Fiscal 2008 Outlook
- Square footage growth rate for 2008 will land in the 7% to 8% range.
- CapEx for 2008 will now fall closer to the bottom or below the previous range of guidance of $120 million to $125 million.
- Net of construction allowances this amount should fall within the $90 million to $92 million range.
- The company expects depreciation and amortization of just under $100 million for the year.
Key questions from the second quarter earnings call conducted by Chico’s FAS, Inc. on August 26, 2008.
Kimberly Greenberger (Citigroup): Could you address the differential on the inventory on your balance sheet versus your comments about the Chico’s brand?
Kent Kleeberger: The Chico’s brand is down about 13% per square foot, the White House | Black Market brand is down about 3% per square foot and the Soma brand is up. Part of the issue we were not able to achieve as low a level in the White House | Black Market brand as we had hoped is because of in-transit inventory levels. We had a significant increase in inventory in-transit at the end of the quarter.
Kimberly Greenberger (Citigroup): Is there almost a 10% spread between what you are talking about at the Chico’s and your total company inventory per square foot, that is all inventory in-transit?
Kent Kleeberger: A good portion of it is the inventory in-transit.
Kimberly Greenberger (Citigroup): Where would you expect the inventory on average to be throughout the third quarter on a per square foot basis?
Kent Kleeberger: The question is, is that we have gotten inventory levels down closer to the trend which has been to me a monumental task but great spirit of cooperation with Michele and Donna in particular. We are going to continue to manage inventory levels closer to trend. Right now I do not have a pinpoint target for third quarter because we are seeing some differences in trend and we will adjust as we go along. But for intents and purposes I think the inventory levels are in decent shape.
Kimberly Greenberger (Citigroup): You have over 30% of your market cap in cash on the balance sheet. Why you are not out there buying stock?
Kent Kleeberger: Because we are not of the mindset that a repurchase program is part of our long-term strategy. To me to go out and repurchase stock is like declaring a special dividend, it is a one-time event. I have had these types of discussions with a number of the investment bankers who want to advise the company on these types of transactions and virtually everyone I have talked to has said basically keep your powder dry and I would not repurchase stock right now.
Kimberly Greenberger (Citigroup): Have you had that conversation with investors?
Kent Kleeberger: It has come up in some cases, but I would say that the majority of the people have not asked the question but a few have.
Neely Tamminga (Piper Jaffray): When things go well for Chico’s the quarterly earnings pattern is consistent from quarter to quarter. You earned 11 cents in the front half of the year. Is there anything that would preclude you from earning 11 cents in the back half of this year or more importantly could there even be some upside to that?
Kent Kleeberger: You are asking me to become more specific in guidance and we are not going to go there because we are in a historical times and it is difficult to predict. I would tell you that the fact that we are going to make money in the second half is and more so then last year is an indication of where we see the business. It just so happens that the margin for error is a lot narrower then where we were previously and from everything that I can see with respect to the macroeconomic environment, I am not hearing any good news out of too many people. So I think it is better for us to remain cautious and not get people ahead of themselves.
Neely Tamminga (Piper Jaffray): How do you think about SG&A dollars considering you have done a good job when you think of cost cutting and various different stages?
Kent Kleeberger: Absent the whole occupancy piece, my sense is the G&A dollars should be flat to down.
Tracy Kogan (Credit Suisse): Can you be more specific on the areas that you have for expense savings and how much you think you can take out of the business?
Kent Kleeberger: We are seeing opportunities in both gross margin and SG&A. In the gross margin line we have eliminated outbound freight to stores via air shipments. We are continuing to take a look at opportunities to try to increase more of our shipments, convert them from air to ocean. I think those are the two biggest areas. Our distribution center team which is another component of gross margin, we just had their six month year to date review yesterday and they continue to identify areas to drive costs out of the structure, whether it is in the four walls or whether it is method of transportation, so we are encouraged there and I have not shared that type of news with respect to our cost savings. Below in the SG&A area, we are focused in payroll and the bonus areas. We have already identified savings on the bonus side. We will be testing some alternatives from the bonus plan for the Chico’s and White House | Black Market businesses. I still think we have got a ways to go in taking a look at the field payroll as a rate of sales. I see some opportunities in each of the brands. Other then that, we have been driving out a lot of other costs in the cost structure like between store supplies and taking a look at some of the maintenance that we have done in the store that for example HVAC, we can instead of doing a four times a year, why not do it three times a year. To me that is easy pickings. So we have been focused on keeping our shared services number lower then last year. That is where we are year-to-date; I expect to continue that trend for the balance of the year. The other piece that was a big piece that we identified early on was the marketing spend where we were looking at page counts and becoming more efficient in our mailing patterns as it related to reactivation and prospecting and despite marketing expenses being up in the first half, we will see significant savings or I should say our spend below last year’s level in the third and particularly the fourth quarter so that benefit has yet to be realized.
Neely Tamminga (Piper Jaffray): What are you doing on the ecommerce to improve that business?
Scott Edmonds: Tactically aligning the inventory levels across the brands with the mailer items is driving significant growth in the ecommerce business and there is a lot of focus on that by the brand leadership. Strategically we are undergoing a project right now with a consulting group, BCG, to look at how we could triple our online and direct business over the next 36 months, looking at best practices, infrastructure, technology, both from a hardware and a software and the marketing side, what can we do to ramp this up beginning in 2009 and get the thing ramped up 3x over the next 24 to 36 months. So tactically it is inventory levels strategically we will be looking at how we can ramp the thing up over the next 36 months.
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