Chico's FAS Inc (CHS) 2017 Q1 法說會逐字稿

Hello, and welcome to the Chico's FAS First Quarter 2017 Earnings Call. (Operator Instructions) At this time, I would like to turn the conference over to Jennifer Powers, Vice President of Investor Relations. Please go ahead, ma'am.

Thanks, Keith, and good morning, everyone. Welcome to Chico's FAS first 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 today's press release for your reference.

And with that, I'll turn it over to Shelley.

Thank you, Jennifer, and good morning, everyone.

Our first quarter results show that we are making continued progress in our efforts to drive cost improvements and operating efficiency, but that the retail environment remains challenging. And that is why we are continuing to reengineer our business into one that thrives in this new environment.

Our flexible and profitable operating model drove improved earnings per share, resulting in $0.26 over $0.25 last year. However, our overall comparable sales decline of 8.7% was below our expectations. As you have heard, apparel and accessory retail store traffic was down significantly through most of March, and our stores also experienced this trend.

We can certainly attribute a portion of our sales decline to the macro industry's traffic challenges. However, our product issues at Chico's and White House | Black Market also contributed to the decline in sales. The good news is thanks to our loyal customers and extensive customer analytics, we identified the issues, and we are adjusting our assortments to reflect the styles our customers want.

Before I discuss those adjustments and review the performance details of our 3 brands, I would like to provide an update on our transformation that is positioning Chico's FAS for long-term profitable growth. (inaudible) transformation are the 4 focus areas we defined last year: evolve the customer experience, strengthen the position of our 3 iconic brands, leverage actionable retail science and sharpen the company's financial principles. The focus areas have become a powerful framework to drive improvement in our business and remain the pillars of our go-forward strategy. Our progress is evident in the company's improved operating and financial performance, which shows that a more efficient and profitable business is emerging.

During each of our earnings call this fiscal year, we plan to highlight one of these strategic pillars in detail. This quarter, I'll be talking about sharpening our financial principles. Last year, we outlined cost reduction and operating efficiency initiatives that we expected to drive $100 million to $110 million of savings to our shared service model, sharper contractual terms, more productive use of marketing dollars and modernized business processes. Among other areas we are on track to fully realize these savings by the first half of 2018.

Since we announced those initiatives over a year ago, we have reduced SG&A costs by $74 million. Our more efficient operating model and heightened focus on expense control continue to benefit our bottom line, even during quarters like this one, where sales did not meet our expectations. We were able to generate SG&A and operating income rate leverage while also improving EPS over last year.

In addition to the SG&A reduction, we established a nonmerchandise procurement team that formalized the discipline around our negotiating and contractual processes. To date, the team has negotiated expected savings of $15 million for FY '17 and has enhanced vendor relationships. The beauty of this new function is that it is an integral part of our ongoing expense discipline. We expect that team will generate further savings into the foreseeable future. We also reduced our marketing spend to be more in line with our peers at 4% to 5% of sales, by decreasing unproductive spend and ensuring our investments are generating a sufficient return. We are seeing real results in improved effectiveness and profit.

Our more strategic marketing spend has resulted in $30 million of savings to date. Along with the savings, our return on marketing spend in FY '16 increased 25% over the prior year due to the improved relevance of our marketing program. Our return on marketing spend continues to increase in the first quarter of this year. So besides reducing costs, our investments are delivering higher returns, profits and effectiveness.

Now let me turn to our first quarter performance, and I'll update you on the actions we're taking to drive top line revenue growth. Our ongoing strategy to efficiently manage promotional activity in inventories drove 70 basis points of merchandise margin leverage. Notably, our ability to adjust inventories in response to our top line struggles resulted in lower on-hand inventory than last year. [To stay in] traction from our cost reduction and operating efficiency initiatives generated $26 million in SG&A savings, leading to a 110 basis point of sales leverage. As a result, our operating margin rate increased by 100 basis points to 9.4% from 8.4% last year, demonstrating steady progress towards our goal to return the company to double-digit operating margin by 2019.

Now, moving to the first quarter performance for each of our brands. The comparable sales decline of 10% at the Chico's brand was disappointing. However, the brand displayed impressive nimbleness by managing inventory and expenses to leverage gross margin and significantly reduce SG&A.

When Chico's new Brand President, Diane Ellis, started last November, she recognized early on that the brand had product issues. And she began to make changes in the areas of mid-tops, sweaters, pants and jackets. Diane and her team started to improve the assortment by updating and differentiating key basics and leveraging Chico's heritage and core competencies to infuse more novelty and fashion into those items. We're seeing traction in those areas, and we're chasing into them. But as you know, in retail, lead times and buy commitments influence buyer product cycle, so we expect to see the full benefit of those actions in the fall. In the meantime, the team is nearing completion on its intensive customer research and psychographic profiling project, which will improve our understanding of our customers' style preference.

During the quarter, denim and woven tops continued to be strong categories and will remain a focus for the brand. Encouragingly, the recently updated and much-loved Travelers collection and Zenergy tops continue to post positive comps.

Now for White House | Black Market. Similar to the Chico's brand, volatile traffic and product misses resulted in a below-planned comparable sales decline of 9.7%. The White House | Black Market customer research and internal analysis revealed that our penetration across lifestyle categories became out of balance as we focused too much at the top of the fashion pyramid. For example, trendy boho-influenced woven tops became over penetrated at the expense of more polished Wear to Work collections and basics. Using our analysis and most importantly listening to our customers and associates, the brand is focusing on elements that will provide an improved balance for fall. They are also building in processes that will better define the guardrails of the assortment and mitigate future misses. Importantly, the new financial agility built into the business, the brand was able to offset the sales loss and actually drove higher operating margin dollars than last year, stemming from gross margin and SG&A improvement.

Similar to Chico's recent trends, knits, sweaters and bottoms continued to be challenging categories. On a more promising note, dresses, including online exclusives and petites, which are White House's most strategic categories, are performing well, as are woven tops and denim.

Moving on to Soma's first quarter performance. Comparable sales were up 20 basis points, which is meaningful since Soma has comped positively for all but one quarter since the second quarter of 2009. The updated Vanishing Back bra, which was launched in March, brought new momentum to the business. The updated bra not only smooths the back, but now also smooths the sides. What could be better? The previous version of the bra had been the brand's top-selling bra since its original launch in 2010. The updated Vanishing Back bra was Soma's most successful launch in history, with the highest marked sales volume and average sales per store ever for the brand. The launch also brought in new customers, increased traffic and improved sales of other foundations. Overall, bras, panties and dresses were the strongest categories at Soma. However, loungewear, sleepwear and swim were weaker as the brand continues to refine its brand positioning and grow its customer base. Looking ahead to summer, Soma's next launch will be a new trend-right bra that features softer support and a more natural style.

Now let me turn to the revenue-driving actions we are taking at the corporate level. Our newly formed business development international and strategy team is executing against our strategic plan to expand our global footprint and identify complementary channels of distribution. We recently established a dedicated team to run our franchise operations. We are initially prioritizing Latin America for franchise growth due to the geographic and cultural proximity to Mexico, where we have a successful franchise business already. The team has met with a variety of potential partners with strong track records for growing brands in the Latin American region, and we expect to enter into an agreement in the near future.

On the business development side, we are testing with travel and cruise retail, in addition to evaluating licensing opportunities in other categories. We look forward to providing more detail on these opportunities as they progress.

The spring season was challenging, but it provided some key learnings. Although there are headwinds in the retail industry, much of our top line performance is within our control. We are proactively making adjustments to our merchandise and related processes going forward. We are pleased that the benefits from our cost reduction and operating efficiency initiatives and our ability to control inventory enables us to mitigate a portion of the sales loss and drive higher earnings per share. This quarter shows that we are on the right track in building a resilient business that can grow profitably in this ever-changing macro environment.

We are focused on improving our results. Our physical stores and DComm models give us an advantage in this evolving omni-channel environment. We are transforming our boutiques from a pure sales focus into customer hubs that, not only sell our merchandise but also serve as a return center and emotive distribution for our flexible supply chain, fully leveraging our physical assets and geographical location. Our deep customer loyalty and extensive customer analytics with high-quality data provide information that help us make needed adjustments to our merchandise. We continue to work on our supply chain initiative, which will improve our ability to source product faster, thereby allowing us to respond quicker to customer fashion preferences. Our customer analytics and personalization of our customer style preferences will enable us to be more consistently relevant to them. We are making progress against our 4 strategic pillars, and we are confident that these initiatives will continue to transform our business for long-term profitable growth and value creation.

I'll now turn the call over to Todd.

Thanks, Shelley, and good morning, everyone. Our first quarter performance demonstrates the bottom line benefits from improving our cost structure and sharpening our financial principles. We've increased adjusted earnings per share by 4% compared to last year's first quarter even with the comp sales decline of 8.7%.

As Shelley noted, there were several internal and external factors that impacted revenues this quarter, including the macro environment, correctable merchandising opportunities and a reduction in promotional depth compared to last year. These factors are largely controllable, and we have plans in place to address them.

While the brick-and-mortar traffic was challenging during the quarter, digital commerce sales continue to grow at a robust pace across all of our brands. This is even more encouraging because our operating margin rates in the digital channel are higher than those at our stores, putting us in the unique position of retailers whose incremental online sales are not dilutive to our overall P&L. Additionally, we continue to leverage digital commerce, gross margin and SG&A expense.

Our newly optimized website at Chico's and White House drove increased revenue and conversion, along with a meaningful decline in cart abandonment. Soma also drove higher revenue and conversion during the quarter. We expect to see those metrics improve even more with the launch of the new Soma website this summer. With the higher-than-expected decline in brick-and-mortar sales, our brands carefully controlled inventory and expenses to drive 70 basis points of merchandise margin leverage, 110 basis points of SG&A leverage and operating income expansion of 100 basis points to 9.4%. This expansion bolsters our confidence in our ability to achieve double-digit operating margin.

Moving on to the balance sheet. We proactively managed receipts to control inventory and ended the quarter with on-hand inventory down 2% compared to last year. During the quarter, we shifted the shipping terms for a major vendor to allow us to take ownership of the product overseas rather than at our distribution center. We expect the change will drive a considerable reduction in logistics costs. In Q1, this shift resulted in our in-transit inventory increasing by $11 million compared to last year. We'll cycle through this change over the next 3 quarters, and we're working with other vendors to change shipping terms as well. As a result, the in-transit inventory amount may increase further over the coming quarters.

Our flexible and profitable operating model enabled us to continue to generate positive cash flows and maintain a sound balance sheet. We ended the quarter in a strong cash position with $170 million in cash and short-term investments and $80 million in debt. Our capital allocation strategy continues to emphasize value-creating investments and capital returns. First quarter capital expenditures totaled $9.5 million, mostly comprised of reinvestments in existing stores and technology projects. One of our key capital strategies is to ensure our stores delivered the brand experience that our customer expects. Our stores still generate nearly 80% of our sales and the vast majority of our profit. Our brick-and-mortar channel is integral to our ability to drive sales and loyalty. This year, we're reinvesting in 55 locations through relocations, refreshes and remodels, which we expect will elevate the brands and enhance the customer experience. As part of our ongoing strategy to improve the productivity of our fleet, we opened 2 new stores and closed 11 during the quarter. We continue to return excess cash to shareholders through share repurchases and dividends. $154 million remains outstanding under our share repurchase authorization.

Next I'll update you on our outlook for the remainder of 2017. Our strategic priorities have not changed. We are transforming Chico's FAS into a business that can thrive in this environment. We plan to continue our focus on more profitable sales by streamlining promotions, actively managing inventory and controlling expenses. We are still dedicated to enhancing the product at each of our brands and to competing -- completing this series of comprehensive cost savings and operating efficiency initiatives that we announced last year. Based on the timing needed to correct our merchandising assortments, we expect the second quarter comparable sales to be down a high single-digit percentage and earnings per share to also decline versus last year. Once the merchandising adjustments flow through in the third quarter, we expect comparable sales to be down low single digits for the second half of the year, consistent with the estimate we gave last quarter.

For the second quarter, gross margin and SG&A will likely deleverage due to our expectation on sales and our need to clear through our Q1 inventory. Fortunately, this residual inventory resides at our distribution center, which will enable us to clear through it more profitably online. As for SG&A, we saved $10 million in marketing expense this quarter, primarily from not comping on productive TV advertising from last year. However, we do not have the opportunity for similar marketing savings in Q2 because Q1 has traditionally been the bigger quarter for that TV spend. We will continue to manage inventory tightly, planning our receipts down to the last year and planning a reduction in on-hand inventory in each quarter. For the year, we're expecting gross margin, as a percent of sales, to be flat to up 30 basis points. We also expect approximately flat SG&A leverage. In response to our current business trends, we reduced our capital expenditure plans by $10 million to a range of $60 million to $70 million for the year.

Now turning to the savings. As we said last quarter, we still expect to realize approximately $50 million of savings from our cost saving and operating efficiency initiatives this fiscal year. This $50 million is in addition to the $30 million of savings we realized last year. To be clear, all of these savings are included in the gross margin and SG&A targets that I just provided.

In the past 12 months, we announced initiatives that would generate $100 million to $110 million of savings. And we are on track to achieve those savings. Consistent with what we outlined in our last call last quarter, we are targeting $50 million of savings in 2017. We realized $15 million of those savings in the first quarter, and we expect to generate another $35 million in savings over the next 3 quarters. The $35 million of estimated savings consists of: $10 million anticipated from the organizational redesign implemented last summer, which we expect to be predominately generated in the second quarter; $15 million expected from nonmerchandise procurement expense, which will be more weighted toward the second half of the year; and $10 million planned in cost of goods sold as a result of the supply chain initiative, which we expect to start realizing in the second half of 2017, with progress ramping even more into the second and first half of 2018.

In conclusion, our flexible and profitable operating model more than offset the sales decline that we saw in the quarter, allowing us to increase earnings per share over last year as we continue to execute against our 4 strategic pillars and refine our operating model to confront the challenges of this dynamic retail environment. We are confident that we can drive long-term growth in both the top and bottom line in the future.

Now I'll turn the call back over to Shelley.

Thanks, Todd. We are confident that we are one of the best-positioned retailers in the women's apparel industry. Our loyal and affluent customer base, our Most Amazing Personal Service and our unique product set us apart. While we expect this challenging retail environment to persist, we will continue to leverage our agility in adjusting and refining our operating model to build a company that will stand the test of time.

We are going after the immense opportunities we see to grow our powerful and differentiated brand. The steps we have taken already are delivering improved efficiency, improved earnings and profitability. Our organization is energized and clearly understands that our brand positioning, our beautiful merchandise and our connection with our customer are at the core of all of our efforts. As we continue to deliver on our 4 strategic pillars, we are strengthening our foundation and reinforcing our ability to drive sustainable earnings growth in the future.

Thank you. And now, 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. And I'll turn the call back over to Keith.

(Operator Instructions) And the first question comes from Pam Quintiliano from SunTrust.

This is Michael Ramirez on for Pam. If possible, can you please provide us with your quarterly comp progression? Maybe some comments on regional strength and weakness in the quarter? And lastly, any sort of differences you might have seen between your on and off mall locations?

Absolutely. So since a lot of what we experienced during the quarter is really those correctable self-controlled things, merchandising issues and so forth, we really did not see a dramatic change over the course of the quarter. It was really mostly fairly consistent. I'd say the same thing about regions. There were really no particular standouts that I'd call out. In terms of malls, it's much the same story. I know there's been a lot written about the strength of A and A+ malls. But the truth is our comp sales percentage in A+ malls, A malls, B malls, lifestyle centers, strip centers were all very much consistent. So it really does point us back to more of that self-controllable merchandise. I probably -- the one area we did see a little bit better performance was our outlets. And again, that was very much self-driven improvements in merchandise that we were able to drive through. Probably another area to focus on for us, we are fairly spread across our different store locations. So we do have about 1/3 of our locations in malls, about 1/3 in lifestyle centers and 1/3 in strip or street-front centers. So that really does diversify our real estate and gives us more flexibility, more, I guess, points of being able to contact the customer. So we do get a pretty good read across each of those 3 different location types.

Okay, great. Actually, in regards to the real estate, so can you please remind us with your leases up for renewal this year and next, sort of what kind of type concessions you're getting from these landlords?

Sure. So we do have a substantial amount of our leases up for renewal or lease action over the next 3 years to the tune of, probably about 60%. In terms of what sort of lease concessions we're getting, like we said, we're seeing consistent comp trends across each of the different mall types. And I think that's playing into our conversations. Clearly, we are getting more response on partnership on our rentals from the folks that are in lifestyle centers and strip centers and in some of those B mall locations. It's been a little bit more challenging in A and A+ centers. But we are seeing, I think, more partnership out of those landlords now than we ever have. So that's a, kind of an ongoing evolving dynamic.

And the next question comes from Adrienne Yih with Wolfe Research.

I guess my question is for Shelley and Todd, and it's more philosophical in nature. Obviously, everything's changing, right. And so even the model, right, if you kind of pursue e-com, it's potentially dilutive to gross margin, accretive to op margin. So all the metrics that we used to look at seem like they are probably not that telling of future performance. And one of the things that I -- it's a long-winded way of just asking: As we look at sort of inventory supply being really tight, but then if sales -- if you miss sales, you consequentially end up with excess inventory. How do you plan in that type of environment? Why wouldn't you promote more during the season to kind of move it at the expense of merch margin? And have you canceled future orders? What type of traffic do you plan to for the back half of the year? And to all that is, how should we, from our side, try to understand what new metrics we should be looking at and then also understand that the old way of looking at the business is probably misleading for us?

I wish I had the perfect crystal ball for every single one of those answers. I'm going to have Todd start, and then I'll finish up at the end of that one.

Sure. So one thing from a modeling perspective is the beauty of the investments we've made in our distribution center and our supply chain, and then the flip-side effect that we do have variable costs in our stores in the form of bonuses that incent our sales associates to sell more, means that we don't see that gross margin degradation in a rate that a lot of folks do see. We really have, from an incremental sales perspective, pretty equal amounts on margin rate ends -- that's both gross margin and operating margin. So that part doesn't necessarily impact the model. As we look to the future, you're right. To the extent that we do not have things that are moving as quickly as we'd like, we do move on those items. To the extent that we have items that are moving, we do build in a certain amount of, what I would call "open to buy" in our model where we can chase into those items. And we're also looking on vendor partnerships that give us more flexibility in what we buy. So we feel like that is putting us in a position where we have a lot more flexibility just in terms of the amount of inventory that we are bringing into the system.

And Adrienne, thanks for the question. I think another thing that we talked about a little bit in the prepared remarks is the fact that we are not abandoning our boutiques. We've got 1,500 boutiques out there, and we are not abandoning those boutiques. Certainly, we're going to continue looking at the profitability of each one and the importance in the fleet of each one of our stores. But to future-proof the business, we are transforming these boutiques into these customer hubs where it is about what kind of experience and unique selling proposition your brand has versus everyone else. And if it's just going to become about who can sell it the cheapest and most effectively online, we're a bit swimming the other way. And we're saying, we have a robust online business. We're going to continue to have and grow our robust online business. We do have some terrific metrics with regards to that because we don't have that dilutive aspect that the majority of other retailers have. But these will be sales centers, return centers. And then to leverage those 1,500 locations, and to your point, about being able to be quick and nimble and flexible and get the product where you want it, use those as 1,500 areas of distribution. And when you talk about what metrics you should be looking at, who is future-proofing their business and able to earn profit at what will be a new decreased top line sale? So continuing to look for the comps of 2013, '14, they're not happening anywhere. But it's who's building a machine that will be able to thrive in the environment where they -- where the customer is in charge, where they want the product immediately. And you've got to be able to deliver in every channel at a profit. And that's why we're -- although this is a tough quarter top line for us, we made more money this quarter than we did the same quarter last year, off of that sales number with the amount of changes that we put in the business. And that's how we're running this machine. We're future-proofing it. We're finding new channels for our product. We're changing the sales model in the store to that return center and distribution center as well. And we're really focusing on that Most Amazing Personal Service, where you're still going to have a human who talks to you, who interacts with you, who helps style you and wardrobe you both online and in boutiques.

Great. Just one quick question, the percent of e-com, it was about 20%, I think, in '16. Did that grow this quarter?

I think we'd look for our e-com percentage to grow every quarter every year. We've seen over the last many, many years that the penetration spend increasing pretty ratably the 2% a year. And we don't really have any reason to expect different as we move forward.

It's fair to say e-com was positive comping?

Most definitely.

And the next question comes from Paul Lejuez with Citi.

Can you give us an update on sales transfer rates and how you might be thinking any differently about store closings longer term? Also curious if you can talk maybe about traffic versus ticket, how that might have changed by concept over the quarter?

Absolutely. So first, store transfer rates. We said in last year's analyst call that our store transfer rates, at that point, were around the 50% mark. I think it's fair to say our expectation is as we get further into our store optimization that, that will probably settle down a little bit. I think we will always have above-industry norms for our store transfer rates. We have a tremendously loyal customer that really seeks us out. And so we'll give another update as we get further in the year and wrap around. But clearly, we are doing very well in our store transfer rates. And I think we'll continue to look to optimize our store fleet. So this year we are planning for about 50 closures off of about 3 new store openings. And we have stores that we continue to look at. We have portfolio reviews twice a year where we go through each market and look at how we optimize that market. And that's a process we're going to continue to go through. In terms of -- I think your other question was traffic versus ticket. So it's fair to say, we -- malls have seen declining traffic for years. And to expect that, that's all of a sudden going to turn around, and magically, more people are going to start shopping in stores is not realistic. And that's really what we're building our business around. So by buying more conservatively, making sure that we have that inventory well-positioned, we would expect our average ticket and our ADS to go up over time. So that is kind of the long-term model that we are looking towards.

And the next question comes from Michael Binetti with UBS.

I just wanted to just reask the cadence in the quarter a little bit. I think you -- I apologize if you said something already. But I think you said it stayed pretty tough through March so maybe February, March were below what you were thinking. I'm just wondering if you could tell us a little bit more about how much April accelerated. Any kind of directional guidance there? I think we're all trying to figure out for our models how to think about the underlying growth rate with a lot of shifting and onetimers in the quarter. So maybe just [reprise] the acceleration in April would help.

Absolutely. And having the Easter shift each year always creates a little bit of funkiness. So April, definitely was a slightly better comp rate. But we tend to look at it across the March, April combined, which gives us really the best comparison to last year. And that was pretty consistent with what we had seen in February. In terms of what we're seeing going forward, that's really built into the outlook that we provided of having comps that were still down in the high single-digit percentage range. And so that's probably the best I can give you on what the go-forward rate of sale has been.

Got it. And then on the gross margins, as we look through the year, I know you said the second quarter will stay a little bit negative on a year-over-year basis. But then as we look on the back half, the comparisons start to get a lot tougher. And it seems like somewhere along the road one of these quarters needs to have a positive year-over-year gross margin despite those compares getting tougher. Can you -- I mean that seems like it's a bet on some of the fashion that you mentioned into the third quarter and the fourth quarter. So if I'm directionally right on the gross margins, where do you feel like the quarter is that you have the best chance of turning positive and then maybe a little bit more on the fashion and what you know about what's coming versus what you have on the floors today that gets you confident in that trajectory?

Sure, so I'll take the gross margin question. And the bottom line is yes, we do expect gross margin to improve in the second half. Part of that is merchandise, which we do have, I think, more customer interaction and feedback on merchandise than just about anybody out there. And really we're in the process of also putting together guardrails around our merchandising assortments that should provide a lot more stability on the top line. In terms of gross margin, also remember that the second half is really where our cost savings from the supply chain start to kick in to the P&L. And so that will help as well as what we would expect to be a better-positioned business from an AUR perspective than a promotional depth perspective.

And on the fashion side, we really have 2 things going for us in the future. One is we'll be cycling into some of the effects of assortment of the new leadership teams that we've put into place. And so a lot of the stuff we've got now is based on a different vision. And so we've got new leadership teams in place and their products will be hitting. And the second is, in some ways, as we talk about -- even though the macro environment is challenging, it feels a little bit less frightening when you do know that some of those mistakes were under our control, that weren't macro. And some of our new skills that we put into place like "open to buy" and "chase", in some ways, the newness of those tools here at the rate in which we were using them caused some of our own problems. When we saw a winner, like boho tops for example, or cold shoulder or a highly decorated sleeve, when we saw those winners, we chased into those in multiple categories without a level coordination that we needed. Therefore, we got too heavy on the top of the fashion pyramid. And so all of that is really correctable. And it gives us a lot of confidence moving forward.

And the next question comes from Simeon Siegel with Nomura Instinet.

This is Julie Kim on for Simeon. Could you give any color on your current inventory position and where you expect that to be at, at the end of the year and any detail on the current composition?

Absolutely. I think the fact that we were able to manage our inventory to the position where it was down versus last year, despite the down 8.7% comp, is a testament to some of the inventory control processes that we've put into place. We are buying more conservatively. We are leaving open to chase and that has allowed us to be a lot more flexible. That's it. Clearly, our rate of inventory decline was not as steep as our sales, so there is a limited amount of Q1 inventory that we are going to look to move through as we get into Q2. And that was built into our outlook. The benefit is because of the way we are allocating inventory, controlling inventory, the majority of those things we're going to look to move through are in our distribution center. And we have found historically, without a doubt, opening that inventory up to the millions of people who look online is a position where we can generate a much better return as opposed to much more targeted people that wander into our stores. So we do expect to generate a decent return on that inventory and expect we're positioned well going into the second quarter. We do expect our on-hand inventory to end every quarter down. And that is what we are actively managing towards.

And the next question comes from Marni Shapiro with Retail Tracker.

So I'm curious if we could dig in just a little bit deeper to the customer as far as online and in-store because traffic, obviously, down in stores, up online. But are you finding when she comes into the stores, that she is already buying more than she used to? And then I guess in aggregate, if she's shopping more online and buying more when she comes to the stores, is she buying less today or more today than she used to?

So I'll take the first part of the question. She certainly is shopping more online. I think when she's showing up in-store, we're finding our conversion rates are up and will continue to be up. She's -- we're seeing more customers come in with purpose, with intent. Now the beauty of our sales associates is they've always been remarkably good at outfitting her. And so that gives us an advantage in terms of being able to build that outfit and should give us an advantage over the long term in building that spend per customer. Now with some of the merchandising assortment issues that we talked about earlier, clearly, that was a little bit more difficult in Q1. That's more of a long-term trend that we see opportunity on. And so something we would look to build towards more in the future.

And our multichannel customer or customer that's shopping with us in multiple channels is our best customer. And that customer is continuing to grow at a rapid rate. And we also talked about sort of the focus. We've got 21,000 brand ambassadors out there. And changing those boutique associates focuses from sales only really to this customer hub where they are a welcome return center, a sales center and then a point of distribution center both to locate product for our 1,500 other stores and then as our expertise in competency grows as a point of distribution for our distribution centers. And so utilizing those bricks and mortar, bringing in that omni-channel customer, allowing her to shop with us any way that she likes but providing that unique service in-store that is just getting harder and harder to find today. And 21% of our sales in the Chico's brand come from appointment setting today. And so that is a big number of customers that are still interacting with our sales associates and coming into our store. And most of those customers are omni customers. And so we're just continuing to go in a slightly different direction than others by embracing what could be a very unique shopping opportunity with Most Amazing Personal Service for our customers.

(Operator Instructions) At the next question comes from Janet Kloppenburg with JJK Research.

Shelley, I was wondering if you could talk -- you talked a little bit about it. But given the downturn in the first quarter sales, I'm just wondering about the predictability of the merchandise planning and forecasting tools that you have put in place. You talked a little bit about maybe you bought too much into it without understanding the system as well as you should. But perhaps you could give us an idea of tools that are in place going forward, including testing and certain algorithms that will give you a better idea of when you should feed into a trend or not? And secondly, I think for Todd, I know that the inventories will continue to come down. But should we think at the end of the second quarter that they'll be in line with what the kinds of sales numbers you're giving us? Or do you think by the end of the second quarter, they will be managed to the level that they should be with the content at the level that it should be?

I'll start quickly, and I'll clarify those comments and then go a little bit into testing. And Todd can [do that]. As we talked about, that "open to buy and chase" trend piece, that is less about an external testing process, about buying too heavy into trends, than it was about getting much better at leaving percentages of our budget open on OTB to chase and then not having an internal process that says, "Wear woven tops, wear sweaters, wear knits," and sort of accidentally all chasing too high at the top of the pyramid. So we've got internal processes that will sort of take care of that. The good news, the silver lining of that is that our merchants and designers did see that trend much earlier than they did because we can see it analytics both in online sales, what's moving online, what's being looked at and searched online. And then watching that sale within the stores. We have got an unbelievable customer-specific database that is decades old and clean. So I can look at people's purchases for the last couple of decades, customer-specific. And now with our new analytics team starting to build the type of math that you need on top of that, not only to market uniquely to each customer, but also starting to create and at the early stage of really creating the merchant side of that. So there's a customer-facing piece, which is how fun is that for you to be able to look into your closet and see what you own and how our new products could match that. But using that same data on the merchant side, how is yellow selling? What's happening with cold shoulder? What silhouette of pants was selling quickest in which geographic area on day 1? And to which customers, passport customers, new customers, purely online customers? So building the math -- as I say, never have a fight that a calculator will solve. Building that math on top of the clean data we already have is something that the entire management team is focused on and probably is what gives us our confidence about the future. I mean top line sales trends are tough, but we know we've got the brands, the leadership, the product, the locations and the unique selling proposition on top of this cache of data that will allow us to [mine] that moving forward.

Another question on that before the inventory is: When you look at your analytics on pricing across category, are you satisfied that you're positioned well there? And maybe if you could talk a little bit about your strategy on opening price point.

Sure. So I think we've found time and again, if we have the merchandise that she wants, she is willing to pay full price. And especially, when we get to the top of our customer pyramid. And so we've done a lot of testing around promotional depth and even clearance pricing and feel very confident with the levels of pricing that we have today. I think we will be continuing to test and continuing to look at where we have opportunities.

I'll give you just one small -- if you know or you may not. But my background is, a lot of my background was spent in grocery and spent in general merchandise. And the idea of OPP, or opening price point, and price laddering and elasticity is you could move anything at the right price point. So my first sort of task here was, "Hey, I cannot wait to get my hands on pricing and price analytics because that's sort of the lynchpin to everything I've done in the past." It is almost decoupled. It is an almost decoupled experience in many of our brands. When the product is right, you can't -- a discount doesn't make them buy more and a higher price point doesn't make them buy less. And when the product is wrong, at some point, the price point doesn't matter either. It is almost a decoupled experience with the -- when you get a trend right and with the kind of brand loyalty that we have. And I was really -- and we're still focused on it. But I was sure the opportunity was enormous. But the truth is they've done some really good analytics prior to me getting here. And I'm very comfortable with that piece of the business.

And in terms of your question on inventories, we certainly are driving to have inventories down in line with sales, but to do it responsibly. We want to make sure that we are clearing through that products, but that we're not following a slash-and-burn methodology. So we would expect to have inventory receipts down quite a bit in Q2 and to have the inventories more in line with our rate of sales. My caveat on that is going to be as we go into the second half, we do have a new cadence of floor sets that may play around a little bit with the timing of our receipts. But as we get closer to that, we'll be providing more details. You should just know, as we are going through the quarter, the goal is absolutely to have our inventories in line with our sales rates.

And the next question comes from Roxanne Meyer with MKM Partners.

My question is around lead times. It's impressive that given Diane just joined in November and identified areas of opportunity, that you expect to see improvements in time for fall. So I'm just wondering, I know you talked about your ability, the chase component. But just wondering overall where your lead times are? Do you see continued opportunity to improve those? And if you think certain categories are going to take longer than fall? Or do you expect all the categories that you discussed, particularly across Chico's to be improved by then?

Sure. So part of the product life cycle calendar that we've talked about before is reducing our amount of lead time. And that lead time has come down by a good 25%. Fall was very much on the edges of how quickly we could build that into our core assortment. But we have left enough open to chase. We have left enough open to buy that we could make some pretty significant impacts on that assortment. And I wouldn't -- I wouldn't discount the current team there too. They have been working very hard on those assortments and making sure that we have something that connects with and resonates with our customer really from early on.

And the next question comes from Susan Anderson with FBR Capital.

This is Luke Hatton on for Susan. Just one quick one on Soma. Have you seen any market share gains there coming from weaker sales [ed] competitors? Or just any details around that?

I think we continue to see positive comp sales with Soma with only 1 negative quarter. And that was pretty modestly negative in the last many years. Soma continues to gain traction, particularly in the bra category, which as you know is critically important to driving brand loyalty. Their new customers are up, we're seeing that we are...

The most successful launch we've ever had.

Yes, we did have -- the relaunch of our Vanishing Back bra, which literally was the most successful launch that Soma has had. So we continue to see momentum there and are continuing to draw the lines around sharpening the edges of Soma in a way that we expect to see continued progress.

And that does conclude the question-and-answer session. So I would like to turn the call back over to Jennifer Powers for any closing comments.

All right. Turning it over to Shelley for some final comments.

Thanks, Jen. Our quarter results demonstrate our agility in navigating this tough environment. And we remain confident that the actions we're taking will enable us to improve the top line as well as the bottom line, positioning us to achieve our goal of double-digit operating margins by 2019.

So thank you, everyone, for joining us today and for your interest in Chico's FAS. And we look forward to keeping you informed of our progress.

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

Thank you.