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Final Transcript
Thomas StreetEvents
Conference Call Transcript
CHS Q2 2010 Chicos FAS, Inc. Earnings Conference Call
Event Date/Time: Aug 18, 2010 / 12:30PM GMT
CORPORATE PARTICIPANTS
Robert Atkinson
Chicos FAS Inc. VP IR
Chicos FAS Inc. VP IR
Dave Dyer
Chicos FAS Inc. President, CEO
Chicos FAS Inc. President, CEO
Kent Kleeberger
Chicos FAS Inc. CFO, EVP & Treasurer
Chicos FAS Inc. CFO, EVP & Treasurer
CONFERENCE CALL PARTICIPANTS
Jennifer Black
Jennifer Black & Associates Analyst
Jennifer Black & Associates Analyst
Betty Chen
Wedbush Securities Inc. Analyst
Wedbush Securities Inc. Analyst
Margaret Whitfield
Sterne, Agee & Leach, Inc. Analyst
Sterne, Agee & Leach, Inc. Analyst
Liz Pierce
ROTH Capital Partners Analyst
ROTH Capital Partners Analyst
Michelle Tan
Goldman Sachs Analyst
Goldman Sachs Analyst
Janet Kloppenburg
JJK Research Analyst
JJK Research Analyst
Lorraine Hutchinson
BofA Merrill Lynch Analyst
BofA Merrill Lynch Analyst
Stacy Pak
SP Research, Inc. Analyst
SP Research, Inc. Analyst
Richard Jaffe
Stifel Nicolaus & Company,Inc. Analyst
Stifel Nicolaus & Company,Inc. Analyst
Dana Telsey
Telsey Advisory Group Analyst
Telsey Advisory Group Analyst
Marni Shapiro
The Retail Tracker Analyst
The Retail Tracker Analyst
Julie Bryant
MKG Financial Group Analyst
MKG Financial Group Analyst
Robin Murchison
SunTrust Robinson Humphrey Analyst
SunTrust Robinson Humphrey Analyst
Marie Driscoll
Standard & Poors Equity Research Analyst
Standard & Poors Equity Research Analyst
Unidentified Participant
Analyst
Analyst
Tom Filandro
Susquehanna Financial Group Analyst
Susquehanna Financial Group Analyst
Brian Tunick
JPMorgan Chase & Co. Analyst
JPMorgan Chase & Co. Analyst
PRESENTATION
2
Greetings and welcome to the Chicos FAS second quarter 2010 operating results. At this time
all participants are in a listen-only mode. A brief question-and-answer session will follow the
formal presentation. (Operator Instructions). As a reminder this conference is being recorded.
It is now my pleasure to introduce your host, Robert Atkinson, Vice President Investor Relations
for Chicos FAS. Thank you, Mr. Atkinson, you may begin.
Thanks, Rob, and good morning, everyone. Welcome to Chicos FAS second quarter earnings
conference call and webcast. CEO Dave Dyer and CFO Kent Kleeberger join me here at our national
store support center in Fort Myers.
Before Dave begins his executive overview, I must remind you of our Safe Harbor statement. Certain
statements made this morning, including, without limitation, statements addressing the beliefs,
plans, objectives, estimates or expectations of the Company or future results or events constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995, as amended. Such forward-looking statements involve known or unknown risks including, but not
limited to, general economic and business conditions and the conditions within the specialty retail
industry. There can be no assurance that future results, performance or achievements expressed or
implied by such forward-looking statements will occur. Users of forward-looking statements are
encouraged to review our latest annual report on Form 10-K, our filings on Form 10-Q, managements
discussion and analysis in the Companys latest annual report to shareholders, our filings on Form
8-K and other federal security filings for a description of other important factors that may affect
the Companys results of operations and financial condition. The Company does not undertake to
publicly update or revise its forward-looking statements even if experience or future changes make
it clear that projected results, expressed or implied by such statements, will not be realized.
Please note that we will file an 8-K with the SEC that will include a transcript of todays
conference call and webcast.
With that, I will turn it over to Dave Dyer. Dave?
Okay, thanks, Bob, and good morning to everyone. This morning we reported solid second quarter
earnings results. Now, while these results may have been in line with street estimates, they fell
somewhat short of our expectations. While many may cite the economy, I know that based on what we
control we should have earned a few pennies more and had a few percentage points higher in comp
store sales. We missed quite a bit of summer business. While the country was experiencing record
heat waves, we were under-invested in wear-now clothing, especially in July. In Chicos we missed
shorts and short sleeve woven tops and knit tops. We transitioned to fall in color and fabric way
too soon. Our jackets were too long and too heavy for the summer season.
In White House/Black Market we had another type of problem. We ran out of inventory. We didnt have
sufficient sale and clearance inventory to drive July sales. We missed full-price skirt and dress
sales, as well. Obviously our inventories in White House/Black Market are very clean. In all of our
brands we had some delivery slides or production issues that affected our inventory flow.
We did have some bright spots, however. Chicos had its best second quarter comp performance since
second quarter of 2005. White House/Black Market delivered another double-digit comp store increase
and continued to show gross margin improvement. Our direct-to-consumer business increased 36% in
the latest quarter. In Soma, our customers responded enthusiastically to our new fashion
assortments. Well open close to 40 new stores plus six sister stores in 2010. And were on our way
to break-even on a cash flow basis this year. Our goal for Soma brand is to be profitable in 2011.
Our July sales and inventory issues obviously followed us into the first few weeks of August, but
we believe well be back on track when our fall books and marketing campaigns launch at the end of
the month. Chicos next round of television advertising launches August 23rd. Im also pleased to
announce that our board of directors has approved a $200 million share repurchase plan through
fiscal year 2012.
I will now turn it over to Kent for the financial details of the quarter.
3
Thank you, Dave, and good morning, everyone. While our second quarter results were within our
range of expectations going into the quarter, we believe we left money on the table in the month of
July by not having enough wear-now in Chicos and really not enough clearance inventory in White
House/Black Market. Accordingly, total net sales for the second quarter increased 10.8% from a year
ago, to $465.4 million. Our comparable store sales, which exclude the sales from our
direct-to-consumer, or DTC sales, increased 6.4%. All three brands again delivered positive comps
for the quarter.
By brand, White House/Black Market had 11.2% increase in comps. Chicos and Soma Intimates had a
blended comp increase of 4.3% for the quarter. Total DTC sales were $27.6 million, an increase of
36% compared to second quarter 2009. Beginning with the first quarter of this year, our
direct-to-consumer sales dollars are reported in total brand sales in our financial statements.
Gross margin expressed as a percentage of net sales increased 70 basis points to 55.7%, primarily
due to higher gross margins at White House/Black Market, along with continued merchandise margin
improvement at Chicos outlets, coming from increased penetration of made-for-outlet apparel and
accessories. As some of you may have noticed, we increased our promotional markdowns at the Chicos
brand during July, and accordingly the Chicos brand merchandise margins declined a tad for the
quarter. Second quarter selling, general, and administrative expenses increased to $211.8 million,
or 4.8% above last years level of $202 million, excluding that quarters $5.0 million in pretax
noncash impairment charges. The increase was primarily attributable to costs associated with the
addition of approximately 50 net new stores compared to second quarter 2009, and increased sales
volume versus last year. Accompanying the variable expenses associated with higher sales over last
year, we also spent, as planned, $1.8 million more in marketing compared to last year. We did,
however, manage other expenses and leveraged total SG&A excluding impairment charges by 260 basis
points on the comp store sales increase. National store support center, or home office expense
dollars, were up only slightly from second quarter 2009.
Interest income for the second quarter was $394,000 compared to a nominal amount of net interest
expense in the 2009 period. In last years quarter, we reversed approximately $800,000 in year to
date interest income related to a note receivable on the Alico Road land sale that eventually fell
into default. The effective tax rate for the 2010 quarter was 36.2%, identical to first quarter but
lower than in second quarter 2009. Our lower effective tax rate in the current quarter came from
favorable state settlements and state refund claims. Net income for the 2010 quarter was $30.5
million or $0.17 per diluted share compared to second quarter 2009 net income on a GAAP basis of
$14.9 million, or $0.08 per share. The 2009 quarter on a non-GAAP adjusted basis had net income of
$18 million, or $0.10 per share. The adjustment for the 2009 quarter refers to the $3.1 million
after-tax impact from the previously discussed impairment charges.
Reviewing our balance sheet, cash and marketable securities as of July 31 totaled $487.4 million,
nearly a $110 million increase over second quarter and last year, even after the payment of $14.3
million in cash dividends since March 2010. The Company continues to have no debt. And the quarter
inventories increased $16.7 million or approximately 12.8% from last years second quarter. About
5% of the increase is associated with inventory for approximately 50 net new stores over last year.
Another 5% plus of the increase is attributable to the $6.8 million increase in in-transit
inventory. Excluding the $6.8 million of in-transit inventory and inventory dedicated to 18 net new
stores scheduled to open for the third quarter, inventory per selling square foot was up only 1.4%
over the end of second quarter last year. Also, when the quarter ended our inventory levels with
respect to spring season carry-over were much cleaner versus last year, especially at White
House/Black Market. At first blush, the in-transit inventory increase puts pressure on our
year-on-year inventory per square foot comparisons. However, the underlying good news is that we
converted more of the on-order to FOB basis versus landed duty paid which helps us on the cost side
but we end up owning and recognizing liability for the inventory earlier. Also, our accounts
payable leverage increased to a record 64.3% of inventory. This calculation backs out approximately
$7.1 million of dividends declared out of accounts payable.
Now I have just a few comments on second half business. We expect comparable store sales to be
positive single digit. Recall that we were up against a positive comparable store sales increase of
12.8% for third quarter last year, and a 14.6% increase for fourth quarter. We plan to open 35
stores in the second half with the vast majority of those openings to occur in third quarter.
Accordingly, we remain on track with our capital expenditures contributing to meaningful year on
year improvement in cash flow. Finally, the trend in SG&A from the first half of the year will
continue into the second half as it relates to store and direct operating expenses. Also, our
marketing spend will be up about $8 million to $10 million in the second half versus last year with
significant amounts for Chicos television advertising, White House/Black Market prospecting, and
various forms of media for Soma Intimates.
With that, I will turn it back to Bob to introduce the Q-and-A portion of todays call.
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Thanks, Kent. One procedural item. Chicos FAS has sued Cache, Inc. and others for
misappropriation of our confidential and trade secret information. The matter is currently before
the courts and accordingly we will not be taking any questions regarding this important legal
matter.
Before Rob gives us the procedure for queueing for questions, because weve been unable to get to a
number of participants who wanted to ask a question on recent conference calls, we are limiting
each questioner to state one question, at which time Rob with Encom will place them in listen-only
mode. In this way we will be better able to accommodate as many questioners as time permits. You
are welcome to get back in the queue to ask a second question in the same manner you did
originally. Rob, how may security analysts indicate a question?
QUESTION AND ANSWER
At this time, sir, we have eight indicating a question. (Operator Instructions). Our first
question this morning is coming from the line of Jennifer Black of Jennifer Black & Associates.
Good morning. I wondered what your biggest opportunities are to improve performance at the
store levels. What needs to take place to realize these opportunities? If you could just talk about
that. You already have amazing service, and Im talking at the Chicos brand. Thank you.
I think the second largest component is really store payroll. But I dont want to sound like
an accountant that were trying to screw it down and save more money. I think that what were doing
with our back office systems, the BOS system and clienteling and the like, I think will probably
step up our customer service level. The management team also made a conscious decision to increase
the amount of training and development for associates in the stores to not only improve customer
service but also to better retain our associates and limit the turnover. So I think those are our
biggest opportunities.
I think theres another opportunity in e-mail capture, as well. Thats one of the things that
we really have been focusing on, and if we can get more e-mails, we can very efficiently market
better to each stores customer base. So thats another thing that were working on.
Our next question is coming from the line of Betty Chen with Wedbush Securities. Please
proceed with your question.
Thanks, congrats on a nice quarter. Wanted to just get more information, if possible,
regarding the production issues that you had mentioned earlier. I feel like if our notes are
correct, maybe we have some of those issues in the first quarter. Just wondering if thats been
rectified, will that persist into the third or perhaps the second half of this year? And then just
if you can, related to that, talk a little bit about the macro issue. Youve mentioned that some of
the slowdown in late July persisted into early August. Im wondering if thats related to the
production or is there something else going on with that customer. Thank you.
Well, I think as we look at the July issues going into August, if you have the wrong weight
fabrics and its hotter than heck outside, obviously thats going to follow you for a few weeks
into August until our customers really are focusing on the fall assortments. Secondly, if we dont
have enough clearance or sale goods in the White House brand, that obviously also is not going to
help us. I would say that the production issues were
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more self-inflicted than market inflicted. I think that we had a few quality fallouts. We had a few
late deliveries, for a variety of reasons. And again, most of them, as you really dig down into
them, are things that we could have improved on or done better. So while I look at it certainly as
a problem, its not one that we cant fix. I think that it just certainly raised its ugly head a
little bit more in the second quarter. White House, for instance, wed been chasing those goods all
season, pulling goods forward, pulling goods forward, trying to pull production up, and eventually
it catches up with you. And thats exactly what happened. As we got into certainly into June and
July, we began to run out of goods and we really didnt have the markdowns to take to support July
sales. Now, on the other hand, thats a high-grade problem.
Next question please, Rob.
Our next question is coming from the line of Margaret Whitfield of Sterne, Agee. Please
proceed with your question.
I wanted to delve into the comps a bit more. I wondered if you could give us the trends that
you experienced by month for the two brands and also into August. Im pleased to hear you say you
expect improvement by the end of this month but what gives you that kind of conviction? Have you
had some success with northern stores responding to the fall product? If you could elaborate that
would be helpful.
I think from a comps perspective we started off on a very positive note for May. Actually June
got better than May and then I think things fell off in July for a variety of reasons, as we
discussed. I think in terms of from a climactic approach, I guess I would say it varied a little
bit by brand. But actually for Chicos the Northeast was probably our strongest area of the
country, so you could make an argument it bodes well for the fall assortment. On the other hand,
whats a nice surprise to me is that the Midwest continues to outpace the rest of the areas for the
White House/Black Market brand.
And our recent floor set in White House/Black Market is very encouraging, which I think tells
us what will come later in the month. We also believe that the marketing or the television campaign
that starts up again for Chicos on August 23, will have a big impact, and we think our next two
catalogs and the product that is in them are perhaps some of the strongest that weve done to date.
Next question, please, Rob.
Your next question is coming from the line of Liz Pierce of ROTH Capital Partners. Please
proceed with your question.
Thank you. Good morning and nice job on the quarter. If you could just talk a little bit more
on what you were just talking to in terms of the shift in the inventory and what does this mean in
terms of how you look at when you convert to spring for holiday, et cetera?
6
It really wasnt a shift in inventory. What it was is we, honestly, we just didnt transition
well from a product point of view. We didnt have enough shorts. We didnt have enough short
sleeved wovens. We didnt have enough wear-now product. We were not able to react in the summer the
way we were. We transitioned too quickly from spring clearance to fall, without really giving
summer goods a chance to perform. And honestly, we hadnt done it terrifically well the year
before, and we did it terribly this year. I think that we certainly have learned our lesson and
understand the opportunities to do summer business as we go into next year. And I think we will
plan and execute better. Again, I look at the business and what happened in July not as an external
factor. Others can blame the economy or the customer confidence, or whatever else. I know that we
didnt have some of the goods that our customers wanted. Some of our pain was self inflicted, and
were going to fix it. I guarantee you we wont have the same problem next summer.
Our next question, gentlemen, is coming from the line of Michelle Tan with Goldman Sachs.
Please proceed with your question.
Kent, I was wondering if you could clarify the comp outlook for the second half? Are you
thinking positive low or mid single digit? Where are we in that positive range? Where specifically
is August trending relative to that plan, and then any clarity you can give us on the gross margin
outlook, as well. Thanks so much.
As far as forward guidance, Michelle, I said about all Im going to say. Comps and margin, et
cetera. I would tell you from an August perspective, pretty much what happened in July continued
into the first couple of weeks of August.
Our next question is from Janet Kloppenburg of JJK Research. Please proceed with your
question.
Good morning, everyone, and congratulations on a nice quarter. I was wondering if you could
elaborate about this in-transit inventory. It sounds like perhaps youve purchased it at lower
average unit cost. Im not really clear on it. And Im wondering what your outlook is for inventory
at the end of the third quarter. And also, Dave, if you could just talk about other seasonal issues
that may come up. For instance, have you reviewed your holiday and spring transitional lines to
make sure that some of these issues with product not being right for the season wont disrupt the
comp trend going forward? Thanks.
From an inventory perspective, the in-transit inventory, well, essentially whats happened is
that for since I got here, the predominant portion of our goods that are on order are on a
landed duty paid basis. And it spells an opportunity to trim some of the costs because in addition
to the supplier getting a mark-up on the piece goods and cutting the goods and sewing the goods,
they also have the propensity to get the mark-up on the duty and the transportation. So if we just
allow the mark-up on the first cost basis, and assume the responsibility for transportation and the
duty and everything else, which is FOB basis, then we should save money on the cost side. It just
so happens that rather than taking title to the goods when it hits our distribution center, we
really take title to the goods at the point that the consolidation, or when theyre passed to the
freight forwarder. So typically from goods overseas, with transit times at two to three weeks, we
own the goods about two to three weeks earlier than we do if its on a landed duty paid basis. But
honestly it all bodes well from a cost perspective going forward. And thats one of the
opportunities that we signaled at Analyst Day last year, or earlier this spring, when we saw
opportunities to improve on the product margin side.
7
And I think in terms of transitioning from holiday to spring, we really have done that pretty
well over the last year. And I have reviewed the product, and I have reviewed the transition
specifically for the Chicos brand, and I do feel that we are on the right path there and that we
will execute it very well this year. Our problem has really been which is kind of strange for a
Florida-based retailer to transition from out of warm weather and into cold weather as we did in
the summer. But I dont think that you are going to see the same thing happen in January-February.
I believe that we have handled that appropriately and very well. That is, unless global cooling
comes along, and the winter is 16 below til March, then we may have another issue.
Thank you. Our next question is from the line of Lorraine Hutchinson with Bank of America.
Please proceed with your question.
Thank you, good morning. Your most recent guidance for gross margin on the last quarters
conference call was 50 to 80 basis points this year. Just wondering if you could comment if that
still stands, and also perhaps give us some clarity on what you are hearing on product sourcing
costs for the coming seasons.
As of this moment, I still think thats a reasonable amount.
I think on sourcing costs, we have one thing that certainly has gone in our favor, is we were
probably over sourced in China, and as we have moved from China to other countries in Asia, we have
been able to do so at lower cost. And also, as Kent has talked about, by moving from landed duty
paid to FOB, we also were able to enjoy greater margin. So I think that certainly in the short
term, meaning as we get through this fall and into next spring of 2011, I dont believe that were
going to experience perhaps what youve been hearing about. I think as we look to next fall that
may be a different issue thats yet to be determined.
Our next question is coming from the line of Stacy Pak with SP Research. Please proceed with
your question.
Hi, thanks. Dave, I felt like when you were talking about the misses at the beginning, shorts,
short-sleeved wovens, fall color and fabric, miss full-priced skirts and dresses, jackets too long
and too heavy, it sort of felt like everything. So Im wondering, first of all, could you speak to
how does Finney and everyone else there feel about Chicos assortment now, is one piece. Second, is
how are the inventories by division? And third, you mentioned delivering positive single-digit
comps in the second half. Are you assuming that for Chicos, as well, or is that just for the total
Company? Thanks.
Well, were assuming the comps for all brands, positive single digit comps. And the other part
of the question?
The question was, Stacy implied it sounded like all of our inventory, we had issues.
8
Well, thats not true.
Actually, we had some very good performance in knit tops and sweaters and actually casual
bottoms.
Our crop pants were terrific.
We had significant increases there, as well as the accessories business. So it wasnt all a
disaster, necessarily. So we did have some good pockets of performance.
I guess the reason that I talked about that, and maybe I gave a more dire, excuse the pun,
impression than I should have, its just that when I think that things are in our control and we
miss them, it bothers me a lot more than it does when there are things that are out of our control.
And honestly, I believe in my heart that we should have had another couple of points in comp and
another couple of pennies in earnings, so well do better.
Next question, Rob.
Our next question is from the line of Richard Jaffe with Stifel Nicolaus. Please proceed with
your question.
Thanks very much, guys. A two-part question. If you could talk about your sourcing partner and
some of the issues you have had this quarter. Obviously your sourcing partner cant help you with
the weather and making decisions about converting early or late, but wondering how that is working
out in terms of initial costs, particularly in light of the inflationary environment?
We have more than one sourcing partner, Richard. We have a variety of sourcing partners. It
just so happens that two of the biggest ones would be Mast, and then much has been made about the
William E. Connor relationship. Were really just getting started with Connor because they have a
slightly different model, especially when it relates to our Chicos business, because our Chicos
business is so complex, we have so many choices, and we move from month to month that were trying
to get their side of the infrastructure built up to service our business. Theyre doing a terrific
job right now in terms of servicing our outlets as well as miscellaneous product here and there.
And we are seeing improved costing, by the way, as a result of it, which is what you would expect.
9
Next question, please, Rob.
Our next question is from the line of Dana Telsey of Telsey Advisory Group. Please proceed
with your question.
Good morning, everyone. Can you talk a little bit about the process of seasonal flows, how
youre thinking about it, is it changing at all from how youve thought about it in the past, any
adjustments there? Then any detail on the comp complexion that you had of the businesses AUR,
UPT, just traffic? And lastly, trends in the outlook business, what are you seeing there, both
traffic and how did the product there do? Thank you.
From the comp comparison, Ill take that portion of it, Dana. We had transactions per store
increases across all three brands, which was really nice to see. I think a bit of the rub came in
the Chicos brand in that we lost a little ground on units per transaction. Now, that probably
shouldnt come as much of a surprise because we were similarly down in first quarter, but theres a
good news story behind that. Weve had some terrific response on our direct mail through
reactivation, as well as getting new customers. And as a result of that, these reactivated
customers and new customers tend to spend less per transaction than our regular customer, if you
will. So really the story in the Chicos brand was about UPTs, but all the other metrics with
respect to White House and Chicos were positive.
Rob, next question, please.
Our next question is coming from the line of Marni Shapiro of The Retail Tracker. Please go
ahead with your question.
Hi, guys, and good luck with fall, if I forget to mention it. I was curious if you can give us
an update on Soma and all the pop-up stores, where you are with them, how you feel about them, and
if theres a thought about converting more of them to regular stores at this point?
Of the pop-up stores, I havent looked at the latest count in terms of success rate, but weve
only had really one that weve questioned the results on, that weve been unhappy. So I think that
virtually every one of the pop-up stores that weve done in Soma we feel very good about, and well
make it a full-line store. Kent, I know youre looking at the list.
Im looking at the list rate now. This really goes through our July 14, openings. But I think,
generally speaking, there were a couple disappointments, but I think when the dust will settle
and these are obviously based on annualizations and some have very short durations were
actually quite pleased and have a pretty good batting average on a lot of these locations. So were
in process of converting a number of these locations. And interesting to me is that there are very
few situations where we have to relocate to another space in the mall for the longer term lease. So
very encouraged.
10
And just let me say that we are really pleased with the progress of Soma. Were pleased with
the comp increases that theyre having. Were pleased with their product assortment. The customer
is responding like never before. Were pleased with the responses as we come into new markets. I
would say that that brand is really right now, if not exceeding our expectations, certainly where
we expected. It is doing very well. And I believe in 2011 that you will see that it will be a
significant up volume as you get towards the end of that year that well probably have to report it
as a segment. So next year youll probably see it as we get through that.
In terms of the product, we have two great catalogs that are coming up. One called Ciao Bella,
which is Italian lace and fashion goods that we think are just going to be fantastic. So were
really pleased. The customer responded to fashion. And the white space for this brand, meaning the
space that we believe that we have where Victorias Secret drops off and where we start, which is
basically looking at our department stores and perhaps some other chain stores that are in this for
the missy customer, we think is a big wide open space where the customer is craving fashion and we
believe we have it, and she is responding to it.
Next question, Rob.
Our next question is from the line of Julie Bryant with MKG Financial Group. Please proceed
with your question.
Good morning. At Chicos could you talk a little bit more about the, as we go forward into
fall, the assortment for fall relative to a year ago including Travelers? And could you touch on
any current or future fabrication changes, such as the natural fabrics versus polyester that we
might be seeing?
Well, were spending a lot of time on Travelers right now. We are really looking at the
product design. Were bringing a lot of new ideas and new statements to it. Its still a very
important part of our business. Were testing new fabrics. Weve got a new designer that has just
started with us. So we think that that business has still some good life in it. The other thing
weve done is were identifying those stores, there are some stores in our portfolio, Chicos
stores, that do very, very well with Travelers. And were making sure that we give them the
assortment that they need to Kent is showing me something. I guess hes showing me something
with the roofing and a lot of the product, the new Travelers product that were seeing in the
Lauren Hutton cover catalog. So there are a lot of things that were doing. And we expect for that
business to remain strong and stabilized, and hopefully grow again.
Rob, next question.
Our next question is a follow-up from the line of Jennifer Black of Jennifer Black &
Associates. Please go ahead with your question.
I have a follow up on JDA. I know it was implemented during the quarter at White House. Can
you comment on how its going? Are there any meaningful benefits today? And if so, does that give
you confidence we will start to see benefits at Chicos and Soma? And then just one other question
is about novelty denim at Chicos. I only see a little bit. Are we going to see more? Thanks.
11
JDA actually Chicos preceded White House. We are moving along. There is a learning curve
associated with this, so I cant say at this juncture that were deriving any significant benefit.
Quite honestly, when you implement a new system such as this, as complex as it is, there is, in
fact, a learning curve, and things are actually probably taking a little longer as opposed to
faster. But I suspect that within a short while, well begin gaining some momentum. Along with an
additional release we have some additional enhancements planned within the next 60, 90 days or so
and so we should gain some momentum. I think the real benefit to derive from the implementation of
the system will be in fiscal 2011. I think that we did, however, put in JDA allocation previously,
and we are beginning to see some benefits there.
Our next question is from the line of Robin Murchison with SunTrust. Please proceed with your
question.
Thanks very much. Good morning. I see you are amping up your wedding content at White House.
The new e-mail that you just sent out yesterday looked great, so congratulations on that. My
question is on Chicos, and your jewelry efforts continue to also look good. Can you just tell us
what percent of mix it is and is it up or down and any margin differential with apparel? Thanks
very much.
Well, off the top of my head, jewelry, which is embedded in accessories, tends to run
somewhere around 15% of our sales, plus or minus a couple points, depending upon the time of year.
And I tried to indicate earlier in the call that actually jewelry is performing nicely.
The trend is up in Chicos jewelry. And we are on top of huge comps from last year. And it
continues to perform.
Our next question is from the line of Liz Pierce of ROTH Capital Partners. Please proceed with
your question.
Actually, my follow-up question has already been answered. Thanks and good luck.
Our next question is from the line of Marie Driscoll with Standard & Poors. Please proceed
with your question.
Hi, everyone. My question is on the outlet channel. Can you talk to how the outlet channel is
doing relative to full price? And is the comp being driven there or is it the same in all channels?
And could you remind me as to the profitability of that channel versus the regular stores? Thanks.
I would say the story on outlets for the quarter is more about margin improvement and not as
much as comp. But all of our outlets were positive. I think that in the Chicos brand were pleased
that the made-for-outlet product has achieved as much as 90% sales penetration at a point in time
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during the quarter. Were starting to do a little bit more made-for-outlet product in White
House/Black Market, and were seeing the benefit of that in the margins. The Soma brand has taken
an interesting tact. While they dont have made-for-outlet product, they are putting some elements
of full priced goods into their outlets, and were also seeing meaningful improvement in their
margins.
And Kent, wouldnt you agree that the outlet business at Chicos was a little starved for
inventory in the quarter, as well?
Yes, I think they had a similar occurrence, I guess its a nice problem to have, similar to
White House, where they just ran out of steam and ran out of inventory because they over-performed,
if you will, or over-achieved earlier in the quarter. So it got a little bit soft toward the end of
the quarter. But theyre getting back in goods, as we speak.
Next question please, Rob.
Our next question is from Edward Yruma with KeyBanc. Please proceed with your question.
Hi, this is [Charis] for Edward. I just wanted to ask around your DTC business, its up 36%,
which is pretty impressive. In terms of the opportunity, how thats progressing there, and also
learnings in that business, and any differences youre seeing by brand, if you could just elaborate
on that a little bit?
The DTC will continue with the comps that we got. We think were only beginning to scratch the
surface, especially as we get better at capturing e-mail from all of our brands. It was interesting
to note, with the direct to consumer, as you know, we do not include direct to consumer in our comp
store numbers. They are included in the total numbers but not in the comp. Many stores do put
direct to consumer in their comp numbers. If we had done that this last quarter, we would have had
170% 170 basis point increase in comp store numbers, if you included the DTC sales. So it is a
very important part of our business, and one that we will continue to grow, and I expect to see it
at strong double-digit comps for some time to come.
Next question please, Rob.
Our next question is coming from Stacy Pak of SP Research. Please go ahead with your question.
Hi, I was just hoping you could answer the inventory by division question. Also, marketing in
Q3 versus Q4. And finally, are jackets fixed for fall?
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We believe that the jacket part was one of timing. We had the wrong weight, too long of
silhouettes, and I do believe weve got the jacket issue thats coming out in the next two catalogs
from now, and I think its one of the strongest assortments in catalogs that we have had in some
time. So I do believe that the jackets are on track. Its problem was, again, more one of weight and
proportion, and perhaps color, more fall color than it should have been in the middle of summer.
But we do believe were back on track there. Kent, in terms of?
The inventory levels, Im not going to get into it by brand. Directionally I can tell you
because of the impact of in-transit as well as third quarter openings, I think its fair to say
that the White House inventory levels are up but not at the same level of comps. In fact, theres
quite a bit of gap. The most significant increase in the in-transit inventory levels was in the
Chicos brand which distorts it on a per square foot basis. Its up, so on an adjusted basis I
suspect its up slightly. The marketing spend, $8 million to $10 million for the fall season the
second half, probably about two-thirds of that will occur in the third quarter.
Interestingly enough, and unlike most retailers, the fourth quarter for this Company is the
smallest quarter of the year. Were working on it, but that is the fact.
Next question please, Rob.
Our next question is from the line of Richard Jaffe of Stifel Nicolaus. Please proceed with
your question.
Thank you very much. Just a question about the Passport Club, historically a very successful
relationship building tool. Your efforts to convert that Passport customer to a DTC customer, to
get that e-mail and to market to her to build a relationship with her through another channel, Im
wondering how thats going and what initiatives we should look for in the following quarters.
Well, our passport customer is our best customer, and obviously that is who we would market
to, certainly through the mailers. And I would say that as we built Passport years ago, we didnt
ask so much for e-mails. So its been the challenge where we may have their phone number and their
address, we dont have their e-mail number. But Passport is up 3% this second quarter versus last
years second quarter.
Next question please, Rob.
Our next question is from Janet Kloppenburg of JJK Research. Please proceed with your
question.
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Hi, just a couple of follow-ups. I was wondering if White House/Black Markets inventories
were still below where they needed and they might at levels that you feel are appropriate. And
also I was wondering if Lauren Hutton would (inaudible audio difficulties).
Janet, youre breaking up a little bit. Would you mind repeating the second question?
Just if Lauren Hutton was going to continue to be a face of the Chicos brand?
We used Lauren Hutton on that catalog, and have not discussed whether to use her or not to use
her going forward. We think that she is terrific, and we really enjoyed having her model for that
catalog.
Regarding White House, I think when we look at the units per square foot in the stores we have been
lower than we would have liked, especially in July. So I would say that when you look at the
inventory, we would like more inventory per square foot in the White House stores. We have just
turned it too fast and have run out of goods. And I think that we will see some correlation to that
in the third quarter, but we certainly dont plan to over-react and have so much inventory that it
causes the other side of the problem. But we are feeding that brand more than we have in the past.
Janet, [Magalia], who has been the star of our commercials, including the one coming up next
week, is the featured model within the next jacket catalog. So it makes sense from that respect.
Next question please, Rob.
Our next question is from the line of Margaret Whitfield with Sterne, Agee.
Just a few follow-ups. In terms of the direct business, could you break it down by Chicos and
White House or give us the rate of change for both units? And what is your plan for ending
inventories in Q3? Finally, in the White House catalog that I just received, looks very strong.
Apparently you are expanding your wedding business as well as the size ranges offered. Can you
elaborate? Thank you.
Margaret, on the DTC business, theres a reason that were incorporating in total store sales.
So were not going to break those out today.
But White House has been very strong in DTC, so I can just say that. In terms of the wedding
business, its something that we thought was fun, since we have done so well with dresses in that
brand, and in special occasion, and we actually found that a lot of wedding parties were coming to
White House/Black Market to buy dresses anyway. So we thought it would be something that wed
experiment with and its been an interesting business. I think it will always be just a very small
part of our total dress business, but we think it adds dimension to the brand.
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Next question please, Rob.
Our next question is from Tom Filandro with Susquehanna Financial Group. Please proceed with
your question.
Thank you very much and congratulations, too, on a good quarter. Couple of quick ones. Any
change in the average age of your shopper at Chicos? And maybe can you guys give us a sense of
what youre seeing in the Soma brand in terms of average age? And one quick one as well, any
thought at all of taking the White House/Black Market concept internationally? Thank you.
Well, I think in terms of the Chicos customer, I think that one of the problems that we had
in the past is that we tried to make her something that she wasnt. We think that we have the best
customer in America. We think that this 45 to 65 or 70-year-old customer is underserved and we love
her. And honestly thats who were targeting to, and thats who were going after, and thats who
is responding to the brand. I would say that Soma carries a broader audience. If we look at White
House/Black Market, wed say our target would be 30 to 50. Obviously White House/Black Market does
well with people in their 20s and we have a lot of multi-generational women that are shopping
together in our stores. But it does skew younger. I would say that Soma appeals to both brands. It
goes younger, as the White House market would be. We have customers in their 30s shopping, in their
20s shopping. We have customers in their 60s and 70s shopping. But I think it takes over where
Victorias Secret may leave off.
I think the other question was would we consider going international with White House/Black
Market, and I think the answer is yes but just not now.
Rob, we have time for two more questioners, please.
Sure, sir. Our next questioner is a follow-up from the line of Jennifer Black with Jennifer
Black & Associates.
I had asked the question about premium, your novelty denim. I noticed there were one or two
styles at the Chicos division. I wanted to know what your thoughts were. They have a higher price
point. I know the fit is great on your basic denim. I wondered how the launch was going, the denim
launch? And congratulations, by the way.
I would say because of the record heat wave, most businesses are experiencing a little tougher
sales in denim. Our customer has responded certainly to the new washes and the new silhouettes and
the new premium denim, but I think that, again, as we get into fall well see that strengthen.
Again, we have plans to keep going with denim, but again, its one of timing. Certainly last year
we werent experiencing quite the
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weather that we are this year, and I think that our customers are going towards crop pants and
other lighter weight fabrics right now. Theres another question embedded in there somewhere, I
think.
Rob, we have to take the next question, please.
Sure, sir. Our next question is from the line of Brian Tunick of JPMorgan. Please go ahead
with your question, sir.
Thanks. Good morning. Two questions. First, on the balance sheet, does the Board approval of
the buyback signal any change on your thoughts on acquisition timing that you mentioned in Q1? Then
the second question, theres clearly concerns out there about how your Q3 sales have started off.
Are there any contingency plans for expenses that you can talk about if comps dont improve?
Of course there are contingency plans. Were running a business.
Yes, believe me, we have a number of different scenarios, depending upon what happens in the
business, how the economy or how we might react to any change in the economy. So were probably a
lot more tightly wound than we used to be.
With respect to the balance sheet and the repurchase, does it impact our thoughts on acquisitions
go forward, the answer to that is no. Obviously weve done the analyses, weve done the long-range
planning. We believe this brand is capable of generating significant free cash flow in the years
ahead, and we dont have to stretch the comp numbers to get there. And so as a result of that, we
think that we have the appropriate levels to facilitate both the share repurchase. If a small
acquisition comes along, and were not actively after anything. I would like to also point out we
dont need to have an acquisition to grow and to hit our long-term financial goals, but we would be
opportunistic if one comes along. So I think weve got plenty of what I would call safety room, if
you will, in our current cash and marketable securities.
Thank you, Kent. One calendar item. Sales and earnings for the third quarter for Chicos FAS
are scheduled to be released on Wednesday, November 17, before the NYSE opening that day. Thank you
all for joining us this morning. We appreciate your continuing interest in Chicos FAS.
This concludes todays teleconference. You may disconnect your lines at this time. Thank you
for your participation.
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