Chico's FAS Inc (CHS) 2016 Q2 法說會逐字稿

Good morning and welcome to the Chico's FAS Inc second-quarter earnings release conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Jennifer Powers, Vice President of Investor Relations. Please go ahead.

Thanks, Andrew, and good morning, everyone. Welcome to Chico's FAS second-quarter earnings conference call and webcast. Joining me today at our national store support center in Fort Myers are Shelley Broader, our Chief Executive Officer; and Todd Vogensen, our Chief Financial Officer.

As a reminder, any forward-looking statements that we make today are subject to risks and uncertainties, the most important of which are described in our SEC filings and in today's earnings release. In these remarks we are excluding Boston Proper from all financial data discussed for comparability purposes. Additionally, we'll refer to adjusted earnings per share which is a non-GAAP financial measure. A reconciliation to our GAAP earnings per share is included in the press release for your reference. With that, I'll turn it over to Shelley.

Thank you, Jen. Good morning, everyone. We are pleased with our second-quarter performance, which reflects the continued progress our team is making against our four focus areas: evolving our customer experience; strengthening our brand's position; leveraging actionable retail science; and sharpening our financial principles. We are transforming our Company to win in the future. And the changes we have already announced are driving cost savings and improving our operating efficiency.

As a result, despite a difficult apparel retail sales environment, we are able to achieve adjusted earnings in line with last year as we improved our merchandising margin rate, decreased total SG&A expense, and reduced consolidated inventory versus last year. Additionally, while consolidated comparable sales were down from last year, they improved sequentially from last quarter.

Importantly, we made significant progress on the cost reduction and operating efficiency initiatives that we announced in Q1. I will provide specifics shortly. But overall, the progress we are making on our strategic plan reinforces our confidence that we can return the Company to double-digit operating margins as our performance improves.

Now, moving onto our results by brand. As we said last quarter, our aim is to be more profitable at our current transaction level and each of our brands is working to achieve that objective. Reduced promotional selling during the quarter impacted Chico's top line. And as a result, comparable sales were down 5.1% quarter-over-quarter. Though sales were down, the brand was able to grow merchandise margin rate by over 100 basis points while leveraging SG&A costs. Our cold shoulder top, denim and pant collections performed well, while knits and jackets were the toughest category.

The brand is taking steps to improve its merchandise. Chico's recently relaunched the Zenergy line, which is Chico's version of athleisure, with the intent to capitalize on this trend and demand from our customers. The brand also relaunched the popular Travelers collection, elevating the product with less busy prints and cleaner lines. Although these merchandising changes are new, early indications are positive.

And we aren't stopping there. Looking ahead to next quarter, Chico's has several additional merchandising initiatives that we are really excited about. After a successful test, Chico's intends to expand its petites offerings to 55 stores. Chico's is also launching its on-trend denim story for the fall, denim for everything. Although we are pleased with the relaunches of Zenergy and Travelers, it will take some time and some more work to us to strengthen the overall brand positioning and to further improve the merchandise assortment at Chico's.

Now onto White House Black Market. Comparable sales for the quarter were down 1.3%. At White House Black Market, a key area of focus for us has been the dress collection. This quarter dresses were one of the strongest categories. Woven tops, denim, accessories and shoes also resonated with our customers, while knits, skirts and bottoms continued to be weaker.

For the fall, the brand is emphasizing its aspirational design with high quality and personalized service. The White House Black Market is expanding breadth and versatility of its clothes so that customers can transition easily from work to evening. Affordable designer denim continues to resonate with our customers, and like the Chico's brand, White House Black Market will have denim tops and bottoms to leverage that fashion trend.

Next, on to Soma. Comparable sales were positive, 0.7%. We have achieved an increase in comp sales for the last 28 of the 29 quarters. Soma continues to deliver what customers want, while also infusing new products and styles into the brand.

Building on Soma's highest volume bra launch ever, the Enticing Lift Balconet bra launched this second quarter. With a lower neckline and a strappier look, it successfully expanded the silhouette options for our Enticing Lift bra. Taking advantage of more available white space in the market, Soma's swim collection, which is now in every store, once again had significantly positive comps. In addition to the swim collection, bras and sleepwear were strong.

However, the fashion side of the business has been challenging, as Soma continues to refine its brand positioning. To help address these challenges, Soma launched a totally new sport collection at the beginning of the third quarter which is off to a great start. The brand has another major launch in early September and, shall we say, we expect that to be memorable.

Now, let me turn to the progress we've been making on our cost reduction and operating efficiency initiatives. Building on our financial principal focus area and the plans we announced last May, we recently completed a comprehensive organizational redesign which clarified roles, responsibilities, and processes across our brands and across our shared services functions. These organizational changes have led to the creation of new jobs in a number of key growth areas, such as digital and business analytics.

In addition to expanding on these key areas of focus, we have reduced our corporate and field leadership headcount by approximately 200 positions. We emerged from the redesign as a flatter organization that is designed to be more nimble and responsive to our customers' evolving needs. We expect that the redesign will generate $25 million in annualized savings, in addition to the $65 million to $85 million in savings that we announced last quarter, totaling close to 4% of our 2015 revenue. Todd will discuss the timing of these savings and related details during his remarks.

In addition, Cinny Murray, Chico's brand President, has left the business. We appreciate Cinny's leadership during her almost eight years at Chico's and wish her well into the future. A search for her replacement is well underway. I have great confidence in the Chico's brand team and their ability to continue to support our efforts and to serve our customers.

Further demonstrating our progress on cost reduction and operating efficiency, the supply chain initiative discussed last quarter is also proceeding well. We completed our assessment phase in June and are halfway through the design phase which addresses frequency and depth of merchandise, along with speed to market. We expect to complete implementation by the end of the fiscal year and to start realizing savings in the second half of next year, as Todd will discuss.

During the assessment phase, we leveraged our rich customer shopping data to define the optimal frequency of fashion deliveries. Our most profitable customers love newness, but our data told us that they weren't able to see, absorb, nor did they have a chance to purchase, our new merchandise before we marked it down. We were competing against ourselves for space to bring in new deliveries, which meant resetting the whole floor every few weeks.

We concluded that we could reduce the frequency of new floor sets by up to 30% while incorporating frequent capsules of newness to refresh and highlight new merchandise. Reducing floor sets will not only improve our AUR by increasing the overall merchandise life at full price, but will also decrease expenses related to sourcing, design, distribution, marketing, store labor and more. Meanwhile, our customers should continue to experience the frequent newness but have better visibility to our overall collection, enticing them to shop and buy from us.

Action in our customer data also informed us that we can reduce our choice count, in some cases up to 20%. Taken together, right-sizing the frequency of our floor sets and editing our choice counts should result in fewer markdowns and the ability to better leverage product and labor. As a result of our assessment, we remain confident that we will generate $30 million to $40 million in annualized savings, as previously discussed. Additionally, given the overlap of people and processes between our supply chain initiative and our organizational redesign, we executed the projects in tandem to ensure the success of both. Completing this behind-the-scenes work will enable our brands to fully focus on providing beautiful products to our customers at exactly the right time.

We are pleased that our performance improved during the second quarter but by no means are we satisfied with declining sales. We are taking a phased approach to drive profitable growth and value creation for our shareholders. We still have a lot of work left in front of us as we execute on our initiative to transform our Company.

When I joined the Company, one of my first actions was to perform an in-depth review and diagnostic of the business, to understand our strengths and our opportunities. That was phase one. And you heard those opportunities quantified last quarter.

Phase two is executing on those initiatives. As we've discussed, our cost reduction and operating efficiency initiatives are well underway and we have now completed our organizational redesign.

We expect that completion of our initiatives will produce a strong scalable foundation that positions us for the third, most exciting phase of our transformation, defining and igniting new sources of revenue for our iconic brands. One of our key areas of focus is strengthening our brand's position through the enhanced merchandising and marketing efforts. We are starting to capitalize on those brand-specific merchandising strategies to improve our assortment and marketing campaigns to drive new customer growth.

Additionally, given the power of our brands and our loyal customers, we see opportunities to grow within our current channel and expand into new ones, including extending our international footprint and partnering with complementary businesses who share our customer demographics. We will talk more about our work on defining revenue-driving initiatives in the coming quarters.

Before turning the call over to Todd, I want to briefly note that I am very proud of how the team performed in what could have been a distracting time period. With the overwhelming support of our shareholders, we now have a refreshed Board, after the additions of Bonnie Brooks, a legendary merchandiser who most recently led Hudson Bay's Company; and Bill Simon, a supply chain guru and former President of Walmart US.

Our team is more galvanized than ever, focused on our customer and engaged in transforming our Company to win in the future. We have seen improved performance over last year and we continue to make progress on our cost reduction and operating efficiency initiatives that we expect will save our Company roughly $100 million annually, or about 4% of last year's revenue. We are executing on our new merchandising strategies and we are excited to be entering our third phase of seeking new revenue-producing opportunities for our powerful and differentiated brands. And now I'll turn the call over to Todd.

Thanks, Shelley, and good morning, everyone. As discussed in our last earnings call, our goal for the second quarter was to improve the profitability of our sales and end the quarter with flat inventory to last year while managing expenses tightly. We're pleased to say that we achieved all of those goals.

When excluding Boston Proper, compared to the second quarter last year, merchandise margin rate increased by 10 basis points. SG&A was down $8 million, leveraging sales by 10 basis points. Free cash flow increased by $30 million. Inventory declined slightly. And adjusted earnings per share were in line with last year at $0.25 versus $0.26 last year.

Now for more specifics on the second quarter. The change in net sales improved sequentially from last quarter but were down 3.6% over last year to $636 million. Consistent with past quarters, our digital commerce business continues to grow at a healthy pace.

Despite the overall decline in sales, we leveraged merchandise margin by 10 basis points for the quarter. Our gross margin rate declined by 80 basis points, primarily driven by an increase in occupancy expense as a percent of sales. While we continue to make progress, please note that we do not expect to leverage occupancy expense until we get into FY17. As a result of the sales decrease, gross margin dollars decreased to $241 million versus $255 million last year.

Our cost reduction and operating efficiency initiatives are continuing to benefit our bottom line as we leveraged SG&A by 10 basis points. Total SG&A decreased by $8 million, or 4%, to $187 million. The decline in SG&A was primarily related to savings in store labor, stock compensation, and non-customer-facing marketing expenses, demonstrating solid progress on our cost reduction initiatives announced last quarter. The initiatives are also benefiting our free cash flow, as our second quarter free cash flow increased by $30 million over last year.

Turning to the balance sheet. We ended the quarter in a strong cash position with $151 million in cash and short-term investments. We returned $31 million to shareholders by repurchasing $20 million of common stock and distributing $11 million in dividends. $204 million remains outstanding under our stock repurchase authorization. We also repaid $2.5 million in scheduled principal payments, ending the quarter with $87 million outstanding on our term loan.

We leveraged our powerful brands and rigorous data and analytics to effectively deploy promotions which allowed us to sell through the elevated inventory from last quarter. As a result, we ended the quarter with inventory down slightly versus last year. Capital expenditures totaled $12 million in the second quarter, mostly comprised of investments in existing stores and technology. During the quarter we opened five new stores and closed five.

Next I'd like to give you more details on the timing of the savings from the organizational redesign that Shelley just described and the initiatives that we announced last quarter. The organizational redesign is expected to reduce expenses by approximately $25 million on an annual basis compared to 2015 levels. For your modeling, about 60% of the expense savings should be reflected in SG&A, while the other 40% is related to cost of goods sold.

Including the savings from the organizational redesign, we now expect our total annualized savings from our cost reduction and operating efficiency initiatives to range between $90 million and $110 million. The annualized savings from these organizational redesigns will begin mid-Q3 this year. We continue to expect our marketing and non-merchandise procurement spend initiatives to reduce SG&A by $35 million to $45 million, with approximately $15 million to be realized this year. We should begin to realize the $30 million to $40 million in expected annual savings from our supply chain efficiency initiatives in the second half of 2017.

Now I'll update you on our financial outlook for the rest of the year. We continue to see a challenging and competitive apparel retail environment. And as a result, we still expect comparable sales to be down low single-digits in the third and fourth quarters. We do expect that execution on our cost reduction and operating efficiency initiatives will drive savings to the bottom line.

Our continued focus on retail science should allow us to leverage merchandise margin via more effective pricing and promotions. However, our occupancy costs will likely be leveraged with lower sales, resulting in slight gross margin deleverage. SG&A savings from our cost reduction and operating efficiency initiatives should roughly offset this gross margin pressure.

Now that we've made significant progress with our initiatives to adjust our cost structure, we expect to continue leveraging SG&A in the second half of this year and for the full year, despite the difficult sales environment. We also expect that continued conservative receipt planning with open to chase built into our models, combined with targeted allocation to our stores, will enable us to manage third- and fourth-quarter inventory to be in line with last year.

We're now planning to close approximately 35 stores this fiscal year, as we have pushed some closures into next year to best optimize lease expirations. However, we still estimate our total store closures through 2017 to be approximately 155. As we stated before, the closures will primarily be in the Chico's and White House Black Market brands.

The sales transfer rate from our closed store locations continues to exceed our expectations. These high transfer rates of our core customer, combined with the strength of our online business, reinforces our belief that the rationalization of our fleet will lead to improved Company performance.

Our capital expenditure estimate for the year has not changed from the $65 million to $70 million. CapEx reflects continued plans to open approximately 17 more stores, more than half of which will be Soma stores. In addition, we'll continue to invest in existing stores and technology to advance our priority to evolve the customer experience.

In conclusion, we are confident in our future. We have three powerful differentiated brands with incredibly loyal customers that we can leverage to seek new revenue growth opportunities. Additionally, our plans to capitalize on our operating improvement initiatives are well defined and we are already making visible progress on those plans.

Our management team is resolute and energized about the actions that we are taking. The team realizes that successful execution against our revenue and operating initiatives will improve our business performance and enable us to increase shareholder value. Now I'd like to turn the call back over to Shelley.

Thanks, Todd. While we expect this challenging macro environment to continue, I'm confident that the actions we're taking will transform our Company for long-term, profitable growth and value creation. Our brand positioning and our connection with our customer are at the core of all of our efforts.

Given the powerful and differentiated brands we have and our wonderful and very loyal customers, we see tremendous opportunity to strengthen our brands' positions as well as successfully compete in new channels. As we continue to take action on our four focus areas, we are becoming more nimble, adapting faster to our customers' needs, all the while improving our efficiency and cost structure. Thanks. Now with that, I'll turn the call back over to Jen for Q&A.

Thank you, Shelley. At this time we'd be happy to take your questions. In the interest of time and consideration to others, please limit yourself to one question. Thank you. And I'll turn the call back over to Andrew.

(Operator Instructions)

Susan Anderson, FBR Capital Markets.

Hi, good morning. Nice quarter in a very tough environment. I was wondering if you could dig a little deeper on merch margin. It was nice to see that inflection there. What's the big driver? Is it leaner inventories, smarter promotions, less clearance or lower AUC? Maybe you could talk a little about that. Thanks.

I think the answer is yes. It's really a combination of a lot of those factors, maybe less so AUC, but certainly -- and we walked a fine line this quarter, as we've tried to move through our inventories.

But we've been very targeted in where we're promoting. We've worked very hard to reduce receipts where it's appropriate. The result has been less clearance that we have to clear through at very deep prices.

So the combination of all those things has really allowed us to not only grow the merchandise margin rate, but remember, we ended last quarter with our inventories up 4%. So to do that and end with our inventories down feels like we've positioned ourselves very nicely for the second half.

Great. And just one follow-up on the AUC part. I think you guys had talked about, last quarter, the opportunity there to lower AUC, look at better ways of sourcing. Is that opportunity coming in the back half? Or is that something that we should look out into 2017 for?

It's going to be more of a longer term project. I think we mentioned that the supply chain initiatives would start to bear fruit as we got further into 2017, and that is still the case. As we head into the back half of this year, it's going to be a similar story to the past for us, where we do have a little bit of opportunity, say, out of currency or other things, offset by manufacturing labor, inflation in the Far East. So overall, not expecting much out of AUC this year but next year is where we really are pointed.

Great. Thanks so much. Good luck next quarter, you guys.

Betty Chen, Mizuho Securities.

Thank you. Good morning. Congratulations on the nice progress. Shelley, I was wondering if you can talk a little bit more about some of the assessment you mentioned about reducing the frequency as well as the choice count. It sounds like, if we understand it correctly, perhaps the flows were just so quick that the customers didn't even have a chance to come in and buy, and maybe had too many options to them.

Maybe if you can clarify so we understood that correctly. And also, whether that is pretty much relevant across all the brands. And maybe timing on when we can see some of those changes occur. Thanks.

Thank you for the question. And you are correct in your assumption. As we talked about our four focus areas, and have been talking about our four focus areas ad nauseam, I think this is one of the instances where you can start to see that leveraging actionable retail science aspects come to life.

Because we have such robust data, more than 90% of our transactions go through our loyalty program. We have a great understanding of when our customer shops and at what price point she purchases at, and at what cadence in our own process cycle she's most likely to come in. And what we actually discovered by just using some great analytics is that our frequency of change and newness did not match the frequency in which our customer shops.

We know she loves newness. We don't want to take that away from her. So I think Todd used the word delicate balance before. This continues to be a delicate balance of making sure that there is enough newness, both in full stage sets and in fashion capsules coming in. But that we also aren't clearing product and adding newness and clouding both the website and the floor with so much choice count that she's not even able to see the things that we know she wants to focus on.

So this was done with a lot of care, with a lot of rigor. And is really done with trying to match the cadence of newness with the frequency of our customers' shop and allowing her to have more time to look and purchase that full-price product. And in our test models that's what's been happening.

And Shelley, is that applicable for all the brands? Or just curious whether it's --

Yes, it's applicable for all the brands but it's most applicable for White House Black Market and for Chico's.

And will we see that in the second-half buys or more for 2017?

We're effecting -- as you know, with people's calendar cadence you've got to start effecting stuff now if you want to see it. So we're certainly working that way today and you'll start to see that early in 2017.

Okay. Great. Thank you so much. Best of luck.

Thank you.

Paul Lejeuz, Citi.

Thanks. We've had a couple years now of depreciation running a bit above CapEx. Todd, wondering how we think about that relationship over the next several years.

And then secondly, could you talk a little about the profitability of the Soma chain and whether EBIT margins are moving higher or lower this year? And what comp is necessary to get leverage in that business? Thanks.

Sure. I'll start with the depreciation question. You're right, this year we're still expecting to see depreciation in the $110 million to $115 million range, which is well north of our CapEx.

What's happened over time is we've shifted our capital spending from pure bricks and mortar to a better mix with technology. Technology has much shorter lives on it, so the result is you have an acceleration in the useful life of the CapEx we're putting into place. That's caused depreciation to run a little bit higher than our current run rate on CapEx. That should even out over the course of the next few years, but it will take a few years to even out.

In terms of profitability of Soma, yes, that obviously is something we pay very close attention to, to say the least. I think for Soma it is not only about continuing to drive those positive comps and new customers, but we're also managing expenses very tightly there. The brand just has inherent in it a very cost-conscious culture that is allowing us to continue to be strong on the profitability as well as on the top line.

Thanks. Good luck, guys.

All right. Thank you.

Simeon Siegel, Nomura.

Great. Thanks. Good morning, guys. Shelley, in light of your comments and the initiatives, what are the thoughts on a general time line to returning to positive comps? Todd, maybe any context you can give on that comp guidance in light of the easier back-half compares. I don't know, any comment on any current trends.

And the following up on Paul's question, can you, or would you, share what Soma's margins are versus the other concepts at this point? Considering the fact that a meaningful portion of the fleet is over a few years old. Thanks.

Sure. We'll start with comps. Two things. I think, as we've gone through our process and strategic planning with Shelley, we've really tried to follow a very prescriptive three-phased approach to our strategic planning. Where first was diagnostic, came in and understood that we did have some opportunities on the operating efficiency and cost side. So phase two was obviously going after those. And then phase three is going to be looking at new revenue sources.

We started on some of that work, which you heard about on the merchandising side, doing a little bit on marketing as well. But I would say that's an initiative that is -- really, that's the fun stuff and that is the stuff that we are going to be building into now. It's tough to see a lot of that impacting the very short term.

So in the short term we're looking at an environment, from a macro perspective, that continues to be a little bit challenging. I think I've heard the word uncertainty plenty of times in conference calls over the last couple of weeks. I think that's a fair way to put it. So our outlook basically reflects that uncertain environment in the short term, knowing that long term we're working to transform the Company and get back to that positive comp growth as we get into next year and beyond.

Great, thanks.

And you had asked about Soma. So out of fairness, we really do not disclose the individual profitability of any of the brands. So for competitive reasons, probably won't get into that level of detail, other than to tell you that Soma is profitable and continuing to be a profit driver for us.

Great. Thanks. Best of luck for the rest of the year.

All right. Thank you.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone. You touched on the merchandise margin and merchandise margin coming from more effective pricing and promotions, what should we see on the promotional cadence? Does it differ by brand? And you think of pricing with the newness and the assortment coming through, are there changes in pricing that we should look to that would show up in the margin also? Thank you.

So Dana, yes, I think in terms of promotional cadence, the clear goal is you will probably see different promotions. What we've been testing into is what promotions customers respond to. You may see shifts where there are time periods where there are more large full-store headline promotions and then there will be times where it's more category specific. But I think varying that promotional cadence is clearly a part of what will drive success in the long term.

And I think the other aspect of merchandise margin as well that sometimes gets missed, a lot of merchandise margin improvement or decline is really built on how much goods are left over at the end and get driven through clearance. The more we can sell at full price in season, the better off we are. And that goes right back to Shelley's comments around the supply chain initiative and making sure that we're giving our customers time to see our products and time to actually buy them when they're still full price.

Dana, you also asked if the promotional cadence will be different by brand. If you remember in our last call, that's when we announced disbanding the centralized marketing function. The primary reason for that was not only is it an expense savings driver, but it was really to put those decisions that are closest to the customer back to the brand.

And so each one of our brands has a unique set of customers and a unique personality and brand position. Although the science and the analytics around which customer, which promotion at which time is a bit standardized through our analytics group, the when-and-where-and-how each brand needs to be unique and specific to that brand.

And just one more follow-up. On the placement for the Chico's Brand President, what are you looking for that role? Is there any characteristics that makes that, whoever it is, the right person for that role? Whether experience, whether it's what the goals are for the future. Given what Cinny Murray had done in the past, it's a different business today than it was when she joined. Thank you.

That's right. And Cinny did amazing things for the brand in her nearly eight years that she was here. There's a right time and a right place for all kinds of leadership styles and it has been transformational, as you well know, at the macro level. And that retailing has changed and it would be nice to say so much over the last five years, but I think you could say so much over the last five months. It's just a speeding bullet of change. And so, of course, we'll continue to find somebody who understands the customer, who loves the kind of knowledge and brand positioning and the opportunity that exists in an iconic brand like Chico's.

As Todd mentioned earlier, it's hard to say what you're certain of in retailing today but the things that we're certain of is that digital commerce is here to stay. That the personalization of offering to each customer is only going to grow in importance. And that those that will win even the pure-play retailers today are looking for some kind of physical manifestation of their brand. And so as we look to all of our leadership, we're looking for people that can not only lead our tremendous store fleet, take care of that unbelievably loyal customer, but also lead us into this new future.

Thank you.

Pam Quintiliano, SunTrust.

Thanks so much for taking my question, guys, and congratulations on the quarter. I actually wanted to follow up on Dana's question regarding Cinny's departure, and how we think about when we see the impact in the stores through when? Is it still Cinny? Who's leading now and where are you guys in the process of the search? And then I feel like she was pretty visible for your loyal Chico's customer, so are you communicating -- do you communicate that transition to your customer? Because she was definitely, I feel like, communicative with her. Thanks.

Yes, thank you for the question. Remember, we're at a brand President structure, not a chief merchant structure. So the way that we're structured is brand President. So underneath our brand Presidents are our merchants and designers.

So the look and feel of the Chico's brand and the White House brand is also very much impacted by our lead designers and our design staff. And we run a brand President model, which is a bit different than having an iconic chief merchant whose fingerprints are on every product. So it's a little bit of a different structure.

Certainly our customers' relationship is with the brand. We communicate openly and honestly with all of our loyal customers and we'll continue to do so. And as far as -- continue.

No, sorry, go ahead.

And as far as our search, I've been looking at talent as long as I've been with the Company now the last eight months, making sure that we've got the appropriate talent in every position. And that search is well under way.

And if I could -- thank you for that -- and if I could just ask a very quick one. Regarding your loyalty programs, any update on the numbers there and how they've been moving?

No significant update. We still have over 8 million customers in our loyalty programs. We still capture customer information on well over 90% of our sales. So we continue to know who she is, what she's buying, when she's buying. And we're actually, as part of the organizational redesign, what I would say, beefing up some of the functions around our ability to analyze and actually action that data in ways that we think is going to be very positive for us in the future.

And one of the most attractive aspects of Chico's FAS to me during my own due diligence, was the Net Promoter Score that comes through that loyalty program. And the fact that our Net Promoter Score among the brands is 77%, 75% and 75% when the average specialty retail number is 51%. So not only do 90% of our transactions go through that loyalty program, but these people are recommending to others and advocating for our brand at a best-in-class rate.

Thanks so much. Best of luck.

Janet Kloppenburg, JJK Research.

Hi, everyone. Congratulations on all the new initiatives. A couple of questions. Merchandise margin was up about 10 basis points but up more than that at Chico's. Was that just clearance at White House Black Market? And how should we be thinking about merchandise margins at White House Black Market and Soma? Will you be reducing promotional activity there in the second half as well?

Also on inventory levels, I just wondered if you felt that they were clean of seasonal clearance and that they were aligned with your sales outlook. And lastly, Shelley, with the transition at Chico's and the leadership role, should we expect that brand's return to positive comps could take longer than White House or Soma, because you will be having a changing of the guard there? Thanks so much.

I'll start with the merchandise margin. In a nutshell, yes, I think we talked before about walking that fine line of making sure we're moving through the inventory that we had last quarter but still at a more profitable rate.

And so what that meant was, yes, for White House we had a little bit more clearance to move through, but we did that successfully. And at Chico's we were able to be a lot more selective on our promotions and that probably impacted top line, but also gave us a much better merchandise margin and more importantly a margin dollar answer.

So going into the third quarter, we feel like we're back in a very strong position. We've got inventories that are current. We feel like we've moved through the inventory that we need to from previous seasons and we're heading into Q3 clean.

Thanks, Todd.

And to address your last couple of points, first of all I want to make sure when we talk about reduced promotional activity, that we're all talking the same language. If you remember correctly, Todd and I for the last couple of quarters, have talked about our marketing expense and that our marketing expense isn't in line with peers.

So the idea of Chico's FAS reducing promotional cadence or reducing marketing expense, in many cases does not mean reducing in any way below that peer set. That this is, again, utilizing that actionable retail science and making our marketing dollars work significantly harder for us.

In looking at promotions that customers respond to, someone talked about pricing earlier. Just scratching the surface of really looking at that price point and elasticity and pricing analytics. So I don't want the reduced promotional cadence to feel as though we're going to stop promoting and stop enticing our exciting customers to come into our boutiques. On the contrary. We're going to reach her with her promotions that she's most responsive to and quit spending dollars on double or triple stacking those on ones that she's not responsive to.

On the second question, around the Chico's brand and the change in the Chico's brand, I am exceedingly confident and certainly wouldn't make moves otherwise, if I didn't have this unquestionable faith in the team that's there. There's a tremendous group of leaders, a group of designers, of retailers, and of strategists in that Chico's brand. And they're going to continue to march forward. And with any new leader, they're always comes, I think Todd can attest to that with me, with any new leader there always comes change.

But this is also a shared services model, right? Where the front of the house has its path to do in relationship to the customer, and the back of the house is brand agnostic and continues to march along. So I'm very confident that you'll continue to see some improvements in Chico's.

Thanks and good luck.

Thank you.

Kimberly Greenberger, Morgan Stanley.

Great. Thank you so much. Shelley, I'm not sure if you're ready to talk about this yet or not, but I thought I'd ask about the teaser that you mentioned on the call. Growth areas and new revenue sources in the future, if there's anything even conceptually at this point that you are interested in sharing with us, I'm very interested to hear that.

Then a follow-up on Janet's inventory question, Todd. Should we conclude that you feel good about the way inventory's positioned for the back half of the year? And that you think, I think you said flat year-over-year inventory expected at the end of both third and fourth quarter, do you feel like that's where you want to be? Or given the ongoing challenging environment, would you like to see it even slightly leaner? Thank you so much.

So I'll take the inventory question first. So on inventory, yes, we feel like we are well positioned and the inventories that we have are definitely aimed at forward-looking sales. So yes, I think we feel good about that.

To your point, with the challenging environment we're being very selective on the inventories that we're purchasing going forward. So we are reducing our receipts in a way that I think flows very nicely through the quarter and aligns more directly with the sales expectations that we have.

You have to remember, the inventory measurement is a point-in-time measurement. So what ends up being as important for us is the flow and timing of when the inventory comes in going forward. And as we've gone through that planning, we feel very confident.

And then the second, way more fun part of your question, is about the revenue-producing opportunities that we talked about. I'm just a think, plan, do, three-phase person. And the real opportunity at Chico's FAS is growth in sales and certainly of top and bottom line.

But you need to do that on an organization that's primed and ready and prepared to do that. Hence, the operational changes that we're making, the structure changes that we're making, the strategic initiative review that we're going through, that will lead us to, as Todd said the fun part, phase three, which is that top line and focus on top-line revenue, not just bottom-line revenue.

When you've got iconic brands like we do, Chico's is a unique and special brand that is positioned with the demographic where there's still white space left in the world. Most everywhere else in specialty retail is red ocean, shark on shark. We've still got some headroom within that targeted demographic with Chico's.

And so finding those exciting ways to talk about, not just the iconic brand, but pieces of that brand, like Travelers, like Zenergy, and making sure that those products are located not only within our store and online, but also where else would that customer choose to want to buy that product. And just starting to seek out those opportunities and partnerships now is very exciting. I think we feel the same way about White House Black Market and Soma as well.

And we have a small but mighty international business. It's very small, but it performs very well. And I've purposefully held the reins back on that business through phase one and two so that we can prepare for growth there. So we'll certainly give more details and be much more specific in the future about those revenue producing opportunities. But phase one and two are always going to be there and always going to be ongoing in the background. But the phase three revenue-producing phase is the one that goes on forever. That's the exciting one.

Great. Thank you so much.

Thank you.

Adrienne Yih, Wolfe Research.

Good morning. Congratulations. It was a tough quarter and you managed through it very nicely.

Thank you.

Shelley, in your time looking at the seasonality across the four quarters, there's always been, recently, there's been an opportunity in the fourth quarter. I'm wondering what you see there, what you have planned, perhaps, for this fourth quarter/holiday to take advantage of that opportunity.

And then for Todd, the measures that you've taken on the SG&A and the prior bridge components, the bridge to low double digit, I think it was 50 to 80 bps on SG&A and 250 on gross margin. Does it change the complexion of that and/or the timing? Thank you.

I'll go quickly on your first question. Yes, that was a surprise to me when I came, actually, that all of our brands don't have the usual pop in Q4 that I'm used to. I worked for one retailer that called Q4 the violent peak, if that gives you any indication of the kind of Q4s I'm used to.

This year, since we're primarily focused on phase one and two still, you'll see some incremental changes to product assortment, gift card promotion and et cetera, into Q4. But I'm in agreement that there's no reason why we aren't a gift-giving location or a holiday-dressing destination. I think you'll see some signs and signals of that this Q4. But certainly as we enter into those revenue-producing opportunities full time, I think you'll see significantly more of them in Q4 of 2017.

Great.

And in terms of double-digit operating profit, that absolutely is still the goal that we are working towards internally and have plans towards. I would say we are seeing, and have talked to you about, more SG&A opportunity than we probably would have initially planned on. But still see gross margin opportunity which you're seeing through the supply chain initiatives. So it will be probably more of a mix of both as we go forward.

Fantastic. Best of luck.

Thank you.

Lorraine Hutchinson, Bank of America-Merrill Lynch.

Thank you. Good morning. You talked in the prepared remarks about Soma continuing to redefine the brand positioning. I was hoping for an update on this and wondering how you are communicating all these changes to the customer.

I would say quietly. I would say we're communicating them quietly to the customer right now. Again, along with the theme that we've been talking about today, Soma is and remains to be our greatest growth opportunity and growth vehicle. And when we are ready for a more expansive and explosive growth opportunity for Soma, we want to have our product, our pricing, our promotion, our brand just right. We are continuing to tweak all of those metrics right now and testing many of them. Then we'll communicate that out and we'll also communicate our growth plans.

Thank you.

Brian Tunick, Royal Bank of Canada.

Yes, good morning, this is Kate Fitzsimons on for Brian. It seems like you guys are really aggressively looking at the cost structure of the organization. Todd, I was wondering how you were thinking about store closures beyond the 175, through 2017? And what do you see as the ultimate fleet size opportunity for the banners in light of the customer shift to online?

And then secondly, any update on the transfer rates you are seeing at the store closures you're executing? That would be helpful. Thank you.

Yes, thanks, Kate, that's a great question. In terms of our real estate, as you know, we really started launching off on more material amounts of closures last year. And so we've been measuring that as we've been going along. Again, it comes back to the quality of the customer data. We can actually measure if she used to shop in that store and we close it and she's shopping even somewhere that we wouldn't have expected, be it online or be it vacation spot, and what that looks like. What we are seeing is still a very high rate, a much higher rate than industry standard, for sales transfer, which gives us a lot of comfort in the store closure plans that we have.

I think this is going to be an ongoing conversation for us that's probably early to say, because we are still going through some of the strategic planning and the real estate planning. But as we go into the future, making sure that we have that right balance between brick and mortar and digital is going to be critical. I think we're finding as we get further into the store rationalization process, that we actually can do with fewer stores in some spots.

We're going to need to continue to test into it and make sure we've got the right set of algorithms around what those sites are. I think that's probably a little bit more to come. But the beauty of the customers we have and the brands that we have, is it does give us probably some options that others do not have.

Have you guys commented on what percent of your fleet is up for renewals in, say, like the next three years, as we're thinking about this opportunity?

Not specifically. But I would tell you we have done a lot of short-term renewals as leases have come up, just to give ourselves some flexibility. Our leases are typically structured so that we have a kick-out after year five. So there is a healthy chunk of leases that we are looking at as we get over the next several years.

Great. Thanks a lot.

Neely Tamminga, Piper Jaffray.

Great. Good morning. This might seems like a fairly basic question upfront, but we've heard a lot about the high retention at Chico's, of which most of know exists. Where's the new customer acquisition coming from? And could you speak to us freshly about the idea that the brands can help each other along that customer acquisition curve? Some fresh insights there would be helpful. Thank you.

Absolutely. Thanks for the question, Neely. So I think you're exactly right. What we are in the midst of is really looking at all of our marketing spend and where the most effective marketing spend is. And that's not just what marketing dollar drives the most sales, but segmenting our marketing between what marketing drives the most new customers, what is the best for retention, and so forth.

And we're finding a lot of interesting things along the way. I think a lot more to come. For some of our brands it's about the right merchandise that appeals to a new customer and we're getting great insights on that. Some of it is the marketing vehicle itself. So it varies and part of the journey that we're on.

In terms of the cross-brand marketing, that is probably -- it's a terrific opportunity for us. And we've seen, as we do cross brand marketing, we do it in a respectful way for our customers, where they don't feel like they're being bombarded but they feel like they're getting a respectful introduction. We are getting great response.

I think it's important to remember that outside of maybe the people that are listening to us today and the people who live in Fort Myers and Naples, people don't know that White House Black Market and Chico's are in any way related. And only some people know that Soma is related to Chico's. And so the opportunity exists in the fact that those are three separate distinct and unique files and we can see cross-shopping there and incent more behind the scenes.

But it's a delicate balance too, because you want to have those clean sharp edges at the front of your brand and at the front of the house. And whether a very dedicated and loyal White House Black Market customer would necessarily want to be incented at Chico's is something that we've got to be very careful about. However, I think the opportunity to leverage and understand those three customer bases better is a big part of that actioning retail science bucket.

And then secondly, as it relates to adding newness to that customer bucket, and I'll speak primarily to Chico's, I think sometimes people forget there's a 55-year-old born every minute. Everyone thinks that the top of our file is quote, unquote, aging out or worse. But the fact is, people are coming into that bucket at the same rapid rate. And if you look at the aging population of the US and that aging boomer market, there's a tremendous amount of people in our core demographic. And there continues to be more people added to that core demographic each and every day.

It's our job to make sure that our brand is current, that it's modern, that it's relevant, that it's speaking to the upper and lower end of what is one of the widest psychographics and demographics in specialty retail. And we've got to please both ends of that spectrum. The modernization and the newness of that brand and its increasing penetration online gives me a lot of confidence there.

Thanks, you guys. Best wishes in the second half.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Jennifer Powers for any closing remarks.

Thank you, Andrew. We do apologize for any questions that we weren't able to get to today, so as always we are available for follow-up afterwards if necessary. And now I'm going to turn it back over to Shelley for some closing comments.

Great. Thanks, everyone, for listening today. As you can see, we're working hard to transform our Company for our customer today and for the future. And we're executing on our cost reduction and operating efficiency initiatives. We have redesigned our organizational structure to make us more nimble and responsive to our customers' needs and our progress is already evident in the savings that we have seen.

So successful completion of our initiatives and the development of additional revenue opportunities will position Chico's FAS to drive substantial growth and increased shareholder value. So thanks, everyone, and thank you for your interest in Chico's FAS, Inc.

The conference has now concluded. Thank you for you attending today's presentation. You may now disconnect.