Charlotte Russe Holdings, Inc. F1Q09 (Qtr End 12/27/08) Earnings Call Transcript

Jan.22.09 | About: Charlotte Russe (CHIC)

Charlotte Russe Holdings, Inc. (CHIC) F1Q09 Earnings Call January 21, 2009 5:00 PM ET

Executives

John D. Goodman - Chief Executive Officer & Director

Frederick G. Silny - Chief Financial Officer, Executive Vice President, Treasurer & Corporate Secretary

Emilia Fabricant - President, Chief Merchandising Officer & Director

Analysts

Betty Chen – Wedbush Morgan Securities

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Janet Kloppenberg – JJK Research

Jeffrey Van Sinderen – B. Riley & Co.

Christine Chen – Needham & Company

Samantha Panella – Raymond James & Associates

Robin Murchison – SunTrust Robinson Humphrey

Stacey Pak – SP Research

Operator

Welcome to the Charlotte Russe first quarter 2009 conference call. With us on today’s call are John Goodman, Chief Executive Officer; Emilia Fabricant, President and Chief Merchandising Officer and Fred Silny, Chief Financial Officer.

Certain statements made on this conference call including, without limitation statements addressing the beliefs, plans, objectives, estimates or expectations of Charlotte Russe Holding or future results of 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 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, its 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 or 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 earnings press release issued earlier today. The earnings 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 Mr. John Goodman.

John D. Goodman

Thank you for joining us today. Emilia, Fred and I are pleased to be able to talk to you today. I’ll begin with a review of our findings during our first 60 days of the company followed by a discussion of our strategic plans and specific actions we intend to implement in 2009. Fred will then take you through the financial and Emilia will conclude with a discussion about brand, product and merchandising.

Before we begin the formal remarks I would like to note that we issued a press release earlier today announcing that the Board of Directors is engaged in a process to evaluate strategic alternatives including a possible sale of the company. As we indicated in the release no time table has been set for completion of the review and we will not be making any further comment or answer any questions on this topic until the review is complete.

We appreciate your understanding on this. As a result of this development we have cancelled our Analyst and Investor Day which was scheduled to take place next Wednesday the 28th in New York. As most of you know our Board of Directors recently conducted an in depth review of all aspects of the business in order to develop a clear and compelling strategy to increase sales and profitability and drive improved returns for our shareholders.

That work has provided a roadmap for our leadership team and clearly demonstrates the substantial opportunity that exists here. When I look at the competitive landscape, the target customer, the product, the real estate and the capabilities we have within the organization I see great deal of runway for building the brand to its fullest potential.

The business is a strong cash flow generator providing us with the financial resources to achieve our objectives. At quarter end we had $55 million of cash and no debt. We are well aware of the difficult conditions we’re operating under and we know our task will not be easy. Our first quarter was very disappointing. While this is primarily due to the difficult selling environment it also reflects our own over assortment issues which both Emilia and I will address later in the call.

We were encouraged by our performance in October and November but sales trends deteriorated significantly in the final month of the quarter leading to a substantial build up of inventory in December. In order to enter January in an appropriate inventory position it was necessary to take significant markdowns throughout the month of December. We closed the first quarter with comp store inventories down 12.6%.

Looking ahead we firmly believe that when we have better product, present it well, market it effectively and execute in the stores we can drive improvement in this business even in today’s challenging environment. In order to achieve our goals and execute our vision everyone at all levels must be accountable.

During my first 60 days I’ve been intently focused on gaining a deep understanding of the company’s strengths, identifying issues and opportunities, finding solutions and executing quickly. I’ve been conducting meetings at all levels of the organization. This includes merchant meetings and product reviews as well as extensive discussions on inventory productivity, operational capabilities and processes.

I spent a lot of time in the field visiting stores across the country in order to see the brand as the customer sees it. I’ve also met with key partners outside the business including suppliers and landlords. The entire senior management team has been a very important part of this process. I’ve grouped the findings from my 60 day review into five categories.

Number one, corporate culture, number two, brand positioning, number three, product and marketing, number four, inventory productivity and number five, real estate. First corporate culture, I’m extremely encouraged by the talent we have across all levels of the organization. I found that we are good at tactical execution but lack the longer term strategic perspective.

Our new leadership team has developed a well defined vision that connects all aspects of the business from brand positioning, product and marketing to buying, planning and allocation. I am pleased to tell you that the new team is working extremely well together. We’re enthusiastic about the opportunities we see for the business and we’re already working to generate improvements.

As I noted earlier we’re driving a culture of accountability that will be critical to our success in this difficult retail environment. Next I will talk about brand positioning. In many of our internal and external meeting we asked the question, what does the Charlotte Russe brand mean to you? The research shows that the Charlotte name resonates with our target customer but we have work to do on further defining the brand.

As the company talked about on the last earnings call an extensive consumer research study was conducted by consulting firm Maricon in 2008. That research tells us we have a meaningful opportunity to improve our brand image and enhance our fashion credibility. We will do this by strengthening the emotional connection we have with our customer and letting her know that we know who she is, what she likes and what she needs.

One of the most effective ways we can accomplish this objective is with compelling fashion right product at a great perceived value to our customer. In the past the company focused primarily on delivering value to our customers and didn’t necessarily emphasize a fashionable, well defined point of view.

Our merchandising spoke more to the casual aspects of her lifestyle. We didn’t present wear to work and dressy casual in a compelling way particularly for the older end of our 16 to 29 target age range. I believe these factors have cost us market share and represent a significant opportunity. When our fall deliveries arrive in stores this summer you will see product that not only provides value but is also trend right, well styled and equally important, well edited.

In the past we were over assorted and had too much product in our stores. Today we are fostering a singular merchandising vision that is supported by better assortment planning, more efficient buying and shorter delivery flows. We believe these actions will translate into a more compelling, cohesive presentation on the selling floor and an enhanced experience for our customer.

Our band and product development initiatives will be supported by compelling visual representation and aspirational marketing campaigns. In fact this is an area that has been underutilized. Going forward marketing will play an important role in communicating our refined brand positioning and fashion perspective. We will leverage our marketing partnerships with stylist Eric Daman and brand ambassador Susie Castillo.

Eric is renowned for his work as fashion director for the hit TV series Gossip Girl and his styling efforts on Sex and the City. He has a terrific fashion sense and he understands and respects the Charlotte customer. Susie is an actress, accomplished author, former MTV VJ and a former Miss USA. She will be the face of the company serving as a spokesperson appearing in marketing and advertising campaigns and playing a key role at promotional events.

As we elevate our standards to meet the needs of our fashion savvy customer we not only have to be trend right, quality right and price right our marketing must reflect these key [inaudible]. The fourth category is inventory productivity. We’re implementing new planning, allocation and pricing optimization tools that will allow us to buy tighter, turn faster and ultimately drive stronger margins.

We have changed the way we manage our delivery flows shortening deliveries from eight weeks to six a timeframe that is much more reflective of how a fast fashion business should operate. At same time we are adjusting our markdown strategy to allow us to keep collections together on the selling floor and move through trends more quickly. Later in the call Emilia will provide additional detail on these initiatives.

We’re also substantially reducing receipts. We believe this business should operate with leaner inventories enabling us to deliver the well edited fashionable point of view that our customer demands while also improving profitability. Next I’ll discuss the opportunity in real estate productivity. We believe we have the ability to improve sales per square foot through the following initiatives.

Tailoring our new store size and format to a smaller footprint of approximately 5,500 square feet taking advantage of opportunistic deals at A-mall locations, offering more compelling products and achieving stronger sell throughs, implementing a more effective planning and allocation process and merchandising that makes our stores easy to shop.

We also believe we have an opportunity to improve and grow our outlet business. Currently we have 47 outlet locations. We’re putting together a plan to build a full scale business that caters to the demographics of the outlet customer and incorporates appropriate strategies for product, pricing and promotion. There is clearly potential to make this business more productive.

The initiatives I’ve just discussed and those you will hear about from Emilia are designed to begin to bear fruit this spring and are expected to have a more meaningful impact beginning in the fall. Today we are operating conservatively, cutting costs where possible. We have taken actions to rationalize headcount and restructure reporting relationships in order to drive a more entrepreneurial less bureaucratic workplace environment.

As you will hear from Fred we have also revised our new store openings and capital spending plans for this year. Operational excellence will remain a top priority as we focus on driving improvements throughout the business from product and merchandising to supply chain and store level execution. I want to assure you that the management team is committed to building shareholder value and taking Charlotte Russe to its full potential as soon as possible.

Thank you for your time today. Now I’d like to introduce our Chief Financial Officer, Fred Silny.

Frederick G. Silny

I’m happy to be part of the team here and looking forward to working with all of you going forward. Total revenues in the first quarter increased slightly to $240.7 million. Comp sales of negative 9.1% were at the weaker end of our anticipated range and higher than expected markdown activity drove non-GAAP earnings to a loss of $0.07 per diluted share.

In the first quarter we incurred a charge of $2.2 million for expenses related to the recent management transitions. In my discussion today I’ll be referring to non-GAAP financials which exclude these costs. A reconciliation of these non-GAAP financials to GAAP numbers is detailed in our earnings release.

Looking at comp store transaction metrics for the quarter average unit retail was down 8.9% to $10.23. Comp store transactions were down 1.3% and units per transaction were up 0.9% to $2.81. By geographic region conditions were most challenging in the Southeast and West. As traffic and sales trends worsened in the month of December we experienced softness across all regions of the country.

First quarter gross profit was down 25.5% to $50.1 million and gross margin declined 740 basis points to 20.8%. The decline was primarily driven by two factors, first product gross margin was down 490 basis points. This decline was due to the level of markdowns required to end the quarter in an appropriate inventory position.

Second rented occupancy expense deleveraged by 240 basis points. Non-GAAP SG&A expenses came in at $52.7 million or 21.9% of sales up 300 basis points from last year. That reflects 160 basis points of store payroll deleverage. Another 110 basis points is related to other store expenses such as seasonal supplies as well as higher corporate overhead.

First quarter non-GAAP operating loss came in at $2.5 million which compares to operating income of $23.1 million in the year ago period. Interest income declined substantially to $157,000 versus approximately $1 million a year ago primarily due to lower cash balances and lower interest rates. Non-GAAP net loss for the period was $1.5 million or $0.07 per diluted share compared to net income of $14 million or $0.56 per diluted share in the first quarter of 2008.

Turning to the balance sheet the company remains in strong financial condition. As of December 27th, 2008 we had $55 million of cash and no debt. The business continues to generate strong cash flow which will readily fund our working capital needs and planned capital expenditures in fiscal 2009. During the first quarter we generated cash flow from operations of $13.8 million.

In addition we have a $30 million revolver which is expandable to $40 million. At the end of the period we had $8.5 million in outstanding letters of credit and no borrowings. First quarter depreciation was $11.2 million. Capital expenditures for the period totaled $4.3 million. Of that amount $2.5 million was deployed to new store openings and approximately $1.8 million to corporate IT and other.

Since we arrived in mid-November I have been working closely with the rest of management and the finance team to take a hard look at the budget. For fiscal 2009 we have pared back capital spending plans from $35 million to $30 million. Of that amount $17.6 million will be used for new stores, $5.7 million for remodels and other related capital items and $6.7 million for corporate, IT and other.

As John mentioned we made some decisions regarding the size and structure of our organization. We are also carefully managing expenses, making reductions in areas such as store payroll, supplies, travel, consultants and recruiting. We anticipate that these actions will generate approximately $3 million in savings through the balance of fiscal 2009.

In concert with our reduced capital expenditures we have taken down our new store opening plans to 20 locations for fiscal 2009. We opened eight stores during the first quarter bringing our total square footage to 3,506,000 as of December 27th, 2008.

There are a number of strategic initiatives and process changes under way that we expect will positively impact the business beginning in earnest in March and then building throughout the year and having a more meaningful impact in the second half. Based on the timing of these actions as well as the traditional seasonality of our model and the shift of Easter into our third quarter we expect business to remain challenging in the second quarter.

We anticipate that comp store sales will be in the negative mid to high single digits and expect to report a non-GAAP diluted loss per share in the range of $0.10 to $0.20. We also expect to end the second quarter with comp store inventories down in the low to mid teens reflecting the strategic decision to operate with leaner inventories going forward.

We realize that in the current economic environment our task at Charlotte Russe will be challenging. We remain absolutely to building shareholder value as quickly as possible. Now I’ll turn things over to Emilia Fabricant, President and Chief Merchandising Officer.

Emilia Fabricant

I would also like to express my excitement to be here and look forward to getting to know all of you. Since arriving in mid-November I have learned a great deal about our brand, our business processes and our company culture. Before I share my insights let me tell you that our merchandising organization is focused on four major objectives.

Evolving and refining the Charlotte Russe brand to broaden our appeal, dramatically improving our merchandising assortment in terms of quality, style, fit and a point of view, developing impactful marketing that emphasizes our fashion perspective and lastly, creating a boutique store environment that is easy to shop and provides and engaging customer experience.

As we make progress in these areas we believe we can elevate the Charlotte brand to a level that creates value for our customers, for our associates and for our shareholders. As you’ve heard from John from a product perspective we were over assorted in the first quarter. We had some great trends and strong sell throughs in key categories but there was simply too much product and too much of the same product.

This stems from some fundamental issues that we have already addressed in our first 60 days. First our buying, planning and visual teams have valuable expertise in their respective area but they were not communicating regularly or working together as a unified group. This resulted in product offerings that were not cohesive and streamlined on the selling floor. We are now fostering a singular strategy so that we can act as one team with one vision and one voice.

This will bridge the disconnect among our product offerings and make the Charlotte point of view clear and understandable to our customers. Second, historically we have allowed an overflow of goods and repeated styles without modifying them for future trends. There are a number of initiatives being implemented to address this. We have shortened our delivery flows by trend beginning with the spring selling season and we’re now delivering by floor set.

We’ll be operating as a fast fashion business should. Receipt flow will be timed to enable the achievement of an integrated fashion point of view. The presentation to the customer will be cohesive. Goods will be merchandised and marketed as collections and outfits and each trend will have a predetermined life cycle on the selling floor. We’re implementing new assortment planning tools that will allow us to tailor assortments to both a regional and individual store focus.

We’re testing now and expect to be fully operational by the end of March. All stores will receive new handheld technology in March that will allow for greater precision and profitability in our markdown strategy. These actions will fundamentally change the way we operate. We’ll be buying tighter, we’ll be assuming a more strategic markdown posture and cadence and we’ll be moving through goods more quickly which should result in improved gross margins.

I also found that we have been underestimating the Charlotte customer. She is educated about what’s in style and loves fashion and therefore we have to raise our standards to offer her products that are more trend right and quality right. Our goal is to interpret trends for her and then more effectively communicate the Charlotte point of view to the customer. To that end we will be bringing some design in house and working more closely with our vendors.

We will elevate our level of style and design while maintaining our existing pricing strategy. One exception will be our New Peoples Liberation denim offering. We’re very excited about this partnership which affords us the opportunity to meet our customers’ desire for premium branded denim.

We know our customer wants fashion and we know that value is also important but not at the expense of having the right look. Our research tells us that she is buying premium denim brands and knows how to mix them with other items that allow her to achieve a trend right look on a budget. Beginning this fall Charlotte Russe will be the exclusive distributor of Peoples Liberation products which in addition to denim includes knit tops, knit bottoms, hoodies and outerwear.

The denim will range from $88 to $98 while price points on all other product offerings will be comparable to the Charlotte’s current value pricing. The new line will be showcased as a collection and supported by new marketing and merchandising initiatives in our stores. In year one sales of these products are expected to be approximately $30 million at retail. As we evolve the Charlotte brand marketing should become one of our core strengths.

We need to communicate a distinct fashion perspective that will get new customers into the stores while at the same time building greater excitement and awareness among our existing shoppers. We are very enthusiastic about Eric Daman’s involvement in helping us convey our brand positioning to the customer. Eric’s styling expertise and fashion sense bring a point of view that resonates with the Charlotte customer.

You will be able to see his influence with our new spring campaign. Eric along with Susie Castillo will also be assisting us with marketing strategies designed to drive store traffic. This will include fashion [shows], in store events and social events that involve customer participation. Our eCommerce business can also be a powerful tool in this regard.

We will be communicating more regularly with our customers and providing them with more opportunities to enjoy their shopping experience. In addition to promotional campaigns we will be creating fun social networking ideas such as our Shop Together program. In many cases our website will be the first introduction to the Charlotte customer. eCommerce is still a very young business for us and has the opportunity to grow into an important contributor.

The final area I would like to cover is store environment. One of our primary goals is to make Charlotte Russe a destination. I’ve described to you the process changes and best practices we’re implementing with respect to brand positioning, product development, planning and allocation. All of these initiatives will combine to help us deliver a more compelling presentation in our stores.

They will be easier to shop and offer a boutique environment that is comfortable and fun. We can accomplish this by reconfiguring fixtures, creating more outfitting, building distinctive in store shops and utilizing aspirational visuals. We will also be building on our existing service proposition fostering more interaction between customers and sales associates.

Looking at the spring selling season I’m encouraged about the way merchandise will be presented on the selling floor. We have been able to affect important process changes that will be evident in stores beginning in March. As we go forward the customer will increasingly see a more understandable direction in trend.

Looking ahead to fall we expect to see a complete transformation in terms of process, product and marketing, store presentation and the Charlotte point of view. Although we’re operating in a difficult environment I believe we are appropriately focused on the essentials of our business. As we execute on our strategic plan we should be able to complete more effectively and capture a greater share of our customers’ spend.

Now I’ll ask the Operator to open the call to questions.

Question-And-Answer Session

Operator

(Operator Instructions) One moment please for your first question. Your first question is from Betty Chen – Wedbush Morgan Securities.

Betty Chen – Wedbush Morgan Securities

John, I was wondering if you can walk us through just the rationale by the Board and the senior management on the timing of evaluating strategic alternatives now that we’ve just had a new team come in and a very thorough strategic review? If you can walk us through some of the thinking there that would be helpful? Then I have a couple of quick follow ups.

John D. Goodman

Betty, as we first stated earlier in the call, we’re not going to comment today on the strategic initiatives that we’re looking to do. We won’t be commenting on that process.

Betty Chen – Wedbush Morgan Securities

Since we’re going to be starting to see I think some of the changes that you’ve outlined and I think Emilia also outlined especially on the merchandising and marketing aspects, should we think about the expected guidance in terms of comp trends? Is that primarily because of the macro environment or do you think that there could just be a lag effect in some of these changes materializing in terms of sales and earnings?

John D. Goodman

I think it’s a combination of both. I certainly think the macro environment is difficult out there. Also come of the changes are taking longer than others but as you heard today from Emilia, Fred and myself, we’re making these changes as quickly as we possibly can. Macro is certainly the primary focus for that. We believe that we will see better comps later in this year.

Betty Chen – Wedbush Morgan Securities

Just to clarify, the comments regarding shorter lead times and a much leaner receipt, is that effective starting for the second quarter or really the Q3 and beyond time frame?

Emilia Fabricant

We’ve always had the lead time in place, it’s just a matter of turning the inventory faster and really controlling our inventory position. That’s effective immediately.

Betty Chen – Wedbush Morgan Securities

So then when I think Fred had outlined expectations for inventory to be down low teens to mid teens by the end of the second quarter, that was part of the buying plans or does that factor in higher markdown cadence to come out at that kind of inventory position?

Frederick G. Silny

We took a whole look at our inventory position and that’s what we’ve been effecting since we got here, really looking at our inventory composition, looking at our turns, wanting to improve our turns, improve our margins going forward and certainly our comp performance. As we looked at our inventory that was the first key component that we effected. You’re really seeing that starting in February, March, more March time frame.

Betty Chen – Wedbush Morgan Securities

Fred, what is the goal in terms of inventory turns per year that we can look for? I know historically Charlotte had been one of the fastest already in the state, is there a goal that management has set out to reach whether it’s this year or in upcoming years?

Frederick G. Silny

If you look back at 2008 our inventory turns as measured to our GAAP financials, was about 11.5 times and as we move forward and because of the initiatives that John and Emilia outlined earlier, we really anticipate an improvement in turns. We haven’t enunciated a goal at this time but you should definitely see improvement over the 11.5 times.

Betty Chen – Wedbush Morgan Securities

Lastly, in regard to the partnership with Peoples Liberation, how should we think about the structure of that kind of deal? Is it a royalty that’s paid to Peoples Liberation so we can gain some perspective on the merchandise margins related to that initiative?

Emilia Fabricant

We don’t comment on the structure of the deal at this time.

Betty Chen – Wedbush Morgan Securities

Okay, but Peoples Liberation team is designing the product?

Emilia Fabricant

Yes, they are.

Operator

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

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Fred, a couple questions on the numbers, as we look at the SG&A can you help us out on the second quarter looking at dollar gross? It looks like dollar gross in Q1 x the charges was about 17%. Is that the type of dollar gross run rate we should be looking at go forward? Secondarily, could you talk about the shift between Q2 and Q3? Can you give us any color on the EPS impact and/or the comps impact?

Frederick G. Silny

Let me try and answer your second question first. We mentioned that there is an Easter shift from the second to the third quarter and we think that the effect of that is about two to three percentage points of comp. With respect to your first question about SG&A, we mentioned that we’ve been going after SG&A savings and so that will be running at about $1 million a quarter for the rest of the year, a little bit less this quarter and then a smidge more in the following two quarters.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

So outside of that $1 million it would be safe to assume that it would be a similar type dollar growth if we take out that $1 million? Is that what you’re trying to say?

Frederick G. Silny

As we move forward the team is committed to controlling expenses here. We’re going to be looking for future savings, that’s definitely on our agenda, but at this time we’ve identified about $3 million in savings for the rest of the year.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

In the guidance you have 20 locations that are being opened, how many closures do you have and if you can share with us how many stores, if any, are not profitable and how many are four wall cash negative?

Frederick G. Silny

With respect to profitability, for a chain our size we’re very fortunate. We have very few stores that are cash flow negative. With respect to closures, there’s a possibility that there will be some as we move through the year but we don’t have a planned number to discuss with you at this point.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

My final question, really it’s one question. Can you help us out, there’s two things that are happing here in the time that I’ve watched the company and followed the company, one is this premium pricing strategy and the second is marketing. Historically Charlotte Russe really hasn’t relied a lot on marketing, so obviously that expense is going to come into the overall business model.

How do you look at that? How much should we be thinking about the increase in marketing spend? Then you’re going to have a grouping, $30 million worth at retail of this premium denim, I think Emilia said, then everything around it is going to be still at those $30 average transaction value type price points, I don’t quite understand the philosophy or the strategy there.

Emilia Fabricant

Let me try to clarify it, first of all Peoples Liberation is not all premium denim. The whole collection is less than 3% of our total retail sales. The other categories in the collection which include knit tops, hoodies, outerwear are all within our pricing strategy as it exists today. It isn’t a higher price point strategy. I would more define it as an actually higher branding strategy that fits in what our customer wants and is looking for.

We know by research she wants premium denim and we’re able to offer it through the Peoples Liberation. She knows how to dress with the premium denim in the existing price range and offering a complete look. Also it’s about the exploration of fashion for our customer which does not involve significant risk. I’d like to repeat, that it’s less than 3% of our total retail sales.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Is that $30 million at retail all of the Peoples Liberation including the tops and bottoms?

Emilia Fabricant

The whole collection, not denim. Yes. And the $88 to $98 price point exists in the store today, it’s at the higher end of our range but it does exist in the store today.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

On the marketing question?

Emilia Fabricant

We don’t disclose separate elements of our expenses, but overall marketing will play an important role to communicate our refined brand positioning and the new fashion perspective going forward. We believe that this is an opportunity beyond the traditional in store marketing that we’ve done in the past and we have multi-level of strategy going in there that some of which doesn’t actually correlate with expense.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

How old is Susie Castillo?

Emilia Fabricant

26, I believe. I can get back to you on that.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Will she be the only face on this print and marketing campaign?

Emilia Fabricant

No.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

So she’s one of them, she’s probably the primary focus?

Emilia Fabricant

That hasn’t been determined.

Operator

Your next question is from Janet Kloppenberg – JJK Research.

Janet Kloppenberg – JJK Research

John, I was wondering if you could talk a little bit about the expansion program? I was wondering if you and your team, if this was your decision to open 20 stores? A lot of people are pausing right now on store expansion and given the level of magnitude of your merchandising and marketing restructuring, I’m just wondering if this is a good time to be opening 20 stores?

John D. Goodman

We’re actually opening less than half as many stores as we did last year. The leases on the fiscal 09 store openings were signed before we got here. That’s that part of our strategy to preserve cash, we really looked at how many stores we had in the pipeline. We had 25 stores in the pipeline so we trimmed them down to 20 at this point in time.

The leases that you see we’ve already opened up eight stores in the first quarter so some of those stores were already spoken for and the balance as I said we’ve taken some down.

Janet Kloppenberg – JJK Research

When it comes time to be thinking about leases for next year, is that something you’ll be evaluating or do you think this level is appropriate going forward?

John D. Goodman

We’re evaluating it. I think what’s really important as I’ve said earlier that we see there is an outlet strategy for real estate and there’s also looking at our opportunities in A-malls because we will be going down to a smaller footprint in our new stores, around 5,500 square feet on average. We’re also really partnering with our landlords, looking for advantageous locations, working with them on rent concessions to really drive additional profitability and growth for us this year and for years out.

Janet Kloppenberg – JJK Research

The average size of these new stores will be similar to the existing prototype?

John D. Goodman

The average store size today is roughly about 7,100 square feet. One of our goals is to improve dollars per square foot and by doing that, we believe a 5,500 square foot footprint will help us to achieve those goals to raise our dollars per square foot. We think our stores today are oversized in certain locations as well as a backroom that is larger than it needs to be.

Janet Kloppenberg – JJK Research

This question might be for Fred, given what’s going on in the malls today, are the rent structures, the terms that you’re looking at for the additional new stores to be opened, are they more advantageous than you’ve seen in some time?

Frederick G. Silny

We are seeing some good negotiation with our landlords. We believe that this is an opportune time because we do have cash, we do not have a lot of debt that we can really partner with our landlords in going forward for new locations as well as existing locations.

Janet Kloppenberg – JJK Research

I wanted to ask a couple questions on the merchandising front, I imagine that these $80 and $90 jeans will not be the only jeans that you’ll have in the store, you’ll still have your value priced denim. Is that a fair statement?

Emilia Fabricant

That is correct.

Janet Kloppenberg – JJK Research

You’ll just have less of the moderate priced denim?

Emilia Fabricant

No, that’s not correct. Right now we’ve been testing different price points in the store and we believe that with the premium brand connected to the denim that it will actually fill a need that our customer’s been looking for. It will be above and beyond the business that we have. Refuge is still a big part of our business, it’s executing quite nicely and it will continue to grow that business.

Janet Kloppenberg – JJK Research

Have you done any testing of the higher priced denim?

Emilia Fabricant

Not at the premium branding level.

Janet Kloppenberg – JJK Research

Will it be rolled out to all stores or will it be sort of baby steps?

Emilia Fabricant

We’ve had that price point in the past and we’ve tested the price points, but not with such a substantial brand name.

Janet Kloppenberg – JJK Research

So it will be rolled out to all stores?

Emilia Fabricant

It will be significantly more in the top 100 stores. It will be a much smaller assortment in the others.

Janet Kloppenberg – JJK Research

I wondered if you could talk a little bit about your plans for a private label product development, if that was part of the program or to increase penetration there or if you were happy with where it was now?

Emilia Fabricant

The one thing I’m ready to comment on on the private label is that we are looking to clarify the Charlotte’s point of view, if we work with our vendors or grow the import department, it’ll be our design proprietary to Charlotte and a directional point of view for this company.

Operator

Your next question is from the line of Jeffrey Van Sinderen – B. Riley & Co.

Jeffrey Van Sinderen – B. Riley & Co.

Fred, I wonder if you could take us through how many leases you have coming up for renewal this year and next year? Then, how you’re going through the process of deciding which stores or how many stores to close out of those?

John D. Goodman

We actually have leases coming due in the normal course of business. As I said earlier we’re working closely with our landlords for rent opportunities and that dialog will continue throughout the year. As we look at better lease deals and our stores as we look going forward in some of our leases, we do see that this is an opportune time to really have good discussions and dialog with our landlords and partner with them for the current business, the leases currently and the go forward business.

Jeffrey Van Sinderen – B. Riley & Co.

But do you know how many coming up this year and how many you have coming up next year for renewal?

John D. Goodman

We’re not going to discuss that on the call today or give a specific number but, as I said in the normal course of business we have leases that come due throughout the years.

Jeffrey Van Sinderen – B. Riley & Co.

Then maybe for Emilia if you could talk a little bit more about I guess the thinking behind making the brand more inspirational elevating the brand and I’m just wondering how else besides the People’s Liberation denim does that happen? I understand you have the People’s Liberation collection but the price points there are roughly the same as they’ve always been for your other similar merchandise.

I guess I’m just trying to get a better understanding how the brand or how the Charlotte Russe brand get’s elevated and what your thinking is behind that? Do you bring in maybe other brands that also have higher price points that are more inspirational? Maybe you guys can just frame that for me a little better.

Emilia Fabricant

Well first of all part of the elevation of the Charlotte brand doesn’t necessarily correlate with an elevation of price. Product assortments will be merchandises, collections, outfits, we’ll be communicating more a complete look to a customer, it’s about her shopping experience that will elevate the brand. We’ll have a greater controlled balance within trends and we’ll be addressing with each customer a more appropriate mix from end use perspective. We will look at other brands as they are appropriate and they fit certain niches that we may need in the store. Does that answer your question?

Jeffrey Van Sinderen – B. Riley & Co.

Sort of, basically what you’re saying then is the only place where you plan to take price points up is on premium denim. Is that correct or you’re not sure because you may look at other brands?

Emilia Fabricant

No, at this point research shows that our customer wants premium denim and buys premium denim so in that instance it does work. In other instances we’re looking at raising the standards for Charlotte, not necessarily the price point. How we deliver the product, how we communicate, we’re going to be working with Eric and Susie in the marketing world to express that change in the branding. Also, within design we will be addressing our look, our trend, our vision for Charlotte with the vendors and the import vendors that we use. So, really coming up with a cohesive merchandising plan that will elevate the entire experience for the customer not just in product.

Jeffrey Van Sinderen – B. Riley & Co.

So you had other things in the store that have been around the $90 or $100 price point but it hasn’t been in premium denim, is that correct?

Emilia Fabricant

It’s been in premium denim, it’s never been associated with such a strong brand name.

Jeffrey Van Sinderen – B. Riley & Co.

And how have you done I guess with other premium denim in not such a strong brand name?

Emilia Fabricant

When the style is right, it sold.

Jeffrey Van Sinderen – B. Riley & Co.

I guess just looking back at this quarter and looking at your SG&A numbers, I guess I’m a little surprised that maybe I guess when Len was in control as CFO why there weren’t early initiatives to cut payroll and cut corporate overhead? Any thoughts on that?

Frederick G. Silny

I don’t understand your question.

Jeffrey Van Sinderen – B. Riley & Co.

I’m just trying to understand, I mean it looks like your SG&A level is fairly high to me. I know you’re taking $3 million out of the SG&A line or out of your expense lines this year, at least so far you’ve identified – so I guess what I’m trying to understand is why that wasn’t done earlier? In other words obviously you’ve been in communication with Len and I’m just trying to understand why payroll wasn’t cut, I think that was one of the things you mentioned where you deleveraged? And, maybe why corporate overhead wasn’t cut earlier? Just maybe the thinking behind that would be helpful?

Frederick G. Silny

You have to understand and John went through his findings after being here 60 days and Emilia talked about what she found and I mentioned I worked with members of management and with the finance team to go through our expense structure. We did identify certain areas where we thought we could save and we did take action and we’re going to realize those savings. As we move forward I believe we’re going to continue to rationalize expenses. As John mentioned we’re trying to be a very efficient and very effective organization and so I think as we move forward you will continue to see cost savings.

Jeffrey Van Sinderen – B. Riley & Co.

Then the other thing that sort of sounded to me maybe different from that was your discussion or Emilia’s discussion about doing more design in house. So, I’m just wondering along those lines are you planning on hiring designers or maybe what the thought process is there? Then maybe, what impact that might have on your expenses?

Emilia Fabricant

It’s included in the expenses and it’s a very small number. It’s more of the way we work with our vendors and we take a proactive approach from the beginning of the season with the Charlotte Russe vision in place that will address that change versus a cost.

Operator

Your next question comes from Christine Chen – Needham & Company.

Christine Chen – Needham & Company

I wanted to clarify, it sounds like to me that you’re trying to make the merchandise assortment more edited so can you share with us maybe the percentage reduction that you anticipate in SKU count? Then, I have some follow up questions on People’s Liberation.

Emilia Fabricant

It’s more of a controlled inventory and the time of delivery. In the past we delivered for approximately eight weeks but a consistent delivery per trend, we’re now giving the trend a lifecycle. We’ll be in the trend and then we’ll be out of it and it’s more of a process in place than not having one in place. It’s more a controlled element of the trends and we’re expecting probably a double digit decline in SKU count.

Christine Chen – Needham & Company

Then with respect to People’s Liberation will it only be sold in your stores so it won’t be sold in the department stores anymore or on their website?

Emilia Fabricant

Correct.

Christine Chen – Needham & Company

So their price points are actually coming down to be more in line with your price points?

Emilia Fabricant

Correct.

Christine Chen – Needham & Company

Then are you concerned that maybe if the demand for premium denim is so great that it will cannibalize your Refuge brand which I’m assuming is higher margin? I don’t know if that’s actually accurate?

Emilia Fabricant

It’s actually not accurate. But no, I’m not concerned because I do believe it’s a different end use and a different customer.

Christine Chen – Needham & Company

Then with respect to Eric his role in the marketing assisting with styling, will the customer base know that he’s associated with Gossip Girl and will there actually be tie ins to Gossip Girl?

Emilia Fabricant

No, we are actually working with Eric Damon on his styling expertise and his input with this company.

Christine Chen – Needham & Company

Then with respect to A versus B mall locations is there a discrepancy in performance?

Frederick G. Silny

A discrepancy in performance defined please?

Christine Chen – Needham & Company

I know geographically it was consistent but in A malls versus B malls are the A malls performing better?

John D. Goodman

I think as we look at our performance across the fleets, depending on certain locations there are A malls that are performing better than our Bs and our Cs and vice versa. I think what we’re doing as we rationalize our fleet this year is to really understand each of the A, B and C malls as locations and then look at the opportunities going forward in those malls.

Operator

Your next question comes from Samantha Panella – Raymond James & Associates.

Samantha Panella – Raymond James & Associates

A couple of questions, I guess circling back to SG&A again I just want to understand a few things. Was there anything else unusual other than the $2.2 million that was in SG&A in the first quarter because it did seem high relative to your sales?

Frederick G. Silny

There was really no extraordinary item in SG&A in quarter. If I could say, we did have some, this is a small amount but we did have some consulting expense that we won’t have going forward.

Samantha Panella – Raymond James & Associates

Okay, that actually leads me in to my next question regarding the $3 million in savings, I know you haven’t disclosed what the consulting expense was but would that $3 million in savings be on top of the assumed savings you would get from the absence of consulting costs?

Frederick G. Silny

That’s correct.

Samantha Panella – Raymond James & Associates

Then also just going back to the People’s Liberation initiative, did you test that in terms of the brand recognition with your customer base in these studies that you’ve done?

Emilia Fabricant

It was a general premium denim, it was several different brands?

Samantha Panella – Raymond James & Associates

But People’s Lib was one of the brands included?

Emilia Fabricant

To be considered part of that price point and be considered a premium denim brand.

Samantha Panella – Raymond James & Associates

Then just one last question regarding remodels just going back to your last call it looks like the amount of cap ex you’re spending on remodels is down significantly so I’m just wondering is that less remodels or have you brought the cost per remodel down?

John D. Goodman

It is a combination of both. It is less remodels that we’re going to do but we understand there are certain stores that are going to need to be from carpet and what not. But, in terms of remodels we are going to be doing two remodels this year.

Operator

Your next question comes from Robin Murchison – SunTrust Robinson Humphrey.

Robin Murchison – SunTrust Robinson Humphrey

A couple of questions, regarding the store size and the 5,500 square feet, we should assume over time as the leases come up that the fleet will downsize or converge to this number?

John D. Goodman

I wouldn’t make that assumption. I think it’s on a case-by-case basis. As leases come up and certainly some of our stores as you hear some of the initiatives we believe will be fine at 7,000 square feet. But, we really are looking at our locations and going forward just say if we couldn’t get in a mall before because it was 7,000 square feet and it had to be 180 feet deep and 110 feet frontage, we’re only looking now and saying this will open up some opportunities for us now going forward in these malls.

Then certainly, in the malls we’re in currently if there’s a great location and we feel like 5,500 feet is worthwhile we’ll have dialog with our landlords as well.

Robin Murchison – SunTrust Robinson Humphrey

Are there any categories that you cut out or is this just optimally utilizing space in a better way?

John D. Goodman

We’re really not going to cut out the categories, I think we’re optimizing the space. We really believe 5,500 square feet will be more productive for us. So, I wouldn’t say that we’re looking at categories, I certainly think some of the things about selling certain categories, some accessories maybe we will look at it but all-in-all the whole Charlotte Russe brand essence or image will be alive and well in the stores.

Robin Murchison – SunTrust Robinson Humphrey

But I guess you could maybe downsize some categories if needed?

John D. Goodman

Absolutely, if we had to but I think as we looked at it right now, as we’re laying out the stores we believe we can fit with our SKU rationalization and remember, I commented earlier that our back rooms were larger than they should be. So, we’re really looking at that as part of the opportunity to pick up.

Robin Murchison – SunTrust Robinson Humphrey

Now, if I recall correctly, the average price point on a top is about $18. Is that right?

Emilia Fabricant

Depends if it’s knit or woven, it depends which kind of top, anywhere from $6 which is our basic, all the way to $36.

Robin Murchison – SunTrust Robinson Humphrey

And will that remain consistent as you get your merchandise repositioned?

Emilia Fabricant

Yes.

Operator

Your final question is from Stacey Pak – SP Research.

Stacey Pak – SP Research

I was just wondering if you could revisit the brand positioning one more time? I apologize but I’m just kind of confused because on the one hand I’m hearing things like premium denim and A malls and you’re spending on marketing and you want to elevate the brand and kind of be more inspirational. Yet, it doesn’t really sound like you intend to raise price points over time except for on that small piece of premium denim.

Can you kind of revisit that? And also, what should the store look like? Are you going to change the look inside the store as well? Then, I have a couple of other questions.

John D. Goodman

I think as you look at how we want to position the brand, we believe as we were over assorted we were cannibalizing our existing product with new product that is coming on the floor. I think as Emilia said and as I said earlier you really couldn’t get a sense of the brand and the product. We have some really strong product but unfortunately, there was a lot of it.

So, for us part of the brand positioning is to clean up the store, improve the shopping experience. We want to raise our out the doors. We believe that our customer, we can sell out and move on to the next trend. It’s really important that as we manage our business, as we manage our inventory, as we manage our SKUs that’s an important part of the brand positioning. We also believe that the product, we need to be able to showcase the great product going forward and that is our intention.

With regards to People’s Liberation it’s still a very small part of our business but as we look at our brands and we look at where we can get paid more for the product that we have we will certainly constantly look at where we can get more for our dollar, where we can raise the out the doors, where we can raise the elements of our products. So, all of that encompassed together is really where the brand positioning is and the market it effectively.

Our marketing has been basically in store collateral. So, how do we get the Charlotte Russe name out to the public? How do we do those things in a way that lets people know what Charlotte is all about?

Stacey Pak – SP Research

But if you’re going to be marketing and going in to more A malls which I thought is what I heard, yet you’re not raising the price, how do you pay for it? Is it just that if you kind of have the store laid out better and marketed in collections as you talked about that you would expect to sell through to improve and therefore the out the door goes up?

John D. Goodman

A doors by definition will have better sell throughs, better products. The other part of this is it’s 5,500 square feet potentially so that we will raise our dollars per square foot where currently we’re in the twos today to the threes as an average. So, as you look at it that’s a huge part of where we need to be and improving the profitability of our stores.

I think as we talked about A malls, it’s really in the context that we weren’t able to get in some of these malls because at 7,000 square feet our model didn’t work in certain A locations. We believe now we have an opportunity with the product, with our margins, with our inventory management to improve our profitability in these A malls, B malls, C malls and forward.

Stacey Pak – SP Research

On the stores you mentioned for ’09, I think you mentioned 20 stores, are those leases, those are all committed and are those in this new smaller footprint?

John D. Goodman

No. The smaller footprint will be potentially in the last two stores we’re looking at this year. But, all the other leases have been committed.

Stacey Pak – SP Research

Then last question, just getting down to the $0.10 to $0.20 would you expect sort of a similar hit to gross margin as you’re getting your inventories down or what should we expect in terms of gross margin in Q2?

Frederick G. Silny

As you know, one of the main drivers of gross margin is markdown activity. Of course, in the past quarter in order to end with an appropriate inventory level we took substantial markdowns. I think as we move through this quarter I think through the work that Emilia has done I think that we are really moving forward with much more appropriate inventory levels and I think any impact on margin would be much less than it’s been in the recent quarters.

Stacey Pak – SP Research

Can you give us any guidance on the gross margin?

Frederick G. Silny

Well, not specific guidance but I think that we’ll move back to a more normal level.

Operator

Ladies and gentlemen this does conclude our question and answer session for today’s conference. I’ll turn the call back over to Mr. Goodman for any closing comments.

John D. Goodman

I’d like to thank everyone for their participation today. We appreciate your time and look forward to talking to you next quarter. Thank you very much. Have a good day.

Operator

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

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