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Charlotte Russe Holding, Inc. (NYSE:BG)

F4Q08 Earnings Call

November 12, 2008 5:00 pm ET

Executives

Jennifer C. Salopek – Chairman of the Board

Leonard H. Mogil - Interim Chief Executive Officer and Chief Financial Officer

Analysts

Janet Kloppenburg - JJK Research

Jeff Van Sinderen - B. Riley & Company, Inc.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Samantha Panella - Raymond James

Robin Murchison - Suntrust Robinson Humphrey

Betty Chen - Wedbush Morgan Securities Inc.

Elizabeth Pierce - Roth Capital Partners

Mark Kaufman - MLK Investment Management

Stuart A. Quan - Zander Capital

Dana Telsey - Telsey Advisory Group

Anna Andreeva - J.P. Morgan

Operator

Good afternoon and welcome to the Charlotte Russe fourth quarter and fiscal year 2008 conference call. With us on today's call are Jennifer Salopek, Chair of the Board, and Len Mogil, Interim Chief Executive Officer.

Certain statements made on this conference call, including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of Charlotte Russe Holding, Inc. 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 and unknown risks, including but not limited to general economic conditions and conditions in the specialty retail industry. There can be no assurance that the actual future results, performance or achievements, expressed by or implied by such forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the company's latest annual report on Form 10-K, it's filings on Form 10-Q, management's discussion and analysis, and the company's latest annual report to stockholders, the company's filings of Form 8-K, and other federal security law filings for a description of other important factors that may affect the company's business, results of operations, and financial condition.

The company may also disclose non-GAAP financial measures on this conference call. Pursuant to the requirements of Regulation G, the company has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its press release issued earlier today. The press release is available in the Investor Relations section of the company's website at www.CharlotteRusse.com.

And now I will turn the call over to Jennifer Salopek. Please go ahead.

Jennifer C. Salopek

Thank you, [Julianne]. Good afternoon, everyone, and thank you for joining us today. I would like to start by saying that we are delighted to have a new executive management team on board and they are here with us today to listen to today's call.

John Goodman is joining us as [break in audio] Officer and member of the Board.

Emilia Fabricant is joining us as President and Chief Merchandising Officer and also a member of the Board.

And Fred Silny has joined us as Executive Vice President and Chief Financial Officer.

Each of these talented individuals comes to us with extensive experience, proven leadership skills, and a strong track record of driving growth and creating value. We are honored that they have joined us and very excited about the success that they will be able to achieve.

John, Emilia and Fred join Ed Wong, our Chief Financial Officer, and Sandra Tillett, Executive Vice President and Director of Stores, to form an exceptional leadership team with the knowledge and expertise to take this company to the next level, to drive growth, and to create value for our shareholders.

I would like to welcome John, Emilia and Fred, who I'm sure all of you will have the opportunity to get to know in the weeks and months ahead.

I would also like to recognize Len Mogil, Interim CEO and CFO, for the significant contributions he has made to this company over the past three and a half months. We are extremely grateful for the leadership and direction he has brought to the organization, and his decisive action to implement strategic and operational change. We will of course look forward to Len's ongoing contributions as a member of the Board, and he will remain at the company in the near term to ensure a seamless transition.

During our last conference call we told you about the comprehensive analysis and evaluation of our business model that was under way. Today we'll be sharing with you our key findings as well as the high level strategies that we will be employing to build upon the underlying strength of this business and to create an elevated platform for growth.

However, I will first turn things over to Len to review the quarter and to discuss our expectations for the first quarter of fiscal year '09. Len?

Leonard H. Mogil

Thank you, Jen. Good afternoon, everyone, and thank you for participating on today's call.

Before I get into the financials, I'd also like to express my excitement about the appointment of John, Emilia and Fred. I've had the pleasure of working with and getting to know the outstanding associates here at Charlotte Russe in recent months. We are fortunate to have talented individuals who are enthusiastic about the future of this company, and I believe they will thrive under the leadership of this new team.

Moving on to results for the quarter, total revenues increased 8.6% to $207 million. Although comp sales of negative 3.8% were within our anticipated range, higher than expected markdown activity drove non-GAAP earnings to $0.01 per diluted share.

As noted in today's earnings release, we incurred a charge of $4.1 million for costs related to the recent management transition and a non-cash charge of $6.1 million related to store impairments. In my discussion that follows, I'll be referring to non-GAAP financials which exclude these costs. A reconciliation of these non-GAAP financials to GAAP numbers can be found in our earnings release, issued earlier this afternoon.

There were two major factors that drove our aggressive level of markdowns. First, we had too much back-to-school product. Initial deliveries arrived in stores too early and did not sell during the warm summer months. The second major factor was the weakening macro environment, which caused us to be more promotional than expected, with permanent markdowns substantial exceeding last year.

We have taken the markdowns necessary to clear through the inventory so that our stores look fresh for holiday. At year end, inventories were down 10% on a comp store basis.

We are in the process of implementing changes to improve our buying and inventory management process. Going forward, we'll be focusing on full price selling while at the same time adjusting our promotional cadence and progression into permanent markdowns. By improving the timing and flow of receipts, we will be better able to enhance the productivity of our inventory.

While this is an evolutionary process, we expect to see improvement in the way we merchandise and flow goods beginning in spring 2009, with more significant benefits coming next fall.

[Break in audio] of comp store transaction metrics for the quarter. Average unit retail was down 5% to [$10.65]. Comp store transactions were down 1%, while units per transaction were up approximately 1% to 2.81.

By geographic region, we saw the greatest strength in the Northeast and Midwest, while California and Florida remain challenging. Texas continued to be a strong market for us, excluding the impact of Hurricane Ike.

Fourth quarter gross profit was down 14% to $44 million, while gross margin declined 555 basis points to 21.1%. Our performance was driven primarily by two factors. First, product gross margin was down 370 basis points, primarily driven by higher markdowns, which caused a 360 basis point reduction. Secondly, rent and occupancy expense deleveraged by 185 basis points due primarily to the reduction in comp store sales.

SG&A expenses came in at $43.5 million or 21% of sales, excluding the transition and impairment costs I described earlier. That's up from 20% in the fourth quarter of last year, primarily due to 120 basis points of store payroll deleverage.

Fourth quarter operating income excluding transition and impairment costs came in at $145,000, which compares to $12.8 million or 6.7% of sales in the year ago period.

Interest income declined substantial, coming in at $292,000 versus $1.1 million a year ago primarily due to the use of cash for our Dutch tender offer earlier this year and lower interest rates.

Net income excluding transition and impairment costs was $269,000 or $0.01 per diluted share compared to $8.4 million or $0.33 per diluted share in Q4 of 2007.

We ended the year with a strong balance sheet, with $45 million of cash and no long-term debt. Forecasted ongoing cash flow generated by the business is sufficient to fund our working capital needs and planned capital expenditures in 2009.

For the fourth quarter, capital expenditures totaled $20 million and full year spending was $58.5 million. Of that amount, $42 million was for new stores, $11.5 million for remodels and other store-related capital items, and approximately $5 million for corporate IT and other corporate uses.

Looking at new store openings, we opened 18 new locations during the fourth quarter, bringing our total to 57 for fiscal year 2008. We remodeled six locations in the quarter for a total of 15 during the year. Capital expenditures for fiscal 2009 are projected to be approximately $35 million, which includes $20 million for new stores, $8.5 million for remodels and other store-related capital items, and $6.5 million for IT, corporate and others. We expect to open 20 to 25 new stores in fiscal 2009, reflecting our decision to pull back from the aggressive pace of recent years as we focus on improving the productivity of our existing fleet and driving enhanced [inaudible].

We recognize the enormity of the situation facing retailers today. The economic reality will challenge everyone this holiday season. We are planning the business conservatively and have put together a strong promotional calendar to drive the business. Historically, the company has deployed its marketing dollars towards photography and in-store signage. For 2009, we will be implementing a range of strategic brand development and marketing and promotional events designed to enhance brand awareness and build market share.

Two examples of this for the holiday season are: First, we will be offering special promotions to stimulate gift card purchase and use. And second, we have developed a video and text messaging campaign which features proprietary content on YouTube and MySpace as well as on-screen footage in key movie theaters. The campaign is very viral and includes a call to action at the end which requires participants to text in to Charlotte Russe to receive special offers.

I'd like to now discuss our outlook for the first quarter ending at the end of December. Based on the current tone of business and industrywide expectations for a difficult and highly promotional holiday season, we expect our first quarter comp store sales to be in the negative mid to high single-digits and diluted earnings per share in the range of $0.10 to $0.18, exclusive of transition costs. And we expect to end the first quarter of fiscal 2009 with comp store inventories down in the mid single-digit range.

As you'll now hear from Jennifer, our intense look at the business has highlighted how we can leverage our strengths, where we need to change the existing approach, and where we have opportunities to grow the business, even in this environment.

Jennifer?

Jennifer C. Salopek

Thank you, Len.

We recently completed a robust and comprehensive study of our business in order to develop a well-defined and compelling plan that would enhance profitability and improve returns for our shareholders. The competitive landscape has changed dramatically in recent years and the macroeconomic headwinds have been strong for some time. Our Board of Directors thought it was critical that we take a hard look at the business model and our strategic direction in order to achieve greater competitive advantage.

Our approach was twofold. First, we commissioned an extensive consumer research study to learn our customers' point of view. And second, we scrutinized the economics of the business through several different lenses. This led to a very granular analysis of five key areas: number one, our brand's positioning; number two, our merchandise assortment; number three, the productivity of our inventory; number four, our real estate strategy; and five, the optimal utilization of capital.

The results of the consumer research study were conclusive. We surveyed over 5,000 consumers to achieve a very robust sample. Participants were selected based upon detailed screening criteria that would give us maximum insight to our current and target customer. The survey was very thorough and asked customers about their fashion preferences, where and how they liked to shop, what their wardrobe needs are, how much they spend on apparel, footwear and accessories, what brands they relate to, how they learn about fashion, and many other aspects of their lifestyles that influence their shopping behaviors and preferences.

We are pleased to confirm that Charlotte Russe has a terrific customer base who is shopping our stores. She is hip and trendy and looking for fashion. The research also shows us clearly where we have opportunities to leverage this, but also to capture a greater share of her wardrobe spend. I'll talk about the findings of our study and the outcomes from our own analysis in the context of the five areas that I just outlined.

First, brand positioning. We have a vibrant customer who loves fashion and who has a great sense of style. She is passionate about achieving the right look and very knowledge regarding the brands and styles that will allow her to do so. She is proficient at mixing branded items that connote prestige and the "it" factor with other items that allow her to achieve a terrific look on a budget. She is outfit driven and uses footwear, accessories and jewelry to complete her ensemble.

She is age 16 to 29, works and/or goes to school. Her outlook on life is optimistic based on her values and ambitions. She is social and needs fashion for many occasions within her lifestyle. She is already shopping our stores and loves Charlotte.

Our research has demonstrated a clear opportunity to capture additional market share from this terrific customer base. In the past the company has focused upon offering value to this customer. We targeted the younger end of the core age range and primarily addressed only her casual and clubbing activities. Our customer actually has a more evolved sense of fashion and more complex end use needs within her wardrobe. She spends to support these needs when the fashion is right.

The research also demonstrates that we have a meaningful opportunity to build our brand image and enhance our fashion credibility. We need to strengthen the emotional connection that we establish with our customer and let her know that we know who she is, we know what she likes, what she needs, and the value that makes it all work for her budget.

One of our first brand building initiatives is to create a face for Charlotte and to bring our brand vision to life. We are pleased to name Susie Castillo as Charlotte's first brand ambassador. Susie is an accomplished author and actress. She is a former Miss USA and MTV VJ. She appears in a host of movies and TV shows and lends her support to a number of charitable organizations that resonate very well with our target audience. Susie is beautiful, intelligent, and fashionable. She has broad appeal among women in their teens and 20s and represents all of the best qualities of the Charlotte customer.

The second area of focus is our merchandise assortment. We know our customer wants fashion and we also know that value is very important to her, but not at the expense of having the right look. We are re-focusing our buying process on identifying the right fashion trends and making a commitment to them within our assortment. Our customer should immediately recognize our fashion point of view when she enters our store.

The findings of our research tell us that we have a competitive advantage in key categories such as denim, footwear and accessories, however we have a big opportunity to provide solutions to her other wardrobing needs, most notably wear to work and other dressy/casual locations within her life.

The findings also indicate that we can significant increase cross-shopping behavior. This will be accomplished by placing greater emphasis on our visual merchandising throughout the store and by timing receipt flow across merchandise category to enable the achievement of an integrated fashion point of view. Our customer dresses in outfits and we need to offer her the full look.

We are working on a number of initiatives to create meaningful differentiation within our assortment. This will be accomplished through a more progressive approach to buying, design and product development, as well as intense evaluation of brand opportunities. Emilia Fabricant will be focusing on all of these opportunities as she evolves our merchandise strategy. Her great taste level, design and product development capabilities, and resources will achieve a well-differentiated assortment for our customer and will create competitive advantage for the company.

We are also very excited to announce that renowned celebrity fashion stylist Eric Daman will be joining our team. Eric is currently the fashion director for the hit TV series, "Gossip Girl," which is extremely popular with the Charlotte customer. Previously he was costume designer for the highly successful TV series, "Sex and the City." Eric will provide Charlotte with terrific insights into the latest trends and styles, advise us on creative direction, and assist with product design and merchandise development.

The third area of focus is inventory productivity. As Len previously mentioned, we are evolving our buying processes and bringing greater level of discipline to planning and allocation. Our focus will begin with taking a fashion leadership position and generating full price sell through. This can be accomplished through better managing receipt flow, implement [break in audio] allocation, and accelerating our markdown cadence to be more in step with receipt flow. We believe that this attention to inventory productivity will generate enhanced margin performance.

Our fourth initiative is to maximize the productivity of our real estate. We are in the process of performing a detailed review of the fleet with the goal of optimizing our productivity as quickly as possible. We strongly believe that there is an opportunity to improve productivity by focusing our attention in four key areas - first, merchandising so we'll make our stores easier to shop; second, more effective planning and allocation; third, determining the most effective size and location for future stores; and lastly, optimizing our remodel program.

The research we have done thus far suggests that a smaller store format may be more productive. We have also begun using cluster analysis, which is providing us with enhanced visibility and will enable us to address productivity at the individual store level going forward. Given the work we are doing on the current portfolio and in light of the macroeconomic conditions, we are taking a conservative and thoughtful approach to new store development.

Our last initiative is capital utilization. We are implementing a return oriented approach across all aspects of the business model. For example, we're looking for some very specific performance metrics from our stores, including higher sales and margin per store and increased productivity per square foot. We are also working to create an environment at the corporate level that better rewards performance and fosters increased accountability.

We recognize that our associates are an incredible asset. Together with the leadership of John, Emilia, Fred, Ed and Sandra, I have every confidence that we can achieve our goals. The key to success is the ability to execute, and that comes down to having great talent and the right capabilities. Although we are operating in a difficult and somewhat unprecedented time, we believe that there is a great [opportunity] in front of us. We have a clear road map, a strong balance sheet, and a talented team that is committed to executing this vision and creating value for our shareholders, for our customers, and for the company and its associates.

Lastly, as you have seen earlier today, we received a proposal from KarpReilly Capital Partners and H.I.G. Capital to acquire all of the outstanding shares of Charlotte Russe. We are committed to doing what's in the best interest of our shareholders and, consistent with our fiduciary duty and in consultation with our independent financial and legal advisors, we will carefully review and consider the proposal.

A fundamental premise of the proposal is that Charlotte Russe has no permanent management team. This was addressed by our announcement this afternoon naming a new CEO, a new President and Chief Merchandising Officer, and a new CFO. The Board has been developing a new strategic plan and is confident that this new management team will be well positioned to reinvigorate growth and profitability.

As I said [break in audio] the Board is committed to doing what is in the best interest of the shareholders and will make its determination once we have carefully evaluated the proposal.

Thank you for your attention today. Operator, please open the call for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

I wanted to just talk about some of the implementation strategies that you talked about on the call and the timing of these programs. So I guess I would ask first is Susie Castillo and Eric Daman, will they be beginning immediately with the merchandising team? And when you thought that the new attributes of the merchandising assortments, when they would all be able to come together, Jennifer, to present to the customer the type of assortments you think she's seeking?

Jennifer C. Salopek

Susie Castillo and Eric Daman are onboard and we're beginning to work with them now, and Emilia will have a close working relationship with them.

We expect to begin implementing the strategies that we outlined with the spring season, and we would expect that by back-to-school '09 you would be able to see a meaningful difference in terms of our approach and the results of these new strategies.

Janet Kloppenburg - JJK Research

And then Len, it seems to me that you've got a lot of new strategies you're building into the business that should drive store productivity going forward, but I was just wondering if you  when I hear about the new programs going into place, I'm thinking that perhaps the cost structure of the business is going to increase as well. Could you address that concern, please?

Leonard H. Mogil

I don't believe that that will be the case. I believe most of the things can be done with - we already have systems in place and are implementing others. We have the infrastructure to do many of these things, and it's really a matter of re-doing the way our process is as opposed to additional investments.

Janet Kloppenburg - JJK Research

And then the inventory on a square footage basis being down only mid single-digits, Len, at the end of Q1. It's down a lot more right now and, given the fact that perhaps your merchandising and repositioning won't be complete by the end of December, I wondered if that was a number you were comfortable with.

Leonard H. Mogil

Well, you know, I'm fairly comfortable with the number. But Janet, in view of the current conditions out there, it's hard to say. So I think we planned it conservatively. We've left ourselves some room, but I think at this point that's where I'd have to be on it. And I am fairly comfortable that's where we'll land.

Janet Kloppenburg - JJK Research

And then lastly, Jennifer and Len, I would think you've scrutinized the store base and I imagine that all stores are profitable and will remain open or is there a possibility that some underperforming units may be closed going forward?

Leonard H. Mogil

Well, Janet, when you have 500 stores and they haven't, in certain cases, been addressed in the past, there will probably be some closings. As you know, we took an impairment charge on 22 stores and there will be some closings. But with the new management team in place, I'm sure that between John and Fred and the other people here, they will take a close look and take the proper road.

Jennifer C. Salopek

I would just add to that I think that our opportunity with respect to the fleet is enhancing the productivity. I think it's really about driving more volume out of the fleet, and that's what we have identified so far and so our next step is really clustering those stores together and figuring out what would be the key drivers to achieve that.

Janet Kloppenburg - JJK Research

Is there any consideration, Jennifer, to downsizing some of the stores?

Jennifer C. Salopek

Well, for a new store certainly, as we mentioned, we are considering a smaller format. I think for the existing fleet that will be part of the review and analysis, and we'll have to take that really on a location by location basis.

Janet Kloppenburg - JJK Research

And my last question is just that I think Forever 21 has become a meaningful competitor in your market and I was wondering if there was any advantage you think that they have and perhaps some strategies you may have to become a better competitor against them.

Jennifer C. Salopek

Well, we have great respect for Forever 21, Janet. They clearly are a leader in the market. They have great fashion and a great customer following.

I think what our research has showed us is that we also have a great position with the customer and we have an opportunity to offer her amazing fashion and a good value in a more intimate shopping environment. And we feel that that can very effectively create competitive advantage for Charlotte going forward.

Janet Kloppenburg - JJK Research

So you think you can make inroads there, Jennifer?

Jennifer C. Salopek

We do.

Operator

(Operator Instructions) Your next question comes from Jeff Van Sinderen - B. Riley & Company, Inc.

Jeff Van Sinderen - B. Riley & Company, Inc.

I know you guys have talked a lot about what your research has shown and maybe you could just review for us - I know you've had consultants at the company providing strategic direction for some time and wondering what kind of consultants those were and also maybe you can just talk a little bit about their areas of expertise, what they looked at initially, what did they focus on initially?

And then as a follow up to that, how has that been impacting your expense control strategy? And then maybe you can also talk a little bit more about programs you're implementing to reduce operating expenses in this environment. Can you also maybe point to some specific reductions you've made, where those are in the P&L and then where we should expect to see expense reductions in the future.

Jennifer C. Salopek

We'll do our best to answer your one question, Jeff. With respect to our strategy advisors, they are a terrific firm. They had a wide range of expertise, beginning with overall competitive positioning, brand positioning, identification of core customer, and how that integrates with our merchandising strategy, the analysis of our real estate, business processes to support the execution of that, etc.

They have really assisted us in performing a comprehensive review of the business. We feel that we understand it very well, that we've been able to look into the five key areas and they were great analytical support to us in structuring the analysis and helping us think through some of the issues.

Leonard H. Mogil

On the question of expenses, we don't anticipate that the programs we're going to go into will require significant additional expenses. In many cases it'll be a redeployment and a better usage of what we own today and what we have today. With the new team in place I think we'll have a much better look at the appropriate return metrics and we'll redeploy things.

As for the current environment, everybody, understanding what's going out there, we, as well as, I would believe, most retailers have taken a close look at what's happening and, where appropriate, have slowed down our spending. And where we can defer certain things, have been doing that and moving more slowly than we may have done in a vibrant economy.

But at this time we really need to focus on improve productivity. Sales is where we see a great deal of opportunity for growth and holding our expenses while improving the top line will give us the leverage we need to go forward.

Jeff Van Sinderen - B. Riley & Company, Inc.

And then, if you don't mind, I'd like to ask one follow up to that? Since you mentioned the new team, I'm wondering what kind of experience John and Emilia have in junior fashion and then just thinking about how Emilia moves from being at a merchant at Babystyle, which I think is just a handful of stores, to the much larger store base that you have and what you're thinking in terms of the learning curve associated with that.

Jennifer C. Salopek

Sure. Actually, they both have terrific experience in fashion, and we quite like the perspective that they bring to us, both from a scale point of view and also from a fashion point of view in helping us address the competitive environment that we face now.

One of the concerns in doing the strategic analysis is that our focus has been based on the way the company has always done things, and we believe the mandate for the future is all about embracing a new way forward and acknowledging the new competitive landscape and the way in which our customer is evolving and changing. She does not stand still and she's quite dynamic. So we're quite pleased with their experience in that regard.

Emilia actually, in addition to developing her own line, has a terrific fashion experience in contemporary fashion that starts with Barney's, and we just love her exposure to designer fashion, to contemporary fashion resources, her access to design and product development resources, and her ability to create a very well-differentiated point of view from a merchandising and a fashion perspective for our customer.

Operator

Your next question comes from Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

My question is on mall leases. How many of the leases are coming due, either with a kick out or at the end of their lease over the next, call it, year? And then what type of rent relief are you seeing either on those leases or when you're going to open those 20 new stores, because I've heard that it can be pretty compelling these days.

Leonard H. Mogil

I don't think in the past we've disclosed how many leases expire each year, so at this point it's a normal number for a chain of our size.

On the other hand, on the second point, unfortunately a number of the leases for this year have been negotiated in prior years and we basically inherited them. We are working diligently going through our portfolio and I will have the opportunity, with Fred and John now here, to pass on to them some of what we've found.

But I think, as you know, there are going to be opportunities out there. We're starting to see them, but I think that's for the new team here to go forward with and make the appropriate research and decisions.

But I think there will be opportunities, Adrienne.

Jack Morback - First Washington Corporation

Did you old leases, did almost all of them have a kick out clause in them and, if so, in what year was the kick out for?

Leonard H. Mogil

Many of them did and do have kick outs. Many of them have kick outs at the end of three years of operation, and I've seen some that have five-year kick outs.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Do you have the proportion of stores that you would consider A, B, C locations?

Leonard H. Mogil

No, I don't at this time, Adrienne.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

And then just ending square footage, do you have that on hand? It's kind of a housekeeping, not really a question.

Jennifer C. Salopek

We can get that to you.

Leonard H. Mogil

We can get that to you offline, Adrienne.

Operator

Your next question comes from Samantha Panella - Raymond James.

Samantha Panella - Raymond James

Just curious, you know, just to talk about product a bit, anything that did do well and how you saw the trends as we got into October, November. And if you could just comment on how ecommerce sales are trending.

Leonard H. Mogil

Footwear and accessories really were the high points for us as, I think, they've been in the past.

We experienced some issues in both the tops areas and in lingerie.

The question on ecommerce, really this was our first full year of operation and it was a good start for us, but it's an emerging opportunity for us. We plan in 2009 to really go after the business in a larger way and increase it significantly. We don't break out separately at this point ecommerce from our regular sales.

Operator

Your next question comes from Robin Murchison - Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

If you could, relative to the cadence of sales throughout the quarter, I'm assuming that backtoschool across the board was pretty weak and I imagine things just continued throughout the quarter [inaudible] in terms of weakness, with September being the peak if you can confirm that.

And then secondly, listening to what you're talking about doing with the stores potentially, maybe downsizing potentially, should we assume or would we assume that the number of categories - you mentioned maybe going a little bit more after wear to work - the categories might increase, but the depths of assortment within a category might decline?

Leonard H. Mogil

The cadence - as you know, we don't disclose comp store sales by month - but the cadence throughout the quarter, the downward trend did accelerate as we went through the quarter.

As far as on the store size, we're not really, as Jen, I believe said, our current fleet is what it is and it is going to be reviewed, but probably we will be considering as we go forward some smaller size formats.

And as far as work to wear category, I think Jen will give you the answer there.

Jennifer C. Salopek

Yes, a great question, Robin. I think our plan here is not so much that we would go - not have depth in the assortment, but we have a really good opportunity through receipt flow to offer all of these different end use opportunities within the current space, but to do it in a way that is flowed better and also, by increasing our markdown cadence, to not have as much clearance on the floor at any one. So we can repurpose the space that we have, be more effective with the dollars and the way we offer it, and be more streamlined in the fashion point of view and focus within the assortment.

Robin Murchison - Suntrust Robinson Humphrey

So bottom line, you're just going to move it faster, take the markdowns, get it out instead of letting it build up in the corner?

Jennifer C. Salopek

That's one thing, but we are also going to buy it differently. I think it's important to know that we are not going to put the same amount of stuff and just flood the stores with it, that each delivery group, each element and component of the assortment is going to be well rationalized and will be thought out, and it will have an even flow that gives the customer something new to look at when she shops us. And so we're going to be more selective about what we offer and we're going to build in these different components so that we hopefully will capture more of her spend.

Operator

Your next question comes from Betty Chen - Wedbush Morgan Securities Inc.

Betty Chen - Wedbush Morgan Securities Inc.

I was wondering if you can talk a little bit more about the learnings from your focus group or the study on consumers. You know, if you can talk a little bit about where they've gone, who are they shopping? Also the average spend, how that has trended in recent months or recent years. And when we think about the expansion into wear to work and some of the dressy needs that she has, is there a difference between where she's shopping for those items versus the casual? And so some of that would be very helpful.

Jennifer C. Salopek

Betty, I'm sure you recognize that we have to be somewhat limited in our response to you for competitive reasons, but I'll do my best to give you some directional insight.

We got some great findings from the study. What we learned is that this customer absolutely is very in tune with fashion. She's extremely knowledge about it and, as such, she's very open to where she finds it. So she is somebody with a lot of different stores and formats. She knows what to find at a good value, and she's quite savvy in that regard.

And so as a result of this study, we strongly feel that we need to treat this customer with respect. She is very special, she's savvy, she's well informed, and it would be a mistake for us to just offer her anything and assume she will like that or select from that. We need to be very focused and offer her something that will attract her, we need to have what she wants.

With respect to wear to work, for sure she is finding that at some other places, but I think we have an opportunity to offer it to her in a differential way by giving her the fashion she wants, by increasing the versatility of what she would buy from us and allowing her to wear things day into night, and also doing it for her in a way that works for her budget and her value considerations.

And so I think that's where we are. If you have a follow up, I'm happy to answer it, but I really don't want to go into too many more details, just for obvious competitive reasons.

Betty Chen - Wedbush Morgan Securities Inc.

And then I guess as a follow up, you know when we think about merchandising and sourcing, how are we feeling - we're hearing a lot that, you know, product cost pressures that were once, I think, a big issue, we're not really hearing that as much anymore. Can you comment on that a little bit and whether it's possible for us to maybe see more favorable product costs starting in fiscal 2009?

Jennifer C. Salopek

I think that productivity that we're suggesting is possible for the company is that we have, as we mentioned, had sort of a staid approach to buying. We as a company have not really taken advantage of some of the more progressive approaches that are available to us. And so while we, like other retailers, absolutely face the mounting cost pressures of acquiring merchandise from around the world, but we have not actually put into place measures that would allow us to source it more competitively, to do it in a way that is differentially beneficial to the company and in a way that flows but gives us the opportunity for full price sell through.

Right now our turn is something that will offer us significant advantage. Our retail turn right now is about 4.4. We believe strongly that the company's turn should be far upward of that. We have a huge opportunity there, and we believe that we will drive margin productivity directly to the bottom line, still considering the increased cost, but we will be doing it in a more strategic and more effective way.

Operator

Your next question comes from Elizabeth Pierce - Roth Capital Partners.

Elizabeth Pierce - Roth Capital Partners

Jennifer or Len, I was curious. In recent store checks I've noticed an improvement, what I would say, in terms of merchandise presentation and face out, showing more outfits. And I presume that, given what you talked about and you've articulated, you're going to continue to look for ways to create that excitement to inspire her to step up.

Jennifer C. Salopek

Absolutely, Liz. Thanks for noticing. We've been working on that. We are [break in audio] different ways to achieve that and what she will respond to in the best way and that is absolutely our focus going forward.

Elizabeth Pierce - Roth Capital Partners

And then I know that you did a limited testing of brands during the quarter and I actually got disconnected from the call, I don't know if you touched on that, if that's sort of the go forward strategy, so I'm sorry if you're repeating yourself.

Jennifer C. Salopek

Oh, no problem at all. I actually did mention on the call that we are evaluating the use of brands within the assortment. That's something we're quite excited about. We haven't really experimented to a great extent as of late. We have been working on the assortment to a limited extent, trying to really focus on, I think style would be the right way to say it. And we've been experimenting with some new resources.

But I think what you'll see from us, probably closer to back-to-school next year and a little bit in spring '09 will be more of a concerted effort in that regard.

Elizabeth Pierce - Roth Capital Partners

And I'm curious on some of those branded denim, I mean, the price points seemed a little bit higher than what I think what the customer would think is normally part of Charlotte Russe's heritage. Was that just to kind of experiment to see what kind of sticking you would get from it if she responded?

Jennifer C. Salopek

Yes, it's a really good question. In truth, what our research has shown and what we strategically wanted to evaluate was our whole approach to pricing strategy. And so while we absolutely need to offer value, we have found that we were doing that at the expense of fashion and quality in some of the product categories.

And so in denim our customer wears premium denim, the real thing. She likes it. It's her bottom. And we are trying to explore how we can get a share of that wallet. This was the first step in that regard. We are continuing to explore it, and I would say it's an evolving strategy for the business.

At the same time, it's important to note that our Refuge brand has a great following. We have that customer in our store, she likes it, the price is right for her, and she's probably an aspirational premium denim shopper. So what we want to do is come up with the assortment that allows us to get a greater share of wallet from perhaps a slightly more fashion forward, slightly higher spend customer while maintaining our relationship with the more value-oriented customer.

Elizabeth Pierce - Roth Capital Partners

And then what about on the sourcing side in terms of - and again, I'm sorry if you mentioned this  in terms of I know a year or so, two years ago, talking about shifting some of that offshore. Is that just basically on hold because you have obviously so many other initiatives?

Jennifer C. Salopek

Actually, no. That's part of our integrated approach to the merchandise assortment. The company has been exploring that and has been generally increasing its offshore sourcing.

I think what we have the opportunity to do now with the experience of John and Emilia is to really be sophisticated in that way and achieve differential product, do it in a way that's timely, still improve our turn, and absolutely get the benefit of the vertically integrated margin.

Operator

Your next question comes from Stuart A. Quan - Zander Capital.

Stuart A. Quan - Zander Capital

My question was regarding the proposal from KarpReilly. Were you folks made aware of their desire to buy the company before this release came out?

Jennifer C. Salopek

We're not prepared to comment other than what we've already said in the press release, Stuart. As I mentioned previously, the Board is in receipt of their expression of interest and we are carefully reviewing it and evaluating it.

Stuart A. Quan - Zander Capital

And that was just received today?

Jennifer C. Salopek

As I said, we are in receipt of their proposal and we are carefully reviewing and evaluating it.

Operator

Your next question comes from Dana Telsey - Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Can you talk a little bit about the performance of your remodeled stores versus the core base, what you're seeing there and plans for next year in terms of CapEx spending and the allocation to that?

And then also any update on the POS systems and the impact that's having?

Leonard H. Mogil

As to the remodels, one of the things we're taking a close at is at their performance. They have not performed as well as was originally thought, and we're reevaluating. Also the amount that was spent on them, the company previously had the approach of only a total remodel which, as you know, may cost, in fact, more than a new store when you count what you lose in business and the downtime, etc.

We're actually going to be looking at in the current year - we haven't finalized a number, although we've provided capital for remodels and for other store fixtures - we really are going to look at really the ability to do different levels of remodel, because certain stores really don't quality or warrant a full remodel and we're going to look at getting the proper returns and we're going to experiment with different levels of remodel this year.

And also we're putting in other items into our stores in capital that haven't been there, like traffic counters and things of that nature, to give us a better understanding of who's coming through our door and how many. That hasn't been there in the past.

As relates to the POS system, we've rolled it out. We're actually putting in some enhancements such as workflow management and other things related to it. I'd say at this point we've gotten a faster transaction, but really as far as utilizing the system to gather customer information, etc., we have not really utilized it for that yet, and that's one of the things that we feel is a great thing for the future as we want to learn more and more about our customer, Dana.

Operator

Your next question comes from Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

I just quickly wanted to go over, with the management team, are they entirely in place? I mean, are they entirely employed at Charlotte Russe?

Jennifer C. Salopek

Yes.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

And then with Eric Daman, when will his impact on the product start to show up on the floor?

Jennifer C. Salopek

Well, we're going to begin working with him right away in terms of styling and editing what we have and working on the spring season, so I would expect that shortly we'll be able to see some benefit. But as I said before, the most meaningful impact will be back-to-school '09.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

So your lead times are how long right now?

Jennifer C. Salopek

Well, our lead times are not different than what they [break in audio]. I think the lead time we require is just the opportunity for the new team to get in and design their point of view and put into place all of these new strategies that we have discussed today. So I do think that you'll see some of it in spring. As you know, this is an evolutionary process so there are things that we're going to want to experiment and test before we roll it out to all stores. So I think that will be an ongoing process. We're starting right now.

Operator

(Operator Instructions) Your next question comes from Anna Andreeva - J.P. Morgan.

Anna Andreeva - J.P. Morgan

I was actually hoping to circle back to the expense structure. It sounds like '09 there will be more about redeployment of some of the expenses. But given the tough environment out there, would you maybe talk about some buckets where you see opportunity to control expenses better to help cushion your margins? So that's number one.

And also as you continue to work on the strategic review, is there a sales productivity and operating margin goal for this business that you talk about that you could perhaps share with us, just your guidance for the first quarter extrapolated through '09 implies operating margins the lowest levels they've ever been with the company. If you could just comment on that. Thanks.

Leonard H. Mogil

As relates to the expense structure, in the near term we are fully cognizant of the [break in audio] we're operating in, and we're being very mindful of opportunities to save. But the company has not been run on the basis of a very high expense structure. It's more about productivity and we realize in the short term that productivity will be difficult in the economic environment, but we are building for the future.

And I believe, under John and Fred's management, they'll be looking closely for all opportunities which may not have been covered in the past. And I think with their level of expertise and experience, they may find some opportunities that haven't been uncovered in the past.

Additionally, I think, as you noticed, we're significantly reducing our capital expenditures this year, so we're not building up ongoing fixed costs for the future. And I think as we move out of the current economic environment as well as with the changes and the research and the implementation of things that we'll find that the productivity increases on the sales line will more than offset any growth in expenses.

As to goals at this point, I think it's early on. I think we have to give this new management group the ability to assess what they have, what they're going to do, and I believe in the future they will be reporting that to you.

Operator

There are no further questions at this time. I would now like to turn the call back over to Ms. Salopek for any closing remarks.

Jennifer C. Salopek

Thank you, Julianne. Thank you all for your attention today. We very much look forward to introducing our new management team to you and talking about the continued evolution of our strategic initiatives. Thank you.

Operator

Thank you all for participating in today's conference call. You may now disconnect.

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Source: Charlotte Russe Holding, Inc. F4Q08 (Qtr End 9/30/08) Earnings Call Transcript
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