Chico's FAS Inc (CHS) 2008 Q2 法說會逐字稿

Good morning. My name is Brandy, and I will be your conference operator today. At this time I would like to welcome everyone to Chico's quarterly earnings conference call. (OPERATOR INSTRUCTIONS). Thank you. I would now like to turn the call over to Bob Atkinson, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Brandy, and good morning, everyone. Welcome to Chico's FAS second-quarter earnings conference call and webcast. Scott Edmonds, Chairman, President and CEO, and Kent Kleeberger, Executive Vice President and CFO, will follow my remarks with their prepared comments.

Before Scott begins, I would like to remind you of our Safe Harbor statement. Certain statements made this morning 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 the 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 shareholders, the Company's filings on Form 8-K and other federal security law 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 by such statements will not be realized.

With that, I will turn it over to Scott Edmonds. Scott?

Thanks, Bob, and thanks to everyone for attending our second-quarter fiscal 2008 conference call. With me on the call today is Kent Kleeberger, our CFO. Michele Cloutier, Chico's Brand President, and Donna Noce Colaco, White House/Black Market Brand President, will join us during the Q&A portion of today's call. Net sales for the second quarter ended August 2, 2008 decreased 7.1% to $405.2 million from $436 million for the fiscal 2007 second quarter ended August 4, 2007. Net income for the fiscal 2008 second quarter was $6.7 million or $0.04 per diluted share compared to net income of $38.7 million or $0.22 per diluted share in the prior year second quarter.

As previously reported, comparable store sales decreased 15.9% for the 13-week period ended August 2, 2008 compared to the comparable 13-week period last year ended August 4, 2007 as same-store sales decreased approximately 19% for the Chico's brand and approximately 12% for White House/Black Market. The retail environment continues to be challenging as customers remain increasingly cautious in their spending across the entire retail sector, especially in the Missy category.

While we anticipate consolidated comparable store sales for the fall season to remain negative, we expect to see an improvement in trend and continue to believe we will be profitable in the second half of the year. Although our second-quarter results are disappointing, we continue to maintain a very strong balance sheet with cash equivalents and marketable securities totaling $278 million in zero debt.

Further, we remain focused on reducing expenses and managing lower inventory levels without affecting our ability to serve our customers. We're also limiting capital expenditures to those that are necessary to sustain the business while targeting an acceptable return on where we choose to invest.

The overall performance in the second quarter for the Chico's core brand was disappointing. Our transactions were down 7.4% versus down 13% in Q1. Our average dollar sale was down 12% versus down 9% in Q1.

As stated on the Q1 call, during the early spring time period, we conducted focus groups that gave us valuable information about where we were winning and where we were falling short. Michele and her team reacted to this customer feedback and have repositioned the back half of this year based on these findings.

As many of you are aware, we relaunched our Traveler's Collection in August with a direct mail campaign, and we are pleased with the customer's reaction and the improved performance of this cornerstone category.

Another key category we have spoken about is the jackets business. We're pleased with our current product assortment and initial sell-through and should get a better read on this category over the next few weeks. Accessories continue to be disappointing, and the repositioning work on this category will not be completed until after the fourth quarter.

In addition to accessories, the bottom business including denim also continues to be challenging.

I would like to make a comment on the Chico's marketing effort. Since being named Brand President of Chico's on October 31, 2007, Michele has worked tirelessly to better align the marketing of Chico's with the targeted customer, the babyboomer. Today the Chico's catalog and national media campaign look more on brand than anytime during the past 12 to 18 months. The three most recent catalogs have had the best response rate we have seen in the past year, and we continue to attract new customers to the Chico's brand with 210,840 new customers shopping at Chico's in the second quarter.

Turning now to the White House/Black Market brand, the second-quarter results for White House/Black Market showed continued improvement over the first quarter. Positive customer response to the collections drove stronger full-price sales gains, while lower inventories and reduced promotional activity did not anniversary the markdown sales from last year. With the reduced level of promotional sales in the second quarter, our key metrics reflect a decline in average store transactions but a healthy improvement to the average dollar sale and average unit retail. Our transactions were down 21% versus down 9% in Q1, but our average dollar sale was up 9% versus up 2% in Q1.

The reposition of the brand continued into Q2 with favorable response from the customer. Along with our signature black and white collections, the introductions of gold and brown within the quarter were well-received. She responded to the newness every delivery, and the unique novelty embellishment, prints and fashion silhouettes drove the strongest results.

We continue to make strides in the sportswear business with fashion, fit and quality. Casual and denim outperformed expectations and last year. Light inventory and seasonal silhouettes left opportunity in the later part of the quarter for shorts, white denim and fashion crops. The collection bottoms business relaunches this fall with the introduction of new fabrications and pant fits. The highlights include a new curvy fit in a fully washable seasonless stretch-based cloth.

As we discussed on our first-quarter call, the dress business was a main focus for a Q2 turnaround. Under new merchant leadership, the dress business made a strong come back and throughout the quarter delivered unprecedented full-price performance achieving higher than historic levels of sales and margins. It was a highly successful quarter in dresses, reflective of a balanced assortment of dressy occasion, casual cottons, knits and fashion maxy silhouettes.

The shoe and fashion accessory business gained momentum in the quarter, delivering a solid performance in full-price sales helping to offset a soft jewelry season. Shoes in particular had an exceptional quarter driven by diversified assortment that offered more choices by end use and price points.

The direct-mail cadence was consistent with last year. Mail order items are still key drivers both in store and online, and we expect to be in a better position to fulfill demand on marketed items in the fall season.

Our customer trends in a second quarter showed a decrease in shopping frequency but an increase in spend per customer and average transaction value. And we continue to track new customers to the White House/Black Market brand with 297,880 new customers shopping at White House/Black Market in the second quarter.

And now over to the Soma Intimates brand. During Q2 Soma Intimates continued its strong positive comp store sales growth trend, and the growth rate at Soma.com continued to accelerate. The brand significantly exceeded its sales and gross margin plans for both the quarter and spring season. As we move into fall, inventory is on line with plan.

All merchandise categories exceeded expectations for the quarter with bras, panties, shape ware and activewear enjoying particularly strong results. New customer acquisition programs, including television advertising, direct-mail and e-marketing have increased the active customer database by 66% versus prior year. Strong topline sales volume growth resulted in significant leverage of SG&A expenses, one key indicator we're making substantial progress toward refining the brand's economic model.

Since launching the brand, we've often stated that a strong bra and panty business is essential to develop the customer loyalty required for a viable intimates brand.

By the end of Q2, foundations -- bras, panties and shape ware -- comprised 60% of store sales, up from less than 50% last year. New bra styles, particularly those with functional benefits and the success of vanishing edge panties, were key factors in driving growth of our foundations business. Soma now has a much broader base of annuity bra and panty styles, and the brand has seen a meaningful increase in the number of repeat customer visits per year.

Total annual spend for active customer is also increasing. Over eight out of 10 new Soma customers first purchase a bra or panty, and two-thirds purchase bra and panties their first time at Soma. One additional measure of performance, the brand is realizing healthy traffic conversion rate improvements in both stores and online. And we continue to attract new customers to the Soma Intimates brand with 93,442 new customers shopping at Soma Intimates in the second quarter.

The outlook for fall is positive with a major bra and panty product launch being supported with an additional television advertising investment in selected markets. The holiday product and marketing programs are shaping up to be the best Soma has delivered since inception. The brand is well-positioned to satisfy both the customer looking for unique fashionable gifts, as well as the shopper looking for key items at compelling price points.

During the fall season and beyond, Soma.com will continue to be a key vehicle for growing sales and building customer awareness of the brand nationally ahead of store expansion.

In closing, 2008 continued to be an extremely challenging year, and we remain focused on strengthening our product offerings across all three brands; evolving our marketing and customer loyalty programs; providing our customers with our most amazing personal service across all three channels of distribution -- stores, Internet and catalog -- inventory management and expense control; protecting our free cash flow and our strong balance sheet. We're encouraged by our loyal customers response to the relaunch of the Chico's Traveler's Collection and the subsequent improvement in this cornerstone category; the discipline Kent Kleeberger has brought to the entire Company regarding inventory management and its expected impact on future markdowns; the progress Donna has made in her first year as Brand President on repositioning the White House/Black Market brand as a more sophisticated upscale fashion brand; the continuous progress that Chuck Nesbit and the entire Soma Intimates team have made in refining the Soma Intimates business model; the commitment that Chico's FAS employees continue to show to the Company in these very tough economic times; and most of all, we're encouraged by the fact that 602,162 new customers shopped in one of our three brands during the second quarter. We believe that when the economy eventually improves, these customers will translate into exciting sales growth for Chico's FAS Inc.

And finally, we were thrilled to have Debbie Phelps, mother of eight-time Olympic gold medalist Michael Phelps wearing Chico's the entire time she was at the Beijing Olympics. We're also delighted to have Michelle Obama, wife of Democratic presidential nominee, Barack Obama, appear recently on national television wearing and bragging about one of our White House/Black Market dresses.

And now over to Kent for his comments.

Thank you, Scott, and good morning, everyone. The second quarter was clearly a disappointment to all of us at Chico's FAS. We did not deliver the comparable store sales results we had targeted and accordingly had to take a greater than planned level of markdowns at the Chico's brand in order to remain competitive in the basics portion of the assortment and align our end of spring season inventories closer to current sales trend.

With few exceptions, retailers have been reporting second-quarter results that are below a year ago or below expectation. Further, the outlook by many, including ourselves for the back half of the year, has become more cautionary as the US economy has moved past any benefit from the government stimulus package and faces any number of bearish economic indicators. To us that cautions seems well-placed.

More on that in a couple minutes. Now let's take a deeper dive into the numbers for the quarter just ended.

Gross margin as a percentage of sales for the second quarter decreased 500 basis points to 52.7%. The majority of the decrease is attributable to lower merchandise margins at the Chico's brand further exacerbated by a decline in merchandise margin at White House/Black Market, primarily due to lower initial markups.

Chico's lower merchandise margins were largely a result of higher markdowns made necessary to liquidate inventory and bring levels closer to the current sales trend. In addition, given Chico's negative comp for the quarter, we were unable to leverage the brand's increased product development and merchandising costs. While Chico's markdowns rate was higher than planned for the quarter, it is important to note that we have managed the brand's end of quarter inventories down to a level of 13% per square foot at cost below a year ago. This accomplishment is particularly important as we transitioned our merchandising from end of spring season July to early fall.

Selling, general and administrative expenses or SG&A dollars increased 5.9% to $205.5 million primarily as a result of higher occupancy costs due to new and expanded stores, higher payroll costs and to a much lesser extent higher marketing costs.

SG&A as a rate of sales increased 620 basis points in the second quarter to 50.7%. Store operating expenses represented 480 basis points of that increase, again largely attributable to the higher occupancy costs, higher fuel payroll costs, along with the deleverage associated with the comp sales percentage decrease. The higher occupancy is a direct result of new stores and higher rents associated with the larger Chico's and White House/Black Market stores we have opened over the past two years, along with the changing mix within the total store base.

Also, in order to maintain minimum coverage, we were unable to flex (inaudible) payroll lower to be in line with the decreasing comp trend.

Further, as White House/Black Market and Soma Intimates become a larger part of the store base, their current store operating costs as a percentage of sales is higher than the Chico's brand, which adversely affects total store operating expense as a rate of sales.

Marketing represented 70 basis points of the 620 basis point increase. Higher marketing costs came primarily from market research for Chico's and some additional advertising for Soma accompanied by the deleveraging cost given the negative comp.

Shared services represent an additional 70 basis points of the 620 basis point rate increase, largely attributable to the deleverage from the negative comp and to a lesser extent an increase in information technology spend. It should be noted that a year-on-year basis, shared services expenses are slightly lower than last year.

Looking briefly at the balance sheet, our end of quarter cash and marketable securities totaled $278 million versus $271 million at the end of first quarter and $274 million at the end of last year. We continue to focus on cash conservation during these difficult times. Our cash conservation practices are demonstrated by the slowdown in our real estate growth rate.

During the second quarter, the Company opened 20 new stores, closed one and completed seven relocations and expansions for an estimated 2.3% increase in selling the square footage. It now appears our square footage growth rate for 2008 will land in the 7% to 8% range.

By brand Chico's opened eight new stores and executed four relocations and expansions. White House/Black Market opened 11 new stores and completed three of the relocations and expansions, and Soma Intimates opened one store and closed another. Thus, as to the third and fourth quarters, we're expecting nominal net square footage growth in both periods.

Accordingly our CapEx for 2008 will now fall closer to the bottom or slightly below the previous range of guidance of 120 to $125 million. Net of construction allowances, this amount should fall within the 90 to $92 million range. We still expect depreciation and amortization of just under $100 million for the year.

At the beginning of my comments, I made mention of how a number of retailers who have released their second-quarter results have also given a cautionary outlook on the second half of the year. It should come as no surprise that being dedicated to the Missy sector, we share that same opinion. The second half of 2008 fall season we're expecting negative comps but improvement from the high teen negative comp reported for the second quarter.

In addition, we expect to be profitable in the second half of 2008.

Our cautious outlook on the back half of the year is matched by our conservative plan for inventories. We continue to review our inventory levels on a weekly basis and remain conservative and planned levels for the balance of the season. In this way we should mitigate the negative impact of markdowns on our margins attributable to excessive inventory levels while enjoying improved full-price sell-through at all of our brands.

As we have taken calls from and meet with investors, certainly the number one question in their mind is when will Chico's show noticeable improvement and when are comps going to be positive. The answer is I cannot predict when. However, we are beginning to see noticeable improvement in select categories in Chico's that have been problems in the past such as Traveler's and jackets.

As to positive comps, first, we want to see our comp sales trend move from double-digit negative to something in the single digit negative range. To that end, it would be helpful to all of us in retail to begin seeing greater consumer confidence and increased spending levels.

But more importantly, our focus needs to be on offering our customer the best in fashionable apparel and accessories with consistency of fit and the highest level of customer service. We believe we have three of the strongest brands in specialty retail today with more opportunity for growth, especially for White House/Black Market and Soma Intimates, but right now we have to play defense.

Let me be clear. We have a financially strong company, and the loyal customer base that despite spending less than last year due in part to lower average unit retails arising from higher markdowns, she is still coming into shop. All of us on the Chico's FAS team believe we're following the right strategy for reversing the trend and returning to increased profitability.

We appreciate your continued support in those pursuits. At with that, I will turn it over to Bob to introduce the Q&A portion of today's call.

Thanks, Kent. Brandy, how may security analysts queue for questions?

(OPERATOR INSTRUCTIONS). Kimberly Greenberger, Citigroup.

I was wondering, Kent, if you could address the differentials on the inventory on your balance sheet versus your comments about the Chico's brand? I'm just not able to get to the numbers that you are talking about.

Well, I think the Chico's brand is down roughly about 13% per square foot. The White House/Black Market brand, I believe, is down about 3% per square foot, and the Soma brand is up.

Part of the issue we were not able to achieve as low a level in the White House/Black Market brand as we had hoped just because of in-transit inventory levels. We had a significant increase in inventorying transit at the end of the quarter.

So there's almost a 10% spread between what you are talking about at the Chico's brand and your total Company inventory per square foot. That is all inventory in transit?

A good portion of it is the inventory in transit.

Okay. So where would you expect the inventory on average to be throughout the third quarter on a per square foot basis?

Well, you know, I think the question is, is that we have gotten inventory levels down closer to the trend, which has been to me a monumental task, but a great spirit cooperation with Michelle and Donna in particular. We're going to continue to manage inventory levels closer to trend. Right now I don't have a pinpoint target for a third quarter because we're seeing some slight differences in trend right now, and we will adjust as we go along. But for all intents and purposes, I think the inventory levels are in pretty decent shape.

Okay. And last question, Kent, you have over 30% of your market cap in cash on the balance sheet. I'm just wondering why you guys are not out there buying stocks.

Because I think we are not of the mindset that a repurchase program is part of our long-term strategy. To me, to go out and repurchase stock is like declaring a special dividend that is a onetime event. And I've obviously had these types of discussions with a number of the investment bankers who want to advise the Company on these types of transactions. And virtually everyone I have talked to has said basically, keep your powder dry, and I would not repurchase stock right now.

Have you had that conversation with investors?

It has come up in some cases, but I would say that the majority of the people have not asked the question but a few have.

Okay. Thanks.

Neely Tamminga, Piper Jaffray.

It would seem to me going back when things go well for Chico's, that the quarterly earnings pattern is actually pretty consistent from quarter to quarter. And so I'm just wondering here you guys want a still positive earnings share for the year, you earned $0.11 in the front half of the year. Is there anything that would preclude you from earning $0.11 in the back half of this year, or more importantly, could there even be some upside to that $0.11 in the back half considering the Q4 opportunity?

I think you're asking me to become a little bit more specific in guidance, and we're not going to go there because we're really in a historical times, and it's very difficult to predict. I would tell you that the fact that we're going to make money in the second half is -- and more so than last year, I think is an indication of where we see the business. It just so happens that the margin for error is a lot narrower than where we were previously. And from everything that I can see with respect to the macroeconomic environment, I'm not hearing any good news out of too many people. So I think it is just better for us to remain cautious and not get people ahead of themselves.

Just a follow-up then. Can you give us some guidance as to how we should be thinking about SG&A dollars just broadly speaking considering you have done a good job I think of cost-cutting and at some various different stages. But how should we maybe be thinking about the SG&A dollars?

Well, I think absent the whole occupancy piece, my sense is the G&A dollars should be I would say -- other than occupancy should be basically flat to slightly down.

Tracy Kogan, Credit Suisse.

Just one follow-up on Neely's question, and that is, can you guys be a little more specific on the areas that you have for expense savings and how much you think you can take out of the business?

And then secondly, can you talk a little bit more about what you're doing on the e-commerce side to improve that business? Thank you.

You know I think on the whole expense I think we're basically seeing opportunities in both gross margin and SG&A. In the gross margin line, we have eliminated outbound freight to stores via air shipments. We're continuing to take a look at opportunities to try to increase more of our shipments to convert them from air to ocean. I think those are probably the two biggest areas.

Our distribution center team, which is another component of gross margin, we just had their six-month year-to-date review yesterday, and they continue to identify areas to drive cost out of the structure whether it is in the four walls or whether it is method of transportation. So we're encouraged there, and I have not really shared that type of news with respect to our cost savings.

Below in the SG&A area, we're laser focused, to use Scott's term, in payroll and the bonus areas. We have already identified savings on the bonus side. We will be testing some alternatives from the bonus plan for the Chico's and White House/Black Market businesses. I still think we have got aways to go in taking a look at the field payroll as a rate of sales. I see some opportunities in in each of the brands.

Other than that, we have been driving out a lot of other costs in the cost structure like between stores suppliers and taking a look at some of the maintenance that we have done in the store that, quite honestly, for example, HVAC, instead of doing it four times a year, why not do it three times a year?

I mean to me that is easy pickings. So we have been focused on keeping our shared services number lower than last year. That is where we are year-to-date. I expect to continue that trend for the balance of the year.

The other piece that was a big piece that we identified early on was the marketing spend where we were looking at page counts and becoming more efficient on our mailing patterns as it related to reactivation and prospecting. And I will tell you that despite marketing expenses being up in the first half, we will see significant savings or I should say our spend below last year's level in the third and particularly the fourth quarter. So that benefit has yet to be realized.

And regarding the e-commerce tactically, I will take it tactically and sort of strategically. Tactically aligning the inventory levels across the brands with the mailer items is driving significant growth in the e-commerce business, and there is a lot of focus on that by the brand leadership.

Strategically we are undergoing a project right now with a consulting group, BCG, to look at how we could triple our online and direct business over the next 36 months. You know looking at best practices, infrastructure, technology both from the hardware and software and the marketing side, what can we do to really ramp this up beginning in 2009 and really get the thing ramped up 3X over the next 24 to 36 months. So tactically it is inventory levels, strategically where we are looking at how we can really ramp the thing up over the next 36 months.

Jennifer Black, Jennifer Black & Associates.

I have a couple of questions. I wondered how close -- well, how close you're defining someone in the area of logistics? That is my first question.

We have a very strong candidate that is coming back I think for about the third time to look at real estate.

Great. And then I wondered how much more you can reduce your choice count at the Chico's brand?

Well, that question would be how much could we and how much should we?

So, Jennifer, as you know, we as a brand have reduced our assortment year-over-year, this year down 10. Last year I was down 30. So we continue to look for opportunities, but we're weighing the wide assortment that our customer expects and enjoys from us and balancing depth on item growth. So we're still undergoing that. We're always in testing mode to see where we can reduce, but we are where we are right now.

Okay. And then this is a question I think for Donna. I wondered how many people received the Black Book Insiders Survey, and can you tell what the response ratio is, or is it too soon?

No, it is too soon. This is something that Elaine Boltz initiated along with the brand leaderships, and we just rolled it out. So we don't really have any stats to report yet.

Okay. And then lastly for Donna --

But it sounds like you have got it.

Yes, I do a little shopping. I just wondered, too, the response to the color red at White House/Black Market?

Phenomenal.

That is what I thought.

It far, far exceeded anything that we expected. You know we went into it cautiously because we really want to be sure that we protect the DNA of the brand, but the response has just been tremendous.

Okay. Alright. No more questions. Thanks a lot and good luck.

Liz Dunn, Thomas Weisel.

A couple of questions. First, on the accessories business, can you just discuss what are the obstacles to turning that business? It appears that a lot of the -- I don't know magazines are sort of highlighting statements, jewelry as sort of a big trend this fall, and that seems like something that would play well for you. Why is your business taking longer to turn? That is my first question.

Is that specific to the Chico's brand?

Yes.

So I'm going to speak specifically to jewelry because that is the driving force. The only area in accessories that is large for us is belts.

The jewelry business as we have been understanding where she is willing to go because again repeating old styles has not worked for us. So it still needed to be involved, and we have been in testing mode to understand where she will respond. We have kept our inventories very lean in order not to overinvest and, therefore, create additional markdowns.

We're getting some very good reads right now on our jewelry in this past I will call it three months' worth. So we have started to increase our inventory investment as we approached the fourth quarter, and we will see the return.

Okay. Second question, are you able to comment at all, I mean we're pretty far into August here, comment on August month to date?

No more really than what we put in the press release, consolidated at 10.7 through Sunday and then some of my commentary on the response to the Traveler's initiative relaunch, if you will, in early August, which we were more than pleased with. That's about all we're prepared to talk about relative to August.

Okay. And then just one more if I may. Can you discuss or update us on your thoughts on the environment for cost inflation?

I think that in each of the businesses we're beginning to see some pressures on cost. Part was self-inflicted in terms of raising the quality and the level of piece goods in the White House/Black Market business in particular, but more importantly, we source about 55% of our goods out of China. We're starting to see some significant cost pressures out of there.

On the other hand, we have huge opportunities to mitigate, and those cost pressures through the method of delivery, which particularly in Chico's, we ship predominately air versus ocean, and so we have an opportunity to convert from air to ocean there, as well as the opportunity to do more direct imports because we still have a substantial portion of our businesses in the aggregate on the land duty paid basis. So we obviously see opportunities to more than mitigate the increase in cost on a go forward basis.

Good luck.

Adrienne Tennant, Friedman Billings Ramsey.

My question is on the amount actually of air versus ocean. What is the split right now? And then where do you want to take it, and what would the differential in costing be?

And then just kind of to broaden that out, historically you had kind of thought that you wanted to take more of the risk on -- you did not want to take as much of the risk on the buying side, and you wanted to take more of the risk upfront in the frontline stores, so you wanted to make that air freight decision. How does that change how you are thinking about leadtimes and how much risk you're going to take on the merchandising side?

You know actually I don't think it is a question of taking risk. I think it is really a question of just adhering to the product calendar, so we can make certain go/no go dates when we cut piece goods in order to assure ourselves that have ocean delivery.

I mean I think right now I think the Chico's business is I recall somewhere around 80% air, and I think White House/Black Market I think is probably closer to about 50% air. So even the 50% is a nice improvement versus Chico's; obviously there's still some opportunity there.

But it is really not a question about taking risks. It is really just a question of adhering to the product calendar and trying to get the goods in and the lowest economical costs that we can achieve.

And what is it just to help us out kind of thinking about this? What is the price differential from air to ocean and the time differential?

When I last looked at it and I have not really taken a look in terms of what the fuel surcharges have been doing to us since yesterday's distribution center review, but it could be anywhere the order of magnitude from $0.80 to $2.00 a unit. So it is a huge opportunity.

Okay. And then how much longer does it take? So you will be -- when you start moving -- is that kind of causing the in-transit inventory to be higher, and should we continue to see that go forward (multiple speakers)?

I mean if you go back to the comment about the in-transit inventory with respect to White House/Black Market, they have more ocean penetration in their mix, and therefore, that is driving up the in-transit number.

Right. So we should --

But it is all good news. I mean from a balance sheet, it looks like inventory was not as low as we wanted. On the other hand, we're being cost-effective in converting more deliveries to ocean.

Correct. So we should probably see -- I'm just trying to get a feel for what the true inventory is, you know the landed inventory. So that -- because we should probably expect to see this differential go forward for quite some time. So it is hard for us to kind of get a clear picture of where the true inventories stand. (multiple speakers)

I would say at least for this quarter I think it is a moment in time, and I'm not willing to throw yet another metric out there to be measured by. So you will just have to stay tuned.

You have to also take into consideration we are -- in addition to changing method, we're also changing mindset. So it is not something that we can do in 30 days. It is going to take some time.

Okay. And then, Scott, would you please talk about some of the Passport metrics? I know you talked a lot about the customer. But where -- have you seen any changes in kind of the Passport penetration over the past couple of years, and what are you doing kind of to bolster that program again and make that all that it was previously?

Well, the one thing that I think you guys have noticed is over the last probably six to 18 months, we have pulled back on a lot of the Passport information that we're sharing. We just felt that it was too critical from a competitive set to keep laying out there exactly what was going on with our database.

I would tell you that if I have an area of concern right now in this economic environment where we have looked to cut some of the spend in marketing, is on -- is trying to drill for new customers and prospecting, if you will, and that is starting to cause me some heartburn relevant to the number of prospects that we're signing up. But it is a direct relationship to the money we're spending, and I'm confident that based on the sheer number of new customers we're seeing coming in the business without the prospecting, that once we dial back up the prospecting spend, it will start to build a pipeline of preliminary customers again. But that is probably the area that I have the greatest concern.

So basically the percentage of sales is coming from the Passport members is significantly higher than it was because you're not spending to attract new customers and not having --?

Not full Passport members no, no, it has been pretty consistent on the percent of total spend by brand of the full membership, the full Black Book member and the full Passport member has not changed dramatically. What we're seeing is the prelims; we're just not bringing the same number of prelims in quarter to quarter that we have been.

I will say that in the last few mailings we have seen more prelim interest because I think the marketing is much more reflective of the brands, much more on brand, if you will. And even without spending additional prospecting dollars, we're seeing the prelim pipe up a little bit.

Okay. Great. Scott, Kent, and team, good luck.

Michelle Tan, Goldman Sachs.

It is actually [Nicole Sheblins] who is filling in for Michelle. A few questions. First, where are sales per foot tracking year-over-year at both brands?

And then secondly, what is the longer-term strategy at White House from a price and IMU standpoint?

Could you repeat the first question? I did not quite hear it.

I'm sorry. Where is sales per foot tracking year-over-year at both brands?

Sales per square foot? Okay, I have got it. I can speak to that with respect to new store performance. I don't have it at my disposal right now for the total. But we're probably in White House/Black Market we're north of $500 a square foot, and in Chico's we are a little south of that number on new stores.

Those are bigger square footage stores.

Right and expanded.

And then the White House question, the longer-term strategy from the price and IMU standpoint?

Sure. Donna can take that.

I'm assuming pricing you're talking about retail.

Yes.

Our retails as we have talked about before have gone up slightly as we approach the fall season with the elevation of our fabrications on the quality level, the make of the garment, somewhere in the vicinity of about 7% or 8%. We do not anticipate it going any higher than that.

From an IMU perspective, as Kent mentioned earlier, as we were repositioning the business, we are absolutely not getting the benefit or economies of scale in IMU right now. Again, that will begin to level itself out as we get into 2009.

We were in catch-up mode, and things are beginning to level set now where we can get out of here, and we can research and negotiate, continue to put more product on both. So we see the IMU gains happening in '09, and retail staying about where they are now.

Okay. And where is profitability at White House Market versus Chico's now?

We do not give that information out.

Brian Tunick, JPMorgan.

I was wondering maybe looking at some of the older Chico's stores that have been expanded the past couple of years, do you have any maybe updated thoughts on where you think average store volumes or sales productivity will bottom? Are we in the seventh or eighth inning now of the productivity declines?

And then maybe, Scott, your enthusiasm on your Soma comments. Should we interpret that that you think Soma may be able to breakeven this year? And how far away are the four-wall margins at Soma before you would think about making a bigger real estate push?

A couple of things, Brian, you read the enthusiasm right. I'm enthusiastic about the brand. We do not believe that we're going to get to a four-wall breakeven profit this year. We still think that that is somewhere in the future. But the leverage on the store expenses, the leverage across the board as the volume ramps up is very attractive. We think that we will get there.

Relevant to the productivity levels of the Chico's stores, I would tell you that when I would look at the performance of Chico's in Q4 and Q1, that I believe that is the bottom of the trough.

Lorraine Maikis, Merrill Lynch.

This is Paul Alexander for Lorraine. Could you guys give us an update on the bonus structure for field associates, and what is your -- just kind of generally what are you planning to do there? Can you give us an idea of the magnitude of savings or opportunity there?

I would rather you speak to the magnitude of the savings because we do have associates that listen to this call too and they have not heard it yet. With all due respect to them, I would rather them hear the bonus plan first than the investment community.

So if you could maybe talk about what you think the savings are going to be and stay away from where you think the bonus plan is going to go.

I agree 100% with you, Scott. I think there's probably anywhere from, say, 2 to $4 million, but I think it is a change in mindset. We have people start thinking about not just in the bonus but also in the field payroll about taking a look at sales per associate hour. It is all about productivity, and that is what we're trying to focus on.

And once that is in place, will that help with the ability to flex up and down the way that you guys had a problem flexing down this quarter?

I think it will certainly help us more from a rate perspective. You know when you talk about flexing, there's really two functions. One is hours and one is rate. I think we can have some significant inroads in the rate. I think we do a decent job on ours, but I still think there's a little bit left to be desired.

We have time for one more questioner, please.

Robin Murchison, SunTrust.

Just a few questions here. One is for Kent. Earlier I of think when Neely asked you about SG&A and absent occupancy, you thought SG&A should be flat to down. I just want to visit with you on that in terms of the impact of minimum wage. That does consider the impact of minimum wage?

Yes, it does. I would like to think that the minimum wage because of the nature of our associates both in the distribution center, as well as a good portion of our field associates, already make more than the minimum wage. We are more heavily weighted to our full-time versus part-time in the field. So yes, it does take into consideration, but the impact of which is nominal.

Okay. And then just two more if I can. One for anybody in terms of any observations or differentiation you want to make in terms of performance in those four states -- Florida, California, Arizona and Nevada?

And the second question is aimed for Michele. I meant noticeably in the monthly catalog, and I don't know how to put this delicately, but the girth, if you will, you know the women, the models are certainly a little bit thicker than they have been in the past. I presume that this is working based on your earlier comment about the reception to the catalog merchandise over the past three months.

(multiple speakers) Clearly if you look back at the fall holiday campaign, anything would be heavier and wider. But you know who she is speaking about specifically.

So just a level set, the size of these models are an eight. So if we consider that to be girth, I don't think that is reflective of the consumer today and certainly not our customers. So we're very pleased with the size of the women and the way they look in our clothes because it is much more reflective of who we're targeting.

And just to be clear, I mean vis-a-vis in the past the way the catalogs were done. (multiple speakers) That is helpful. Thank you.

I think it is very astute. That's exactly where we wanted it to go.

Thank you, Scott. What about the four states? Anything to say there?

I do not know why you're asking such tough questions on a state by state basis. Really we look at our stores on regions, and I will say that the West Coast which would encompass California and Nevada are probably -- it is one of the lower performing regions, if you will, for Chico's as I recall looking at my daily sales report. It is not a huge gap, but it is underperforming on at least the west part of the United States.

Florida I have had discussions with a number of other retailers that Florida for a number of others is in the tank. I don't think our Florida performance is all that different from the rest of the areas of the country. It was that way I think earlier in the year when I first looked at it, but I don't see a noticeable difference presently.

Probably a little bit more impacted I think in the White House brand, and then clearly in the month of August, tropical storm Fay was the most famous tourist we had in Florida. It kept coming and visiting, and it has cost us quite a bit of business. And I'm sure on the monthly release we will probably speak to dollar volumes what that storm has cost us.

Yes, I'm hearing that from some others, too. Thanks very much, and good luck with the rest of the year.

Thank you, Robin, and thank you all for participating in this conference call. Have a good day.

This concludes today's Chico's quarterly earnings conference call. You may now disconnect.