last year's $0.50. I guess, the guidance suggests that that $0.30 number is generally okay. Because I would assume if you guys were planning something closer in the order of $0.10 you might come forward on something of that mismatch of street relative to consensus. Could you just help us a little better navigate the language, whether you can do it through comp expectations, obviously being negative, but are we talking negative low or negative double as we've kicked off the quarter? Just a little bit more color I think would be helpful, and I just have one follow-up question.

Well, Neely, I'd like to help you, but I think that's about as much guidance as I'm willing to give right now. I think that there's three different pockets of business. I think Scott summarized them best earlier. Listen, you know, White House Black Market seems to be turning, Soma is chugging along, Chico's is a little bit slower past recovery, but I have to tell you that total retail environment, particular in Missy sectors, is challenging. I'm just not that -- we're just not that good in being able to predict and give you a point estimate either from a comp perspective or earnings perspective. So I think the fact that we're planning negative in the first half and comps and planning down earnings in the first half is about all we're willing to throw out there today.

Okay. And then just some clarification questions. On CapEx numbers that you put out there, is that net CapEx or gross CapEx, and then in terms of your marketable securities obviously it's a hot button issue right now. Do you have any exposure to the municipal auction rate securities that we should know about?

Alright, two pieces on the CapEx. Scott gave a range of about $100 to $125 million on a gross basis. If you were to back off ten in allowances, as I said, it would be under $100 million on a net basis. As it relates to exposure we don't have any auction rate securities. I think that the average maturity of our investment portfolio right now is roughly around five days. We have about 10% of the money in overnight money and we had about 10% of the money invested in single issuer munis that were probably -- I think the longest maturity out there was maybe 12 days, so we don't have the exposure to auction rate like others do.

Fantastic. Good luck, you guys.

Next question will come from the line of Lauren Levitan with Cowen and Company.

Thanks. Good morning. Scott, I was hoping you could elaborate on your assessment of the environment. You obviously mentioned that you do expect it to remain week but could you give us any sense of regional differences, how the macro factors might be affecting, how the consumer is looking at different categories, at price points, how it may or may not be affecting her frequency of visits and expectations for promotions, and then any thoughts on how the competitive environment might be impacting you as well. Thanks, Scott.

Sure, Lauren. Thanks for the question. You know, we are seeing regional differences currently, more so in -- actually, Michele and I were talking about this very early this morning. When you look at the concentration of stores we have in Florida and in California and Arizona, and you sort of overlay the foreclosure rate in those markets, there's no question it's having an impact on our comp. To the tune in February of almost four points. I mean, it was -- in just a couple key states. So, there's no question that the higher the foreclosure rate, the higher the concentration of stores we have in that state, it's a tremendous challenge for us. As for as the competitive set you guys follow our competition for a living. When you look at the way that they're going through these restructures and reorgs, its sort of what we've been going through here for the last 18 months. I feel like we're a little bit ahead of the curve on them there. We have nine executives on the executive committee that run the company. We have no openings, no searches going on right now. I don't think I can say that for my key competitors. So, I think that relevant to what's going on out there in the Missy sector, it's a very tough environment. We'll certainly hear more at the end of the day today, and as the week unfolds, but I think that specifically the Chico's customer is even more challenged than the White House customer. The core edit point for the Chico's customer is like 52 years old, while the edit point for the White House customer is in the 40-year-old range, that brand tends to bring in a much younger customer. If you've traveled to the stores you'll see groups of college girls shopping in White House Black Market. So, I think there's a little bit of -- a little more protection from the economic environment for the White House brand than there is for the Chico's core customer, and as far as the macro environment going forward over the next six months, it just seems like every day you read that the current environment is the worst that it's been. When I look it at these university of Michigan consumer confidence studies, all of the stuff that's been pouring out this week, I wish I had a crystal ball that could tell me when this was going to get better for this sector specifically, but I think planning down our comp negatively for the first six months and planning earnings down year-over-year is a pretty conservative approach in the environment.

Thanks, Scott. One follow-up for you. And you've been very clear that you think you were over earning and under investing and that the historical operating margins weren't something that we should have expectations of you revisiting, but you've also given us, in the past, some thought that you thought could you get back into the 16% plus range. I am wondering if with some of the changes you've made in the business, if you've revisited what you think the appropriate profitability for the business is in a more normalized environment. Thanks.

Certainly a double-digit operating income model. There's no question there. I think that we are focused on getting it back to double-digits and revisit the story at that point.

Okay, thanks very much. And good luck.

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

Thank you, good morning, Your commentary implies a pretty sharp increase in second half earnings and I guess you are planning for positive comps in the back half. Is that driven by specific macro factors or product improvement? And I guess what gives you the confidence that you can get to positive?

Well, certainly everything that we're reading, Lorraine, you know currently -- of course this is our current viewpoint. Some sort of recovery due to the reduction in interest rate and the fiscal stimulus package that's going to be out there that everyone is pointing it to the back half, and when you layer in the horrific comps that we posted in the back half of the year we feel like a conservative plan is to get back to a flattish comp, and if we did that that would speak to earnings growth during that period.

And then did your commentary imply overall earnings growth for 2008 year-over-year for the full year?

Well we're not prepared to give guidance on that, other than I think -- I would expand a little on what Scott said. I think that it's both macro and I think there's also some merchandising issues. I think that while we're seeing a recovery in White House Black Market we still have some bottom fit issues. We think we've got answers to that such that in the April-May time frame 100% of the -- we'll have a new bottom fit in woven bottoms, so I think that's helpful. I think in Chico's on the travelers line, in speaking with the Vice President of merchandising over in that area, she feels pretty good about new product that's coming in in the May-June time frame. So, admittedly it looks fresh, and she's pretty conservative in her points of view so we're looking to see some improvement merchandise specific, but most of what I'm hearing, most of what I'm seeing out there is people are really looking towards the second half recovery. If we are in fact in the recession and it looks a little bit longer, and we have more failures in the financial markets, it could be longer.

Thank you.

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

Thanks, good morning. A question for Scott or Kent. Can you guys talk about any cost inflation you are seeing out of China and then what opportunities you might have to offset these cost pressures? And then if you could also just remind us how much of your merchandise came from China in the latest year? Thanks.

Thats in the -- Michael Smith is looking that up. The percent of total. And you know we just recently hired (inaudible) -- what is it? It's approximately 55% out of China. And as far as the inflation out of China, you want to grab that?

Yes, I'll take that. Of course as you know we're seeing the inflation starting to be a conversation in the negotiation of our merchandise. However, we are continuing to move to a direct sourcing model, which will absolutely offset that. In addition, as you know, we put a lot of goods in the air versus ocean and we're looking to get a slightly higher percentage back on the ocean, which should help also offset some of these costs. But it's not significant yet.

Thanks. And just one follow-up. On Soma, you said you closed three underperforming stores this year. Was there any particular region of the country where those three stores were, or any type of location or were they near a Chico's or not near a Chico's? Just some color on those closing.

They weren't in any specific geographical area. The original strategy for the brand, when it was branded Soma by Chico's, was to open beside our top performing Chico's. A lot of those are in strip centers and are destination. As we move the brand in Fall of '07 to Soma intimates, that proved to be a flawed real estate strategy. Perfect example, we opened beside like a $5 million store in Dallas, Texas in Inwood, store number 65 for Chico's, 99% passport customer, great Chico's, opened 2500-square-foot Soma next-door to it and it's one of the worst performing Somas that we had. Because, again, in this category she only shops a couple times a year. And even taking the great Chico's customers, applying the number of customers in that market that shop that store to two visits per year to the adjacent Soma was not enough to drive the top line. So, we have a little bit of a refined real estate strategy these days, and some of the worst performing stores were our early stores, and those are the ones that we've been closing.

The next question will come from the line of Liz Dunn with Thomas Weisel.

Thank you. Good morning. I guess the turn that you're seeing in White House right now, is that at all related to Donna's influence? And when will her full influence be seen? And then I was just -- I was in a store yesterday, and I'm looking at the assortment, and it's very heavily focused on dresses. Dresses obviously continue to be really strong right now as a category, but as I think about where White House has sort of taken some wrong turns in the past, it seems like it's too dressy sometimes, too casual other times. What are you thinking from sort of a merchandise planning and process standpoint for that business, such that you can maybe even announce some of the fluctuation. The second question, is really just a follow-up to Neely's question on first half guidance, you did say in a previous press release you were committed to being profitable in the first quarter. Are you still comfortable with that? Because that language was not in this press release. Thanks.

Regarding the question on White House, Donna's first day in the business was August 8. So, the first day she walked into her office was August 8. So, she certainly wasn't going to impact Q3. She had a minimal impact on Q4, but she pulled all of Spring and reviewed Spring receipts down to everything she could possibly get her arms around. What you see in the stores today certainly is a reflection of Donna's influence on Spring. I think the way that we've talked about it is we expect Spring '08 to be a steady progression of improvement, and that bears out Donna's influence, there's no question. As for as the dresses, I'll answer that with one of the keys to Donna's disciplined approach to run the business is a balanced assortment. In the past, I believe that you're spot on, we got too casual, then we got too dressy, we got way too dark. The key is it really is in balance. Regarding the comment I made on the December sales release was that -- December call, was that our goal was to get back to profitability in Q1, and, Kent, I don't know how you want to--

No, we definitely expect to be profitable in Q1.

And then just one more, if I may. On remodels, what's your current thinking? I mean, I know you've given us the guidance as to how many remolds and expansions will you do but what's the thinking about that as a use of capital in an environment where you're clearly pulling back on capital and looking at ways to improve your returns in other aspects, but are you really seeing the types of returns that are appropriate on the expansion?

Absolutely. I mean, the reason that we're doing these remodels is that we are absolutely landlocked. We have stores that sometimes in excess of $1,000 per square foot. And it gives us no opportunity to expand our assortment even if we wanted to. So, we absolutely do see payback on our investment in expanded stores.

The next question will come from the line of Roxanne Meyer with Oppenheimer.

Great thank you. My first question is for Michele and then I have a follow-up. I just want to understand how you think about your target market for Chico's. As you strategize and plan more fashion for you customer, do you see the the biggest issue, is how to appeal to a broader customer or how to get more wallet share from your existing one. I guess, how do you balance between satisfying your young to mid-40-year-old customer up to through your mid-50s to 60-year-olds?

Okay, so in terms of the target demographic as Scott said the sweet spot is 52. That's our focus. So, to say that I'm going to appeal to a 35 and a 40 to a 60, 65-year-old, it's about attitude, not age. So, we're going to target a 50-year-old. As you know, over time, I feel like we moved beyond that in terms of the assortment. So, we're just making sure we round it out with that target in mind. What was the second part of that question?

I guess, you know, are you looking to broaden it at all or just really --

In terms of the customer, yes. So, the focus is obviously and has been, new customer acquisition as well as get our loyal customer to continue to spend more. It's both, it's not an either/or.

Okay great, and then my next question is just relating to the store size. A few years back when it seemed like you were maxing out -- you certainly were maxing out in productivity. It clearly made sense to expand the stores. But I guess I'm wondering, have you reconsidered what the optimal store size should be in this environment where not only you've got macro pressures but more competition? Thanks.

I absolutely think we look it at optimal store size. I think that at least in the short while that I've been involved in the real estate process we are challenging some of the size of the stores even as ones that we're expanding. We're probably a little further along on the Soma franchise just because we're trying to refine the model and recognize that we open too large a stores and we have too much of an obstacle to overcome from an occupancy standpoint, but you can count on the fact that we'll look at store size.

Yes and the overall right now front line average store size is 2,541 square feet. Last year we opened them in the 3,400 range. The year before, 3,100. I certainly don't think you'll see us increasing that, and depending on the market, what we believe the market can bear out, that will determine the store size.

Okay. Great. Thank you and good luck.

Your next question will come from the line of Dana Telsey with Telsey Advisory Group.

Good morning, everyone.

Good morning.

Can you talk a little bit about the marketing tactics, what you're looking at for each brand in 2008, seasonal versus how it compares to last year, and then what are you looking at for the cost of Soma in '08 given the strides that you've made there? And just lastly on catalog circulation. Are the numbers going to be lower this year than they were last year? Thank you.

The catalog circ. will be down per average store and that will primarily come out of the prospect file. In the second half of the year primarily. As far as the marketing tactics, you will see a little television from Chico's. You will see a little television from Soma. There's some currently running. We don't current have any plans for television for White House Black Market. We have a great new creative brain in the Chico's marketing who's coming up with some creative ideas, but primarily, as I said in my opening comments, Dana, our intent is to anniversary the marking events of last year to not lose any sales based on external promotion.

And then the cost to Soma?

We really haven't given any specific point estimates other than to say that the business has improved, both from a top line and a bottom line perspective, and it will be less dilutive in '08 than it is in '07.

Thank you.

Your next question will come from the line of Michelle Tan with UBS.

Most of my questions have already been asked. Is there any additional color you can give us on what you saw in the outlet channel, I know you mentioned it briefly in the release. But, any color on what you're seeing is as far as trend of business there? As we know it had held up well for awhile relative to the mall-based business.

The comment that I would make on the outlet business is the outlets for Chico's FAS, Inc., have always been a true liquidation process for us. At Chico's we do buy a little bit of product under the label additions, at White House, to offset some of the margin erosion in the outlook business of Chico's. At White House, we currently do not do that. Donna's background, she was running factory stores for Ann Taylor, and it is absolutely an agenda item for us for 2009 as we improve our core businesses, to focus on the outlet business and move that more towards a factory store model. We certainly have the experience in-house now between Donna and Michele, and certainly know the impact that the outlet business is having on the earnings of a lot of our competitors and other retailers in the space. Operator, we have time I think for one more question.

Thank you. And the final question will come from the line of Crystal Kallik with DA Davidson.

Good morning, thanks, just under the wire there. Kent could you tell us your thoughts, I realize it's early and some of these environments makes it a little bit tricky, but previously there there was some talk of the comp needed to leverage SG&A being around 3% to 5%, and maybe gross margin 7% or 8%. Do you have any thoughts now that you've been able to look at the numbers, and see what the environment is, do those numbers still make sense right now?

I think that right now we're -- the current model would suggest some where in the neighborhood of 3% to 4%. I still think there's some opportunities in our cost structure to carve out. I still think there's some margin opportunities to increase in reate but generally in that 3% to 4% range is what I'm comfortable with right now.

Okay great, could you tell us there's any more cancellation costs you're looking at entering into Q1 or the first part of the year, like you recognized in Q4?

You know, it really hasn't been on the radar screen, so I would say that I wouldn't expect any significant additional cancellation charges. It just so happened that we made a call in late fourth quarter when we were taking a look at the trend of the business versus our preliminary thoughts on '08, particularly in the Spring, and we just decided the right thing was to try to get out of some inventory commitments and we were able to incur some cancellation charges as a result of that but we've also, as a result, signed up to some liabilities on additional piece goods, which we think we could cut on a go forward basis, just not as early as we had originally planned.

Great. That's helpful. And then just finally, clearly the direct business is bright spot right now for you. I know you talked about it being up to 15% longer term. How do we look at that for '08 with the way the trend has been particularly strong year-over-year?

Well, you know, we grew that business. I think the number was 36% in '07 over '06. While I'd like to say that's would we would like to do in '08, it just so happens with the first half it's going to be a little bit tough so I think we have to be a little bit more conservative in our growth rate. It will still be probably in excess of say 15% but we'll have to wait and see when things pick up a little bit.

Okay, great. Thank you very much. And good luck in Q1.

Okay, operator. That concludes the call, and we thank everyone for dialing in this morning, and we're all going to get back to work. Thank you.

Ladies and gentlemen, this does conclude the Chico's fourth quarter 2007 earnings results conference call. You may now disconnect.