Chico's FAS Inc (CHS) 2008 Q1 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 Chico's's first quarter 2008 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

I will now turn the call over to Mr. Michael Smith, Vice President of Investor Relations. Please go ahead, sir.

Good morning, welcome to Chico's FAS, Inc. first quarter 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 herein including without limitation; statements addressing the beliefs, plans, objectives, estimates, or expectations of the company, or future results, or even-- events constitutes 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 the conditions in the specialty retail industry. There can be no assurance that the actual future results, performance, or achievements expressed or implied, by such forward looking statements will occur.

Users of forward-looking statements are encouraged to review the company's latest annual report on Form 10-K, its filings on Form 10-Q, management's discussion and analysis in the company's latest annual report to stockholders, the company's filings on Form 8-K, and other federal securities law 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 will now turn the call over to Scott Edmonds.

Thanks Michael, and thanks to everyone for attending our first quarter fiscal 2008 conference call. With me on the call today is Kent Kleeberger, our CFO, and Michele Cloutier, Chico's Brand President will join us during the Q&A portion of today's call. Net sales for the 13 week period ended May 3, 2008 decreased 9.6% to $409.6 million, from $453.1 million reported for the 13 week period ended May 5, 2007. Net income for the fiscal 2008 first quarter was $12.7 million or $0.07 a diluted share, compared to net income of $47.2 million or $0.27 a diluted share in the prior year's first quarter. As previously reported, comparable store sales decreased 17.5% for the 13 week period ended May 3, 2008 compared to the 13 week period last year ending May 5, 2007. The Chico's brand same-store sales decreased by approximately 22% in the White House Black Market brand, same store sales decreased by approximately 10%.

The challenging sales environment experienced in fall 2007, has continued into the first quarter of 2008. The generally suppressed economic outlook, including housing pressures, rising food and fuel prices, and the more negative employment picture have corroded consumer confidence, and impacted discretionary spending on apparel, especially in the Missy sector. As we stated during our earnings call in March, we are focused on inventory management and expense control. This focus resulted in a year-over-year decline in inventory, per square foot, of approximately 4%. We are pleased with the progress so far, and are continuing our efforts to bring down inventories further, for the balance of the year. While our overall year-over-year operating performance has declined, we did see an improvement in the trend of same-store sales performance for the White House Black Market brand in the first quarter of 2008 over the fourth quarter of 2007.

The Soma Intimates brand continues to experience significant top line sales growth during the quarter, however our core brand Chico's, saw continuing deceleration in same-store sales during the quarter, and we continued to experience significant year-over-year declines in our travelers collection. We recently conducted customer focus groups to confirm that the corrective measures we have in place for the fall season, should improve the performance of this very important product category. In addition, we gained further insight into our customers apparel purchase behavior.

We continue to expect 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 gradually improve, and return to positive comparable store sales increases, some time in the second half of 2008, if we can expect some level of improvement in the economic environment, resulting in overall earnings growth during this time frame. We are steadfastly committed to protecting our free cash flow and our strong balance sheet, that includes approximately $271 million in cash and marketable securities, and zero debt. This along with our extremely loyal customer base, should position us to take advantage of any market opportunities, when overall economic conditions improve.

Chico's first quarter's overall performance or for our core brand Chico's was extremely disappointing, our transactions were down 13% versus 7% in Q4, and average dollar sale was down 9%, versus 10% in Q4. A record early Easter, and unseasonably cool temperatures further compounded a difficult business environment. Despite opening the quarter with more forward positioned inventory, we were unable to post stronger sales, due to assortment challenges and sluggish demand. From a product perspective, we continue to see deteriorating results in our travelers collection, however as previously mentioned, the corrective measures we have in place for the fall season, should improve this category's performance.

Accessories were also down continuing the same comp trend we saw in the fourth quarter, again being driven by jewelry and belts. The bottoms business is also challenging in the first quarter. Although, pants, denim, and shorts have been posting very strong results for the past 12 months, these categories took a hit, as we saw the customer pull back on her spend, in full price commodity businesses. The most significant challenge in the bottoms business, was in seasonal businesses like crops, shorts, white bottoms, and linen. These categories at full price, have been down significantly year-over-year.

Although our results would indicate our customer was disappointed in our product mix, we did see her respond favorably on key categories. Jackets had a significant improvement over Q4, posting a positive comp,including the novelty portion of this category. Outerwear, novelty sweaters, and active wear, all had solid performances. Our basic tee-shirt business also posted a strong comp in the quarter.

Much of what we saw occur in the first quarter, has continued into the early part of Q2. We continue to be focused on moving through our inventory, and managing to an August [BOM] that should be down year-over-year. These results have required that we aggressively increase our consumer insight. Our extensive focus group research has validated our concerns in both the travelers category, and the overall business, and we are positioning the back half to deliver what we believe will have our customer reconnect with us again. We will increase our novelty investment, continue to provide product that's unique, watch our investment on commodity categories, and celebrate our 25th anniversary, with limited edition product. Again we are certainly not under-estimating that this will be a challenging year, and we will watch our inventory investments very cautiously.

Turning to the White House Black Market brand, the first quarter performance of White House Black Market showed improvement over the previous fourth quarter trend, and steady progress in improving quality, fit, and brand marketing initiatives mentioned on previous calls. Although we have not turned the corner to positive comps, we are tightening managing inventory, while we continue to improve the product, the infrastructure, and processes in the White House business. With the consistent improvement in the product, we are experiencing positive traction in some of our key metrics to last year. Average dollar sale increased 2%, and average unit retail increased 4% over last year. Transactions and comp stores were down approximately 9%, however the quality of these transactions continue to improve. We are seeing a positive response to our new full price collection, and in particular, a strong turn around in our bottoms business. By the end of Q1, we were able to significantly improve the pant fit, and quarter-over-quarter impacted the bottoms business with a strong comp improvement. You should see continued improvement in growth in this category throughout the second quarter, and a complete relaunch in fall 2008.

Outerwear, which is a new business for us, was extremely successful throughout the quarter, as was casual and denim business, Our dress business, which is a core competency of the White House Black Market brand, was challenging in the first quarter, and continues to be difficult in the month of May. Fallout from quality issues, severely impacted inventory levels, and subsequently comp sales. We have repositioned the product, and reorganized the business under new leadership, expecting to be in a stronger position by mid June.

The direct mail cadence was in line to last year, and we experienced a strong response to our first quarter mailers. Fashion continues to drive our full price business, and we are seeing higher than historic selling on items featured in our direct mail campaigns. We have not been in a strong enough inventory position to meet the positive customer response, and should be better aligned to meet the demand by fall. We remain confident in the repositioning of the White House Black Market brand, to a more up-scale and sophisticated fashion brand.

Turning to Soma, We are pleased to report the positive momentum of the Soma brand continued to accelerate in Q1 2008. Both front line and direct consumer channels experienced strong growth, propelled by new product introductions, and compelling promotional programs around the Valentine's, Easter, and Mother's Day, holiday periods. The five style Soma solutions bra launch in February and March, filled major voids in the bra product assortment,supported by a strong problem solution launch marketing platform, Soma solutions was almost entirely incremental to bra sales for the quarter. In addition, momentum behind the successful fall 2007 vanishing edge panty launch, was sustained through new style introductions, as well as expanded fashion color choices. Within the apparel category, active wear continued its strong performance, while the sleepwear business defied the negative overall market trend with a flat performance.

Television advertising behind vanishing edge panty, supported the brand in selected markets during the pre-Easter and pre-Mother's Day period, driving significant increases in comp store and DTC sales in the television markets. We were very pleased to see comp store sales live sustained, in the period after the television flights. A new TV market, Chicago, was added in the pre-Mother's day period with growth results consistent with the experience in other markets. Additional television support for this brand, is planned for the fall in key markets.

Since the Soma brand's inception, e-commerce has been viewed as critical to building brand awareness, and trial ahead of store expansion. During Q1, the Soma direct to consumer business grew 17% of total brand sales, up from 13% in Q1 of '07, exceeding prior year sales by two times. E-commerce conversion rates for Soma are very high, and are running double last year's rates. Our highly integrated front line [DTC] product and marketing strategy for Soma, is providing extremely successful in driving new customer acquisition and sales. Excuse me-- is proving extremely successful in driving new customer acquisitions. We continue to be encouraged by substantial progress the Soma team is making toward perfecting the economic model of the brand, with respect to both sales growth and operating margin improvement.

In closing, 2008 continues to be an extremely challenging year, and we are planning our business accordingly. We remain focused on inventory management expense control, improving our product offerings across all three brands, continuing to evolve our marketing and customer loyalty programs, continuing to provide our customers with our most amazing personal service across all three channels of distribution, stores, internet, and catalog, and protecting our free cash flow, and our extremely strong balance sheet. I continue to believe that when the economy begins to improve, Chico's FAS, Inc.will emerge once again as the leader in the Missy specialty store sector. Now over to Kent for his comments.

Thank you Scott. Good morning everyone. I would like to believe that the first quarter of 2008 will prove to be our most challenging quarter for fiscal 2008. We continue to face a tough economic environment, as tighter wallets result in less traffic, on top of other issues, such as an early Easter, that was felt by the lion's share of apparel retailers. Added to that, were some of our own fashion mis-steps with product, along with the major challenge of trimming inventory levels, particularly in Chico's. However, all of that gloom and doom, as we have had small victories, and pockets of improvement where there's still a lot to do.

First let's look at the key financial results. As you can see from our press release, we experienced a negative 17.5% comp for the quarter, but we were still able to deliver net income of $12.7 million, or $0.07 per diluted share. Additionally, we recognized charges of $6.8 million, which represents a combination of efforts to clean up aged and over stocked inventory at Chico's, and estimated cost to close seven Soma stores, that were oversized, and not part of our long range plan for this brand. Consolidated net sales for the first quarter were $409.6 million down 9.6% versus last year.

The Chico's and White House Black Market brands continue to face challenge in certain merchandise categories, but more so in Chico's. It should go without saying, each brand is standing up to these challenges, virtually every day they show up for work, in an effort to course correct. We believe the White House Black Market brand could turn the corner a little quicker than the Chico's brand, which is not totally unexpected, based on a narrow assortment for White House Black Market. That being said, Chico's is a much larger and more complex business, and has been, and will be slower to turn around.

During the quarter we became more agressive on managing our inventory, facilitated by higher mark downs, and cancellation charges. Our gross profit came in at 55.9%, down 580 basis points over last year. The biggest drop came in the Chico's front line margins, down 290 basis points versus last year. You may remember that Chico's experienced record margins in first quarter 2007, the decrease in the gross margin rate experienced added pressure as we continued to fund investment in product development and merchandising functions. Although first quarter and overall inventory was up approximately 12% since the end of fourth quarter, and up 14% versus the end of Q1 last year, inventory on a per square foot basis was down 4.2%, versus the end of Q1 last year, or about $65 per square foot, compared to $68 last year. We will continue to focus on managing our inventories at a more conservative level, as we go through the remainder of the year. Our ongoing challenge is to bring overall inventories down, without starving categories that display an improved trend.

Moving to SG&A, total expense for the quarter approximated $212.1 million or 51.8% expressed as a percentage of sales, and reflects an increase of 660 basis points versus last year. The increase was primarily driven by store operating expenses, which reflected a 520 basis point increase, as occupancy costs increased by $10.2 million, which also means we had a savings in other areas such as labor and store supplies. Marketing also came in a little higher at $22.8 million, displaying nearly 100 basis point increase in rate. While we have previously stated that we will be spending less marketing dollars in 2008 versus 2007, most of the savings will be in the second half. In addition we planned incremental marketing dollars in Q1 this year, versus last year, to fund TV for Soma, which has been working with much success. We also invest in customer research for Chico's, which includes a number of focus groups conducted throughout the country.

Another piece of good news is that shared services expenses for the first quarter came in lower, at $28.3 million versus $29.5 million for first quarter last year. Unfortunately the level of comparable store sales declined, masked much of the progress we are making on our expense structure, as deleveraging caused by lower sales was the primary culprit for the increase on our SG&A rate versus last year.

As we look at store operations we do have some measured successes, we have eliminated bonus guarantees, and are planning and testing new approached to the store bonus plans, we've also begun work on a more efficient payroll management structure, through improved sales planning and rate management. We have also started a number of cost savings initiatives, including those involving utilities, store maintenance, and store supplies. Although not a component of SG&A, but worthy of mention, is that we have virtually eliminated air freight delivery from DC to stores, with few exceptions, saving the businesses about $5 million versus last year. These items represent just the beginning of actions that will add up to significant savings, and more efficient operations.

While our direct to consumer business saw a slight decrease in the first quarter to 16 million net sales, are down 3% from the previous year, we continue to see the direct to consumer business as an overall growth vehicle, as it only represents 3.9% of our overall sales. You should know that while the Chico's brand [DTC] business was down, in line with front line stores, the White House Black Market and Soma businesses nearly offset the Chico's shortfall. We are also pleased to report that during the quarter our Soma brand continued to show significant top line improvement. We feel confident that the customer is responding to product selection, including new product introduction, and the overall shopping experience, further we are making significant inroads in fine tuning the go-forward store model. We are committed to the long-term growth of this brand, and it's significant potential value to our shareholders, so stay tuned.

Regarding store openings, we opened 23 new stores, closed five, and expanded a relocated 17 during the first quarter. We expect to open between 17 to 19 stores, and expand or relocate nine or 11 stores during the second quarter, and maybe will close one or two more stores.

In summary, the Chico's FAS brands have a strong history, and we have set very high standards for ourselves, and our businesses, based on past performance. Nonetheless, we have not met our sales and profit goals for this past quarter, and we are disappointed in the numbers we are reporting today. It is important to remember that we are a very productive business that ended last year, doing about $800 per square foot, and generated positive earnings, and cash flow, despite generating negative comparable store sales. Additionally we have a very low customer, a strong balance sheet with plenty of cash, and no debt.

So as we progress through this year we are focused on cash management, which encompasses preserving and maintaining cash while the business staying challenging, better management of our inventory levels is front of mind, and we are working with each of the brands to bring them more in line. Further the CapEx purse strings are tight for the time being, and we spend only what is critical for the near term execution, and necessary for the long term health of our business. We are very much aware of the current challenges facing the retail sector, as it relates to consumer spending. We see very little in the economic tea leaves to get excited about for second quarter, which is why we are still planning negative comps, and lower earnings for last year. Our focus continues to be improving and strengthening our brands, as we traverse through this tough economic cycle, facilitated by the continued hard work of all of our associates. I firmly believe we have the potential to turn this business back into a hugely cash-driven franchise, that will reward our long-term shareholders.

With that said, we'd like to turn the call over to Q&A at this point.

(OPERATOR INSTRUCTIONS). Your first question will come from Lauren Levitan, with Cowen and Company.

Thanks, good morning. Scott, I'm wondering if you could give us any more clarity on your comments around traveler,s and thing will be working by fall, and related today that if you can give us a sense from these focus groups you conducted of-- are there certain types of customers falling off? Is it related to age, or size, or lifestyle, or region, anything-- any insights there would be helpful.

Then I just had a clarifying question for Kent. Could you give us a little more color on the inventory break down, some more granularity related to the levels at Q1, and across different brands, and regular price versus markdown? That would be very helpful to have a better understanding of where the inventory declines are coming from. Thank you.

Lauren, on the customer focus group relevant to, are we seeing any specific type of customer fall off, that answer is really no, there is no one age, or one region of the country, that we are seeing you know customers fall off. Their spend is down sort of across the entire group.

Regarding the travelers, you know, sort of the comment about fall we thought we were on to a what we needed to do for that category, before we put the focus groups together, and that's really just confirmed that we were tracking in the right direction. Some of that is relevant to the mix between novelty and basics. The mix between color, you know additional color, but I don't want to give too many specifics on that as I do believe our competition could react to anything that we said for the fall period. Kent, she asked you about the specifics on inventory.

We have so many statistics and metrics we are measured by, I am reluctant to give anything else out there in the public domain, but I will tell you inventory was down in both Chico's and White House Black Market. Actually more so in White House Black Market than Chico's. I will tell you, in particular with White House Black Market, we have had significantly less actually markdown inventory as well as full price.

Thank you.

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

Good morning. I was hoping--

Kimberly, we can't hear you.

Can you hear me now?

A little better, yeah.

Okay. I'm sorry. I was hoping you could talk about the expectation for positive comp in the second half of the year. Is that based on some category performance that you are expecting to get better? Is it based entirely on an improving economic picture or is there something else that you are looking at in your business, that's giving you a reason for optimism? Thanks.

Well I think in terms of the positive comp outlook, we said some time in second half. I think realistically, we are looking for a gradual improvement, as we approach going in the fourth quarter. You know, certainly there is a number of issues that are being addressed in each of the businesses from a merchandising perspective. If I were to go through each of the ones, I would like at travelers first, and I'd take a look at some of the deliveries we'll see in the August and September time frame. I think it looks fresher, there's much more novelty, but we are at least-- we are trying to make positive change. We have got sounds like we have got the jacket fit worked out well in Chico's business. That is helping. The accessories business, we are trying new things everyday. It is just that you know, that has been a little bit challenging from an overall market perspective, but we constantly introduce new product.

In the White House Black Market I know that we are still trying to look at the collections part of the business as well. It looks like we have done a descent job in addressing the fit issues in the bottoms, but time will tell how the customer receives that in the second and third quarter. So I think, all of these while individually are small changes, represent incremental change, and stronger momentum, and admittedly while we are doing everything we think we can do to fix merchandising issues, we could use some help from the economic conditions as well.

When you look at the historical builds on fall versus spring, and you compare the volumes by week, by brand, we are a bit more optimistic coming against the numbers that we-- the dismal numbers that we posted last year, that we absolutely should see a turn.

Thanks. Are you buying inventory with the expectation that comps will be positive?

We are still working out our fall plans but we are going to manage it much closer to the vest. So my perspective is, I think we can still do positive comps on lower inventory levels.

Great. Thanks.

But as I said we are trying to ensure we are down year-over-year August [PON].

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

Thanks. Good morning. Two questions. First can you help us-- how should we think about SG&A dollar increases for the remainer of the year? And then secondly, I was wondering if you could just refresh us on your store opening plans for '09, and whether those plans have changed, given the continuation of weak trends. Thanks.

Okay. I'm jotting all my notes down to make sure I address everything you asked. The store opening cadence is going to slow down as we go through the balance of this year, and if you recall the comments about the SG&A expense line, the biggest component for the increase was occupancy expense. So, we are one of a few retailers that include occupancy as part of our SG&A cost. So as we slow down the store growth, we will probably get some relief in the occupancy line, and therefore the SG&A rate.

I think you also had a question relative to '09. We really haven't moved from where we before, at the end of fourth quarter. Probably right now, we are committed to about nine or ten new stores, that's it. Maybe there's some additional relocations, remodels, but we are holding close to vest, until we see a significant improvement in trends.

Thank you.

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

Hello, good morning. My question is product going to be better in the back half--

Liz, I'm sorry, but you are breaking up a little. Can you repeat the question, please?

Okay. Can you hear me better?

Yes, much better.

Okay. My question relates to our advertising plans. It seems as though you are expecting some improvement in merchandise in the back half. Yet you are pulling back on advertising in the back half, and you are expecting positive comps in the back half. I am just sort of confused by all of that. If you could just help us get more a little more comfortable with your advertising plans relative to your comp expectations and merchandising.

I don't think it is necessarily a pull back, as much as it is a spending our dollars a little bit more efficiently. You know, we have taken a hard look at page counts, for all the brands, in addition to that, we have taken a look at the way we mail to prospects, and part of the reactivation. So it is really a function of just investing our dollars a little more wisely.

And then just on inventory, could you talk about the inventory, the unit positioning versus the total number you have reported, because I know you (inaudible) some write-downs, so does that suggest that (inaudible) basis you are actually a little bit higher than--?

On a unit basis?

Yes.

Not really, because if I look at the Chico's business, our average unit retail is actually down. And while White House Black Market is up slightly, they're down in units as well. So it is really not a unit question.

The-- I know you were inferring relative to the charge that we took, and maybe I will just take this as an opportunity to explain what was entailed in that. Really kind of a couple of things. The first thing is, is that we weren't that efficient in recognizing our marked out of stocks. Typically, most retailers will clear their selling floor for the previous seasons goods, about 45 days or so after the end of the previous season, and our execution on that has been somewhat inconsistent. In addition to having some aged inventory in the Chico's brand, and everybody infers that once the goods are transferred from the frontline stores they go to the outlets, well, we have a similar situation in outlets, in that we have a significant number of units that are aged in the outlet stores.

So we have taken an opportunity to take the charge, to clean up inventories, we're also looking at doing some liquidations with [Jobbers] which previously this business has not done for quite some time, but the fact that we are adamant about trimming our inventory levels, we are look at any reasonable approach to get rid of some of the excess units.

Where would those goods be rerouted to, like a [Marmacks] or--?

To be determined. We are having conversations with various outside third parties.

Okay. Great. Thanks. Good luck.

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

Hello, thanks, good morning everybody, can you hear me?

Yes.

Ken, I was wondering if you could just frame up the expense opportunity, as you see it, over the next couple of years. If you can just put it in terms of the kind of operating margin benefit you ultimately see, or in terms of a lower hurdle rate that you ultimately see for the company. And second on inventory, if you look on a per square foot basis, what kind of level should you be running at? We have been running at lower levels for a while, but with Soma direct et. cetera, I am wondering if those mid-50 targets are unrealistic at this point? Thanks.

Sure. I think that you know, when I tale a look at over the longer term, the bind is two to three years, I think the biggest opportunity we have is in the margin category. We can cut expenses, and we can set goals to trim SG&A by 10 or 20 basis points a year, but in my estimation, the real opportunity is margin. It goes into some various buckets.

The first bucket that comes to mind, is the ability to do direct imports. The direct import portion of our business is underpenetrated. Secondly we have an inordinate amount of our deliveries to the distribution center facilitated via air versus ocean, and that's really more complicated, because it involves the product calendar, and being disciplined, and holding to go/no go dates, in terms of when we cut goods. I think there's a huge opportunity to shift from air to ocean rather, and then the last piece, in addition to doing direct importing, there's also I think an opportunity to do direct sourcing, but that also requires some investment in terms of opening up a footprint overseas, in order to, potentially go to direct to factories, and bypass some of the middlemen, not eliminate them, but to bypass some of that business. As well as doing a better job in terms of managing our piece goods as well as the quality opportunities to address issues over there, as opposed to when they hit our DC over here.

So I think that everybody has been asking about what we think the opportunity is for operating margins on the longer term. Realistically, given what we believe the opportunity and gross margin, as well as some expense savings, I would like to see us get back in the 15% and above category, over the longer term. I'm not going to expect that's going to happen in '09, but I expect to get there in three to four years.

The other question you had is what do I see is a reasonable level of inventory per square foot over the longer term, and I just answered that, less than what we have now.

Great. Fair enough. Good luck.

Thanks.

Your next question will come from the line after Adrienne Tennant, with Friedman, Billings, Ramsey.

Good morning. I guess my first question is on-- can you comment on May month to date with four days left in the month, if there are any trends, just continuing from the April trend?

Well, you know, I am really reluctant to comment on May, month to date. I thin it's suffice to say, if we thought there was a material change from the first quarter's trends, we would have said something by now.

Okay. Thank you. Getting back to the inventory, sorry to continue to talk about this. My question here is-- the sales productivity in the first quarter was down 25%. The inventory while it was down, wasn't down as much as it seems it should have been, and I know that you are committed to controlling the inventory, but it just seems as though the way you are talking about it, it may not be as aggressive as it should be. Can you help me understand, why I shouldn't be thinking that inventory maybe should be down 15% to 20%, rather than the kind of mid to high single digit, that seems like you are talking about? Thanks.

Yes. You may recall the fourth quarter call that when we decided to start trimming inventories was probably in the December time frame, and it was very hard to impact first quarter deliveries, so we made no bones about the fact we were going to enter first quarter with higher inventories than we would like. I think what we have done, is that we have addressed some of the issues I said in terms earlier on the overstocks. We have also stepped up our markdown rate, in order to clear goods. When I look at the Chico's business, that the mark down rate versus last year was up about 16%. And White House Black Market was pretty close to that as well.

So, the thing you have to worry about is being overly promotional, such that you over time, you can tell the customer inherently not to pay full price, because eventually we mark down. You have to walk a fine line in terms of how much you can promote on your overstocks. I would like to think that second quarter we will build some additional momentum in trimming that rate-- or trimming the inventory levels.

Would it make sense to try to trim it, very aggressively, just to get ahead of the fall off in the comp cadence, or the productivity of the stores?

Any time we trim at this point we are in the second quarter, it comes out in expense, you either have to pay vendors cancellation charges, or go through [Jobbers] or to like TJ Max or Ross stores, and each of those alternatives have a significant expense. I would like to think what's best for the business is to try to clear the goods in the front line, in the outlet stores, over the longer term, since we can realize more margin dollars. We have to pick and choose our battles.

Okay. Fair enough. One last question on the field organization, it sounded like you were changing the bonus structure. Can you talk about the bonus guarantees there, and have you seen any field organization turnover as a result of that?

On the bonus side, we had done, as business really fell off the cliff last fall, we stepped in and guaranteed stores and district managers and regional managers, bonus dollars if you will. We took that away during the quarter, and started setting more realistic store plans, so they can actually hit the plan, and get back into the bonus pool if you will. We are very careful at this point, to weigh the unintended consequences any time we deal with field payroll issues.

We are in the middle of working on the new bonus structure. The field organization is highly involved with that, from a store manager position, district manager, regional managers and vice presidents, together with the [Hay Group] and we have yet to roll the new bonus plan out. But when we do, we will also test it in certain districts and regions, before we roll it out chain wide, so that we don't deal with unintended consequences, as we did when we dealt with the hourly salary change, I think two Decembers ago. So we are handling this with a lot of sensitivity.

Okay. Great. Thanks, Scott, thanks, Kent, good luck.

Thanks.

Your next question will come from the line of Michelle Tan, with Goldman Sachs.

Great, thanks. Just a couple of questions. Most of mine have been addressed, but on the White House Black Market business, you mentioned this average unit retail was up 4%, is that also, does that also go hand in hand with higher merchandise margins yet in that business, or is that still coming, and the higher average unit retail is really a function of higher quality products?

The latter, higher quality product. We haven't seen improved merchandise margin because of those higher retails yet.

Great. Just to clarify again, sorry, on the inventory issues, asking this again, but just to clarify one question, if comp trend does not improve, are you also trimming receipts, so we will see the inventory come down, even assuming the comps continue to trend at this level, or will you-- is reducing the inventory position also dependent on some improvement?

I think it is on going thing. I am not trying to be evasive, but we will take advantage of opportunities one of the things, I have spoken about is the concept of fallout, where there's a certain percentage of your receipt plan, that we don't take delivery on, either because we have quality issues, or it is late, it depends on the retailers. It could be anywhere from 2% to 5% of your total receipt plan. We have just started tracking that for each of the businesses, so we can use it as a tool, on a go forward business and know really how much, and attempt to quantify in any particular season, how much fallout there really is. So, we do try to take advantage of that, we do try to trim units where we can, as well.

And then on, is there, as far as potential (inaudible) some of the inventory, is all of the charge related to that, been taken in the first quarter, or might we see something else?

Charge related to job--

If there's anymore charges coming on? I like to think of this as a one time clean up for, what amounts to be marked out of stocks that haven't been taken for some time, as well as old, old inventory, that's gotten backed up in the outlet stores.

Okay. Great, thanks for the help.

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

Hello everyone. I have three merchandising questions. The first is, can you remind me when the new accessory merchant started, the background of that person, and a timetable for improvement? Second is travelers. Kind of a post-peak fabric, I thought the new person was in place, and that we would start to see some improvement in June, now you are saying it is fall. What has changed to push that timetable out, were the first goods late, are they not working, and could it be that the fabric is like I said earlier just post-peak and is it possible to replace part of that business with something else, that does essentially the same thing?

And then the third what is the problem with the pant business overall? Is it because travelers is so weak, is there a lack of newness, clearly there's no new silhouette. And then could you talk a little about the denim business, the status. what has caused the business to improve? Is it the lengths, have you improved the fit? And then could you talk about the size of the business, and the price points in denim versus before? Thanks.

Barbara, that was five or six questions. I will ask Michele to answer maybe travelers, accessories and maybe you guys can go off line and try to hit the bottoms business. So Michele, talk about where we are on travelers.

Yes. First question on accessories, new merchant started approximately four months ago, has extensive background both in accessories and apparel. The real issue for me on the accessory business, is we are still in search of a new Head of Product Development. That's a critical open job at this point on that business. We are going to continue to leverage our vendor base, which provides exceptional design work for us, and we're really going to reach out to them and leverage that expertise, in the interim, until we find this new lead of the product team of accessories.

Under travelers, the issue is this, the mix of the business has really impacted our business. What we learned in travelers focus groups, as well as what product we have seen sell, we have remixed our business for third quarter to invest, as Scott already highlighted and I will just reiterate it, more novelty and we're re-looking at color. Any place in the business, that's a basic business, like (inaudible) Traveler's has been significantly impacted. You can get this fabric at a lot of price points, at a lot of different places. We have to provide product she A, doesn't already have, and B, can get anywhere else. We have committed to remixing the business in the third quarter and fourth quarter. We are going learn as we get into these categories, but based on what we are hearing and seeing, it looks promising. The business continues to be diminished as we have been indicating, but there's still a loyal following, albeit a smaller base, but there's still a loyal following that we have to capture.

And then under the pant business the only head line without getting into all of the details, is it is all about full price selling. The second we added incentive to the bottom business, it moved the needle, however not a long term strategy. Where we really saw the movement is in the top part of the business, specifically in novelty. That's what we are aggressively going after.

Thanks.

Your next question is from Lorraine Maikis, with Merrill Lynch.

Thank you, good morning. It looks like you have taken the opportunity to close about seven underperforming Soma stores. i was wondering, were there any common characteristics of these stores, whether it is locations or anything else, and also can you take this opportunity to look at some of the larger underperforming Chico's stores and maybe exit some of your real estate commitments there?

Regarding the Soma closures, the biggest commonality would be size and expense. The one, one of the key findings as we have worked through this launch of this business, is the size of the store, the co-tenancy, those types of things. So if there's any one commonality, is we have closed larger store that are expensive, and we are focused more on a store that's in the 2000 square foot range, and in the $60 a foot, all in range max, versus stores we were paying $80, $90, $100 a foot for, that were 3,000 square feet. That's biggest commonality.

Regarding the larger underperforming chico's stores, again when you have a lease with Simon, or with General Growth, or with [Taubman] they expect you to honor that lease, on an on-going basis, we look at all underperforming stores, we generally close somewhere between three to six or seven underperforming stores annually, and we are looking at all stores on an on-going basis. But I would not expect to hear coming out of Fort Myers any fresh round of store closings, relevant to oversized Chico's stores, or White House stores for that matter.

Thank you.

Just additional color on the stores. We really don't have that many that have a negative four wall contribution from a cash flow perspective, and it just so happened that the bulk of those happened to be outlet stores, because of the way we transfer goods from front line to outlets at a markdown cost. So it is more or less predesigned if you will. But there's only maybe a handful in each of the businesses, Chico's and White House Black Market, I'm speaking to, front line stores where we actually have a negative four wall contribution, but it is not that significant.

Your next question will come from the line of Margaret Whitfield, with Sterne, Agee.

Good morning everyone. I was just curious if you could provide more color on your comments, that you did the surveys of your customers, and gained insight into their apparel purchase behavior outside of travelers that is?

Not going to share much. Believe that's proprietary. I know a lot of people on the call that confirmed a lot of the things we were hearing from our store travels, our store visits if you will, with share, and that's relevant to where they're shopping, their shopping habits, back to the basic comment that Michele made. There seems to be, they're to hesitant to reach for their wallet to pay full price for basics, for a great items, for a great novelty they will pay full price, and beyond that I will keep the focus groups close to the vest. And operator we have time for one more question, I think.

Thank you. This mornings final question will come from the line of Marty Shapiro, with The Retail Tracker.

Hello guys, just in under the wire. I have real housekeeping questions, so I think most of these would be for you. Any update on the tax rate for the full year, and could we get the actual square footage at the end of the quarter, and my final question just on circulation, at the core of the company, and then at the core Chico's brand, if you can talk a little bit about what the circulation was for the first quarter, and any plans to go forward across the brands?

I think that was tax rate, square footage and circulation plan?

Sure.

I think on the circumstance plan we will get back to you on that one. But the tax rate, if you really look at where we are for the quarter, it is sort of the low numbers, because the fact we have most of the interest income arises from tax exempt obligations. So if you look at the first quarter, the tax rate looks artificially low, long term it is around 36%. We think over the longer term it is about around 36%-- I beg your pardon, it's around 33% for this year. And the square footage number at the end of the quarter, let me see if I have that handy.

It is on the web site. You can just go to the website, the ending square footage is updated, as of today.

Yes, I think the number of selling square footage is just under 2.5 million.

Excellent. Okay guys. I will take the rest of it off line with you. Good luck with the next season.

All right. Thanks.

Thank you, operator, and thank you everyone for joining on today's call, we will talk to you next quarter.

Ladies and gentlemen, this does conclude Chico's first quarter 2008 earnings results conference call. You may now disconnect.