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Cache, Inc. (NASDAQ:CACH)

Q4 2008 Earnings Call Transcript

March 3, 2009 4:30 am ET

Executives

Allison Malkin – Senior Managing Director, ICR Inc.

Tom Reinckens – Chairman, CEO and President

Maggie Feeney – EVP and CFO

Analysts

Margaret Whitfield – Sterne, Agee

Liz Dunn – Thomas Weisel Partners

Liz Pierce – Roth Capital Partners

Chris Kim – JPMorgan

Jeff Van Sinderen – B. Riley & Company

Eric Beder – Brean Murray Carret & Co.

Robin Murchison – SunTrust Robinson Humphrey

Maria Vizuete – Piper Jaffray

Operator

Greetings, and welcome to the Caché, Inc. fourth quarter and fiscal 2008 results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Allison Malkin of ICR. Thank you. You may begin.

Allison Malkin

Thank you. Good afternoon. Today's conference call includes comments concerning Caché's business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call, that are not based on historical facts are subject to risks and uncertainties. Actual results may differ materially.

Additional information concerning a number of factors that could cause actual results to differ materially than the information that will be discussed is available in Caché filings with the SEC, including Caché's report on Form 10-K for the fiscal year ended December 27, 2008.

And now I'd like to turn the call over to Tom Reinckens, Caché's Chairman and CEO.

Tom Reinckens

Thank you, Allison. Good afternoon, and thank you for joining us. Here with me today are Maggie Feeney, our Executive Vice President and Chief Financial Officer; Ashok Gandhi, our Vice President of Finance; and Victor Coster, our Treasurer and Secretary.

For today's call, I will begin by providing an overview of our fourth quarter and fiscal 2008 results, and discuss our priorities for fiscal 2009; then Maggie will review our financial highlights and guidance. Following my closing comments, I will turn the call over to the operator to conduct the question-and-answer portion of the call.

Without a doubt, 2008 was a very challenging year, with our sales and profitability affected by the difficult economy. As conditions worsened throughout 2008, we appropriately implemented actions to align our costs and inventory with our sales trends, and importantly, begin fiscal 2009 with increased financial flexibility, as we believe the economy will remain challenging throughout 2009.

As a result of our actions, we achieved our liquidity goals and expect further improvements in 2009, giving our cost reduction plan. To this end, at year-end, inventory on an average store basis at cost was down 34% from the prior year. Cash and marketable securities totaled $30 million, even as we utilized $15 million in cash to repurchase 1.7 million shares of our common stock during the year. We had positive cash flow from operations, and we identified more than $15 million in cost reductions pretax or approximately $0.72 per diluted share, with these savings expected to benefit us in 2009.

Turning to the income statement for the fiscal year, our net sales decreased 3% to approximately $266 million, and comp store sales decreased 4%, and the company had a net loss per share of $0.53, and included one-time charges of $0.13 per diluted share for store closures; $0.10 per diluted share relating to non-cash impairment charges; and $0.03 per diluted shares relating to management changes. Adjusted to exclude these non-recurring costs, our loss per share was $0.28.

For the fourth quarter, net sales decreased 16% to $65.9 million, and included a comp store sales decline of 17%, and our net loss per share on a GAAP basis for the quarter was approximately $0.42 per share, which included a $0.10 per share diluted non-cash impairment charge, and the revised guidance that we gave on January 8 only reflected an estimated total non-cash impairment charge of $0.03 per diluted share. Excluding these impairment charges, our results were in line with our revised guidance.

While none of us could have predicted the sharp decline in consumer spending we saw in the back half of 2008 – which has obviously continued into 2009 – we have made significant progress towards realigning our business model to return to profitability. Our initiatives include intensification of our daytime sportswear, dresses and coordinated outfits; higher impact marketing and adding value for our consumers. Each of these initiatives are now gaining traction.

First with regard to merchandising. In an effort to increase our market share, we are expanding our daytime sportswear and daytime dress categories, which include our wear to work contour collection and our casual assortments. Performance in these areas are encouraging, and we will continue to make investments going forward. Second, we will continue to focus on our good-better-best pricing strategy. We believe this will open our company up to a new level of business. We now offer better value and are priced competitively with many of our mall peers.

With regard to marketing, we have improved the look and feel of our catalog and mailers, adding coupon offers. We have also intensified our value-orientated in-store messages, utilizing prominent signage to educate our customers about our great styles and affordable pricing. Our enhanced targeted marketing efforts helped to offset some of the sales shortfall that resulted from the significant decline in natural mall traffic during the second half of the year. We also continue to be pleased with our Caché Accents program. To date, we have signed up over 620,000 customers, and expect this initiative to continue to grow customer loyalty for our brand.

In addition, we improved the productivity of our store base through the closure of 14 under performing locations. We remain selective with new store openings, as 13 stores opened during the year. In early 2009, we opened one new store and closed three additional stores, and currently operate 294 locations.

Finally, in an effort to maximize cash flow in this difficult macro environment, we conducted a comprehensive review of our business, and launched cost reduction initiatives across our organization, targeting reductions in both floor operating, and general and administrative expenses. As I mentioned, we expect to generate more than $15 million in savings from our cost reduction moves in fiscal 2009. Elements of the cost reduction plan include, first, lower labor costs through a 10% reduction in home office headcount and a 15% reduction in field level supervision. We were also able to reduce in-store sales floor coverage, utilizing our payroll matrix system to better match store traffic with personnel levels.

Second, a reduction in salaries and bonuses. Our executive committee took a base salary reduction. We also cut field employee bonuses, and aligned our store bonuses to the business that we expect to see in the future. In addition, there were no corporate headquarter bonuses for 2008. Third, lower freight costs. Through our ability to consolidate shipments to our store, we now utilize a warehouse model and a drop-ship model together.

Fourth, we expect to improve our markup, as we manage our supply chain cost and benefits from our warehouse model. And finally, lower rent costs, as we negotiate lower rent payments with our landlord. 28% of our leases either expire, are up for renewal, or have kick-out options through January of 2011. So we are in a very favorable position.

As we begin 2009, we are planning conservatively, keeping inventories tight and maintaining our emphasis on fashion newness. We will provide consumers with more wearable items and outfits, while continuing to offer an assortment for our core Caché fans. Our number one merchandising priority is to expand our customer base, thus increasing our market share and top line performance.

To accomplish this, we are first broadening the number of styles we sell in an effort to continue to drive increased shopping frequency and UPCs. We expect to accomplish this through expansion in our casual styles, including denim and tops, and intensification of daytime dresses, all of which show early positive signs.

At the same time, we are reducing our assortment of embellished styles, which are not purchased at the same rate of frequency, giving our customers a broader appeal of updated contemporary looks. We have also significantly lowered our special occasion dress business. As I mentioned, we expect to benefit from our cost reduction plan, and will intensify our marketing, offering stronger value to consumers, utilizing our loyalty program to maximize sales.

We will remain selective in store expansion. For fiscal 2009, we plan to open just three to five new Caché stores, and remodel a minimum number of existing locations, with CapEx or capital expenditures targeted between $3 million to $5 million for the year, down from approximately $11 million in fiscal 2008. And we expect to maintain lower inventory positions throughout 2009 by planning average inventories per store, at cost, to be down between 20% and 30% this year, as compared to 2008 levels.

With that, I would like to turn the call over to Maggie to review our fourth quarter and fiscal 2008 results and guidance in more detail.

Maggie Feeney

Thanks, Tom. Beginning with the income statement, fourth quarter net sales totaled $65.9 million, down 16% from $78.5 million in the fourth quarter of last year. Comparable store sales decreased 17% following a 7% decline in the prior-year period. Our fourth quarter results reflected a 7% increase in units per transaction, a 2% increase in our number of transactions, which was offset by an 18% decrease in average dollars per transaction, primarily due to higher markdowns in the quarter. Our gross profit was $21.5 million, or 32.6% of net sales, which compares to $36.4 million or 46.4% of net sales in the fourth quarter last year. Decline in gross margin was driven by lower sales, higher markdowns, and the resulting deleverage in buying and occupancy.

Turning to expenses. In total, operating expenses were $30.4 million or 46.1% of net sales, compared to $29.6 million or 37.8% of net sales in the fourth quarter of last year. Operating expenses for the fourth quarter for fiscal 2008 included $2.1 million of non-cash impairment charges. Breaking this down further, store operating expenses totaled $23.6 million or 35.8% of net sales, compared to $24.3 million or 31% of net sales in the fourth quarter of last year. General and administrative expenses totaled $4.6 million or 7% of net sales compared to $5.3 million or 6.8% of net sales in the fourth quarter of last year. Operating loss totaled $8.9 million as compared to operating income of $6.7 million in last year's fourth quarter.

Interest income totaled $94,000 compared to $446,000 in the fourth quarter last year. This decrease was due to lower cash balances, given the utilization of $15 million to repurchase 1.0 million shares of our common stock, as well as lower interest rates as compared to last year. Net loss for the quarter totaled $5.5 million or $0.42 per share, which includes charges net of taxes of $1.3 million or $0.10 per diluted share related to non-cash impairment costs. This compares to net income of $4.9 million or $0.32 per diluted share in last year's fourth quarter. For the full year 2008, net sales decreased 3% to $265.7 million below the prior-year period, with comparable store sales decreasing 4%, following a 1% decline in fiscal 2007.

Operating loss for fiscal 2008 totaled $11.8 million as compared to operating income of $7.3 million in fiscal 2007. Operating results for fiscal 2008 included $2.8 million in store closure costs; $2.1 million in non-cash impairment charges; and $616,000 in costs related to management changes announced in January 2008. Operating results for fiscal 2007 included $2.2 million in legal fees and settlement costs. On an adjusted basis, excluding one-time costs, operating loss for fiscal 2008, were $6.3 million as compared to operating income of $8.3 million in the prior-year period.

On a GAAP basis, net loss for fiscal 2008 totaled $7.1 million or $0.53 per share, including charges, net of taxes, of $1.7 million or $0.13 per diluted share in store closures; $1.3 million or $0.10 per diluted share related to non-cash impairment charges; $386,000 or $0.03 per diluted share related to management changes announced in January 2008. This compares to net income for fiscal 2007 of $6.5 million or $0.40 per diluted share, including charges net of taxes of $658,000 or $0.04 per diluted share in legal settlement costs. On an adjusted basis, excluding one-time costs, net loss for fiscal 2008 was $3.7 million or $0.28 per share, which compares to net income of $7.1 million or $0.44 per diluted share in fiscal 2007.

Turning to key balance sheet highlights, as Tom mentioned, we ended the quarter with a strong balance sheet. Specifically, at December 27, 2008, cash and marketable securities totaled $30 million, and average inventory per store decreased 34% at year-end from a year-ago period. We feel good about the freshness and the level of our inventory balance, and we believe we are well-positioned to maximize market share in this difficult environment. Capital expenditures for the quarter totaled $1.8 million, and for the full year 2008, totaled $10.7 million.

Regarding our outlook for fiscal 2009, at this time, we're introducing guidance for the first quarter of fiscal 2009. We currently estimate net sales in the range of $53 million to $55 million compared to actual net sales of $67.7 million in the first quarter of fiscal 2008. This assumes comparable store sales similar to the back half of 2008, as compared to an increase of 3% in the first quarter of fiscal 2008. We expect the loss per share for the first quarter of fiscal 2009 to be in the range of $0.12 to $0.16. This compares to an adjusted loss per share of $0.01 for the first quarter of 2008, and reported actual first quarter fiscal 2008 loss per share on a GAAP basis of $0.15, which included charges of $1.5 million or $0.11 per diluted share for store closures, and $388,000 or $0.03 per diluted share related to the management change in January 2008.

We expect our capital expenditures for fiscal 2009 to be in the range of $3 million to $5 million. For fiscal 2009, we plan to open three to five new stores and close five to seven locations, ending the year with approximately 295 stores and 600,000 square feet in operation. In this difficult environment, we plan to have a positive cash flow, as long as we experience sales levels equal to performance in the fourth quarter of 2008 and what we've experienced in the first nine weeks of 2009.

And now I'd like to turn the call back over to Tom.

Tom Reinckens

Thanks, Maggie. In summary, we believe our strategies have positioned us to gain market share and improve our long-term profit potential. Our merchandise is beginning to resonate with more consumers, as we provide them with a broader range of offerings appropriate for day and evening. We are gaining efficiencies in sourcing, while lowering our costs and inventory commitments. And finally, demonstrating the confidence in our long-term growth prospects, was the Board's approval of an additional 1 million share buyback program, which was initiated in January. We look forward to updating you on our progress during the year.

With that, I would like to turn over the call to the operator, to begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question is from Margaret Whitfield with Sterne, Agee. Please go ahead with your question.

Margaret Whitfield – Sterne, Agee

Hi, Tom and Maggie. Wondered if you could talk about when you took these actions to reduce operating costs and when we might start to see some of the benefits of the $15 million in pretax saving, and where in the P&L would this flow?

Tom Reinckens

Margaret, we started in the back half of 2008 and we attacked our labor – really, our field labor force to really first match the demands of what labor we needed with the softening traffic and softening mall sales that we saw throughout the back half of the year. We accelerated some of those savings. We realigned our field, but most of the savings really are going to affect us really starting in this first quarter – I would say probably about 75% of those savings were fully implemented at the beginning of the year, and the additional 25% of savings really started right around now, in mid-February into March.

We adjusted some benefit programs. We made an announcement about our 401(k) match program to our employees by significantly reducing it. We also put in some savings with some contractual freight savings that we got from our third party providers of freight; that really started in January, the bulk of them, in addition to the consolidation that we put into play in the back half of the year by consolidating shipments and going more to a warehouse environment on our own product, shipping that in one big box as opposed to several different little boxes.

So, it's going to affect every line on the P&L, and we've gone through every single expense, including looking at the cost that the company pays for batteries for the year. So – and copy machines being reprogrammed to print copies on both sides of the paper. You name it, we've gone through it. We're still in the process. The occupancy one, as we talked about earlier, with 28% of our stores coming up for renewal, we're having kick-out options. We are diligently talking with our landlords. And our Director of Store – of Leasing is actually speaking not only on those 28%, but also on other stores, and we're trying to get as much reductions as we can, and we're being successful on that.

Each week, we're getting rent reductions in return for extending kick-out options for another year or even getting rent reductions just on the strength of our portfolio relationship with some of the major developers. So, it's an ongoing thing, but you're really going to see it. I mean, the most important thing I think that Maggie was talking about in guidance is that what we're saying is that we can be positive cash flow throughout fiscal 2009, with sales levels equal to what we experienced in the fourth quarter, where we were down 17%.

So we built the model to still give us and throw off cash in a very difficult top line performance. And it's our hope – and we are actually seeing some slightly improved business over the last week to 10 days – so it's our hope that with all these real cost savings that we instituted, that the model really changes, and when there is a recovery, which there will be some day, that we will then be in a position to generate some significant operating profits.

Margaret Whitfield – Sterne, Agee

You said you've seen an improvement in the past week or so. I know you had some new branded lines in the store and a new casual-oriented catalog recently was issued, if you could talk about the response to some of the new strategies and merchandise?

Tom Reinckens

Yes. We're very excited about really, as a group, as a merchandising and design group, really coming to the conclusion that in order to expand the customer base, that we needed to give more updated look, and that we really felt that really surrounded the casual arena; from the denim base, of introducing some premium denim lines to more casual tops. You can see some of it in the assortment now. It's beginning to percolate in the assortment.

And our catalog, which just hit this past weekend – I actually got mine yesterday – our March catalog continues to have that trend, that feel, with some even – some key day dresses as well, that we're very excited about what's happening. So, knock on wood, we're starting to see some semblance of an improvement, and hopefully that will continue, but who knows?

Margaret Whitfield – Sterne, Agee

Just one final question. Did you buy any on this most recent buyback authorization, the 1 million?

Tom Reinckens

The only thing I will tell you is that we have bought some shares back. We can't buy a lot back, with the way the rules are, on a daily basis, but we have bought some shares back – even this week, we bought some shares back.

Margaret Whitfield – Sterne, Agee

Okay, thank you.

Operator

The next question is from Liz Dunn with Thomas Weisel Partners. Please go ahead with your question.

Liz Dunn – Thomas Weisel Partners

Hi, good afternoon. The first question is, no comment on February sales? The month is over. Is it you're going to hold off until Thursday to give us those results?

Tom Reinckens

Well, actually, Liz, we put out a – in our press release that we put out on Friday, we announced that we will no longer give monthly comps. We just didn't want to be one of the only ones out there doing it. And we felt from a competitive reason that it would be best for us to join the rest of the – with the apparel retailers and report quarterly. But the only thing I'll comment is that we gave the guidance in Maggie's first quarter guidance. And as I said earlier, what I'll tell you is February was pretty much basically the same as what we experienced in January, in those levels.

Liz Dunn – Thomas Weisel Partners

Okay. May I ask you a sort of just a theoretical question? I mean, your enterprise value is now negative. Any thought to just taking the company private? I mean, I would imagine there are costs that you're incurring to be a public company, and clearly the market is not giving you value for – I mean, just even the cash on the books. So, can you just kind of address that?

Tom Reinckens

You know I really can't comment, because we're not the only ones that have really reduced market caps and compared to our balance sheet strength. And I think we're going to do everything that we can to increase shareholder value. And whether it's the introduction of the more casual merchandise – the cost savings that we put together in this model now, as I said earlier, can really generate some significant potential, if we get some improvement in revenue – and not even positive revenue. If you – what we said earlier, we can still be negative and operate in a much better way than we did last year. So I can't really comment other than that. And we're going to do everything we can as an organization to improve our results and continue to operate the company to the benefit of all of our shareholders.

Liz Dunn – Thomas Weisel Partners

What's the minimum cash balance you need to just feel comfortable and sleep at night?

Tom Reinckens

Well, we're sort of – we're still looking at the 30's. We actually have more cash right now today than we did at year-end. And we've come through the slower times of the year, January and February. Not a lot more, but I think we're about $32 million in cash as of today. So, we're being very careful. We don't really – we're looking at our numbers on a cash flow basis in different scenarios. And we're going to make sure that we maintain these levels where it is now. That's really our game plan, not to slip below these levels that we have currently on the balance sheet.

Liz Dunn – Thomas Weisel Partners

Okay. Great, thank you.

Tom Reinckens

Welcome.

Operator

The next question is from Liz Pierce with Roth Capital Partners. Please state your question.

Liz Pierce – Roth Capital Partners

Hi, can you guys hear me?

Tom Reinckens

Yes, we can.

Liz Pierce – Roth Capital Partners

At the walk away through the luggage – trying to get my luggage. And Tom, I have a question for you on product. If I understood you correctly, you said less embellishment, more casual. I guess it's a two-part question. One, can you give us kind of a – break it out, quantity-wise, and how that would compare to LY? And then also, is there's any ramifications on IMU?

Tom Reinckens

With respect to the percentages that we're shooting for, I really don't want to give specifics, but it's our feeling overall that in order to increase the customer base and to increase the top line performance of the company, we have to have more clothes that more people will accept and buy. And that we felt that our niche has always been a little bit narrower than really – it's been too narrow, to be quite honest, for us to break out and get to the level that we need to be.

And in order to do that, you'll start to see, as you look in the store, tops that I think – and bottoms, and jackets, and dresses in the daytime arena that more customers can accept and see themselves wearing those styles. At the same time, we can't alienate our core customer. So we have to have a portion of our assortment within that arena as well. So we sort of have some internal numbers that we're shooting for, but I don't really want to really specifically say, because they are changing slightly as we move forward. And the good part about this business is we see on a daily basis is what styles are selling, to help us decide and move the trends forward, as we get into the rest of the year.

As far as IMU, we're doing everything that we can to make sure that we get the highest possible IMU by being better in the supply chain and making decisions in a timely fashion, without sacrificing our ability to really turn quickly with fashion trends.

Liz Pierce – Roth Capital Partners

Okay. And then, all right. So, in terms of adding more SKUs into the mix or maybe it's not the number of SKUs increasing, but just how you're reporting it, what does that mean in terms of fixturing? I mean, it's not a big store, so how are you going to create the most impactful presentations?

Tom Reinckens

I think what we're doing is really doing it on a lifestyle approach. And I think our first floor set in this arena is really occurring this week, where we're taking our casual merchandise and trying to merchandise that all in one section of the store. And then more of our career [ph] contour looks in another section of the store, and then obviously with our evening wear in another portion of the store.

But clearly, we're really recognizing the fact that – we felt like, based upon our performance in the back half of 2008, that we were a little bit too deep in the amount of core Caché styles and units that we carried, that we felt if you walked into a store, and saw 25 or 30 pieces of the same style, as a consumer, that it wasn't special enough. And therefore, it really didn't help us get the productivity from the space and that style, so that's really our approach.

And we will be obviously keeping it in a cohesive manner so that it fits in. So, in a bin where you might have seen last year in the fall, six or seven styles, you may see now eight or nine. So, it's probably about a 25% increase in the number of styles in the store.

Liz Pierce – Roth Capital Partners

Okay. And then, if you're going to have less embellishments, does that mean like price points in terms of the good-better-best, you'd more shift into that middle category?

Tom Reinckens

Yes, I mean, you could assume that the more embellishments on a piece of apparel obviously cost more and the expense is certainly there. But again, we're really focusing on the value proposition. We're excited about our casual offering in the fall. We're going to have some great price points that we're planning in the fall for some of our core items. We're just pleased with what we're seeing now, because it's just really starting now.

What I told the organization, and if you saw our February direct mail piece, and you saw it, it really wasn't reflective of what the store looked like. It was really where we want to go. And the same can be said with respect to our March catalog. And each day that goes on, more and more of these styles are starting to land in the store; again, that casual lifestyle, you'll see some more muted tones. You'll see some more updated contemporary looks in the store, as we move forward.

Liz Pierce – Roth Capital Partners

Okay, thanks. Good luck.

Tom Reinckens

Okay, thank you.

Operator

The next question is from Chris Kim with JPMorgan. Please go ahead with your question.

Chris Kim – JPMorgan

Hi, good afternoon everybody. Maggie, you mentioned you guys did a free cash flow stress test, and on a negative high teen comp, you can still generate positive free cash in 2009. Could you kind of run us through some of the assumptions, whether it's on the gross margin side? Obviously, you gave us the CapEx. Any other sort of one-time benefits that you'd be seeing in 2009, specifically?

Maggie Feeney

Basically, Chris, we ran it with, as Tom mentioned, down mid-teen scenario on comps, the CapEx in the $3 million to $5 million, and the cost savings that we've come up with through the organization.

Tom Reinckens

Maybe to give you some flexibility, as Maggie said, it's the mid to high teens on the revenue side, but when we went through it, we took a lot of costs out of the equation. So, we were very careful to take a look at every line item and make sure that we were comfortable enough – because, again, the Board really wanted to make sure that the company maintains its financial strength and its balance sheet, because this is not a time to take any risks. And clearly, we were very careful. We got some great benefits in '09, in the cash flow basis, about $5 million, as Maggie said earlier…

Maggie Feeney

$5.9 million in tax…

Tom Reinckens

$5.9 million in tax savings, which more than pays for our CapEx on our current assumptions, and also helps us pay for the million shares of stock we said that we would buy.

Chris Kim – JPMorgan

So, it doesn't sound like there's any assumption for a material improvement in the gross margin trend?

Tom Reinckens

Well, if – we are managing our inventory on a much lower basis. So, and with the cost savings that we have on our movement of the goods from our warehouse to the – directly to the stores, we are getting a better load factor, and I think you'll see some improvements there. I don't really want to really share what our particulars; we never do between the lines, between the top line and the bottom line. But every single line of our P&L has been addressed.

And as I said earlier, we're still addressing as we speak, particularly on the occupancy, that's an ongoing process. And we're looking, continually looking at other lines on our P&L in ways that we can improve and reduce our costs. I said it before, we could really get some decent results even without having positive comps. We took out $72 million of costs – or I'm sorry, $0.72 worth of costs per share, $15 million so far. So, and it's across all lines, and that's pretty much all we can say.

Chris Kim – JPMorgan

Okay. And on the inventory side, you guys mentioned that you're expecting a 20% to 30% decline. Was that for the first quarter specifically or throughout the year?

Tom Reinckens

I think when we get to the year-end, you're not going to see a 20%…

Maggie Feeney

We accounted for it already at year-end…

Chris Kim – JPMorgan

Through the third quarter…

Maggie Feeney

Definitely through the third quarter.

Chris Kim – JPMorgan

Okay. And then finally, just I noticed that the accounts payable line decreased dramatically. What's sort of the reasoning behind that and what drove that?

Tom Reinckens

It's generally because we're doing more of our own production. So, we're…

Maggie Feeney

We're buying the goods ahead of time, you know…

Tom Reinckens

You know, we're manufacturing our own goods. We're not buying as much from the vendor as we did...

Chris Kim – JPMorgan

All right, very helpful. Best of luck. Thanks so much.

Tom Reinckens

Thank you.

Operator

The next question is from Jeff Van Sinderen with B. Riley & Company. Please state you question.

Jeff Van Sinderen – B. Riley & Company

Tom, I wonder if you can just talk a little bit about the concentration of casual sportswear that you're targeting, when you actually expect to get to that targeted level. And then also, are there parts of the sportswear assortment where you are seeing significantly improved traction? And then also maybe you can just touch on when – sort of in line with that – when do you think you'll have the merchandise in the store aligned with what you're presenting in the catalog?

Tom Reinckens

Okay. I think the first and third question are pretty similar in that where – I don't think we're going to really be there, honestly, until – completely until we're in our third quarter, as we get into our third quarter for the fall, for our fall goods. But each day that passes, we are bringing in more and more of that look, for the premium denim lines that you've seen in the store, to more of the day dresses that are landing in the store; they're doing exceptionally well. That classification is very strong positive comps right now.

And so, again, we've accelerated and planned that significantly higher for our March, April and May deliveries. So we're excited about that. If that trend continues on the top line, we should see better top line performance because of that. But, you know, it's a work in progress. And as far as the percentage overall, I don't really want to say. But what you see on the front page of the catalog is really what we're trying to achieve, with that leather little jacket along with that day dress that's on the front of our March catalog. If you haven't seen it, you'll hopefully see it in a day or two.

But those are the looks that we're trying to move towards, to give our customer that more updated look, as opposed to the old Caché, which mainly was rhinestones and grommets and things of that nature. We'll still have some of that; we have to. But we want to move to a more contemporary look. And the response has been pretty good so far. That jacket – I'll relate a story. We were doing our floor set in Short Hills, and the jacket literally sold out in three days, for that one jacket that was on the cover.

Jeff Van Sinderen – B. Riley & Company

Okay. And how important are you thinking that denim is for you guys? And maybe you can just touch on how Not Your Daughter's Jeans worked, and just maybe how we should be thinking about the denim classification going forward?

Tom Reinckens

Denim is going to be very important for us. We are working on that very hard. We have several different premium denim lines in the store right now. We've tested several of them. We're also moving in our own private label, which is really where the direction of the company will be a combination of some of the premium denim lines, but a concentration of the private label as well. We're very pleased with the performance of it. It's really started to percolate, really, just lately. And it will be not as important, obviously, in the May/April selling period as it is in the July, August, or September selling period, when denim picks up a little bit. But it will be very big in the back half of the year for us.

Jeff Van Sinderen – B. Riley & Company

But are you still pretty much in the mode where you're just testing some of the premium denim and then you'll decide what to go forward with? Is that where we are?

Tom Reinckens

Yes, I mean, that's a fair assumption, but we've gotten some good reads and we're moving forward with planning the fall at a much aggressive level.

Jeff Van Sinderen – B. Riley & Company

Okay, good. And then, Maggie, what should we look for or what should we plan the tax rate going forward?

Maggie Feeney

37.5%.

Jeff Van Sinderen – B. Riley & Company

Okay. Great. Thanks very much and good luck this quarter.

Tom Reinckens

Right, thank you.

Operator

The next question is from Eric Beder with Brean, Murray and Carret. Please go ahead with your question.

Eric Beder – Brean Murray Carret & Co.

Good afternoon.

Tom Reinckens

Good afternoon, Eric.

Eric Beder – Brean Murray Carret & Co.

Could you talk a little bit about – I know it's coming down in importance, but what should we think about in terms of how prom is going to flow this year?

Tom Reinckens

That's a good question. We, again, reduced the level of prom this year over last year, and actually the prom – our designers and our merchants did a fantastic job. The selection I think has never been stronger, and we're actually turning it much, much faster than we did a year ago, and we're pleased with the results, and we're really into it right now. It's the type of business that we talked about before, where once you get through May 15, it's pretty much over; it drastically falls off.

But we, again, bought at a much lower level, and actually went and tried to buy a few more pieces, but you can't bring it in much past April 1, because your selling season is so short in that classification. But again, it's at a reduced level compared to last year. And our dress department is really performing very well, primarily driven off of our casual dresses, our day dresses, they're doing extremely well right now, and our short looks are doing well, as well. Our dress performance is actually better than our sportswear performance right now.

Eric Beder – Brean Murray Carret & Co.

You talked about last year rolling out some lower priced accessories and other pieces. What is kind of the thought process of the accessories business?

Tom Reinckens

I think it will continue to be just what you said. We are seeing greater success in the opening price points in our accessories. And I failed to mention it, but our accessories are doing well, too, ahead of our sportswear and actually even ahead of our dresses. It's been positive lately. So we will continue to fund those classifications, which, by the way, are leaning more to the daytime looks.

Eric Beder – Brean Murray Carret & Co.

If we look at you're increasing inventories about 30 plus percent. What in terms of – what categories are going to be more than that, when you look in terms of how you're doing this?

Tom Reinckens

I'm not sure I could hear exactly what your question was.

Eric Beder – Brean Murray Carret & Co.

Regarding inventories up about 30% on a per store basis?

Tom Reinckens

We decreased them, that's correct.

Eric Beder – Brean Murray Carret & Co.

Right. And what categories are higher – what categories do you think are going to be higher, in terms of amount of product decreased going forward – more than that?

Tom Reinckens

Well, overall, I mean it's really it all declined as a percentage compared to last year, including accessories. I mean, I think the only department that probably might be a little bit higher is what I mentioned earlier, about our investment in the day dresses, particularly in April and May. We significantly made a major investment in those. And I suspect that they might be a tad bit higher in that period. But right now, they're actually even lower, I believe, than a year ago – a tiny bit lower, but all classifications are lower. If you dive into the individual departments, the certain silhouettes, that we have more of than we did the prior year, and denim might be one of those categories, but that's not an individual department.

Eric Beder – Brean Murray Carret & Co.

Okay. Congratulations. Thanks.

Tom Reinckens

Thank you.

Operator

The next question is from Robin Murchison with SunTrust Robinson Humphrey. Please state your question.

Robin Murchison – SunTrust Robinson Humphrey

Thanks very much and good afternoon everybody. The just – I, too, was going to ask about prom. It certainly looks very visible on the website that you have brought down the SKUs. And I would agree the assortment looks better this year I think than it did last year. And certainly from what I see or kind of hear in the stores, demand does seem to be down. Product costs – I wonder, Tom, with everything that's going on in Asia and elsewhere, if you can talk about how you're looking at managing product costs and what your expectations are, especially vis-à-vis the re-routing of the merchandise assortment with lower opening price points, what the net effect might be for the year?

Tom Reinckens

You know, Robin, that's a good question. It's a work in progress. To the extent our on-order is slightly ahead on an IMU basis of where we were a year ago, we are targeting that as an advantage, we think, through the balance of the year, because we think that there's excess capacity throughout the world and we think we should be getting better prices. We are also looking and trying to expand into other areas of the world to take advantage of even lower pricing. But that is something – primarily, it's going to be mostly through China right now. But to the extent that we can get better pricing in other parts the world, we're going to try to look for that, particularly in the back half of the year. But pricing, I think, should be better for us. I'd like to see it better than it is even now, but I think naturally, we're going to see some benefits from that, just because of capacity issues.

Robin Murchison – SunTrust Robinson Humphrey

Okay. And then one other, if I can. One consistent comment that we hear from apparel retailers in this environment is that to the extent that people are buying, they certainly want very differentiated products. So, in this very tough environment, as the company is trying to play it safe by chasing basics, if you will, or being basic, it just double-backfires on them. So that would seem to – with your stores and with your merchandise assortment, that would seem to certainly play into your sweet spot.

Additionally, though, I want to be clear that – over the past couple of quarters, maybe even three quarters, it does seem like that on the presentation tables, when you walk into a store, you have highlighted some core basics. And I guess with everything that we're hearing from you today, that that will – will that completely cease to exist? Or how do you juxtapose demand for trendiness with sort of your core basics – the square-neck tops in several colors and that sort of thing – how do you think about that?

Tom Reinckens

That's a very good assumption or observation, because clearly, it's our opinion as well that it has to be all about merchandise newness. And that's what we have spent our entire – most of our meetings talking about with our merchandise merchants and designers, and our planners. And really focusing on the fact that it has to be something new; she can't see it all over the place, and it has to be something special. And particularly for Caché, which is a fashion retailer, I think that gives us a little bit of an advantage. By us increasing the number of styles that we're offering in the store, you're going to see less of those core- type items that you normally would have seen or expected to see at Caché. So you won't walk in and see 25 or 30 pieces of a style.

There are a couple of items, and you mentioned the square-necks; we bought less of them this year, but that is a staple for us and you will see that. But that's probably one of the only ones. We are expanding our assortment in our bottoms to include more styles; in our tops to include more styles. And our magic number is about 25% more styles in the store as we move forward. So we're taking a lower inventory level and translating it into more unique items that the customer can come in and feel – this is special, this is unique, that I can get it at Caché and I'm not going to see it in other places.

Robin Murchison – SunTrust Robinson Humphrey

Thank you.

Tom Reinckens

Okay.

Operator

(Operator instructions). The next question is from Liz Dunn with Thomas Weisel Partners. Please go ahead with your question.

Liz Dunn – Thomas Weisel Partners

Hi. Just had a follow-up question on inventory. Is there a risk that we're too lean here, with inventories down as much as they are in the '30s? And also, as we look at the inventory levels, is that consistent with where you are down on a unit basis? What I'm trying to get at is, might inventories on a unit basis be higher, but they're just – you're carrying them at a lower value or are units actually down 30 plus percent as well?

Tom Reinckens

The unit inventories are down significantly as well, but not as much as the dollars. I think the differential in year-over-year between 2008 and 2007, our average price of receipts that we landed was probably down about 10%. So that gives you an idea. The units are down as well. As far as us being too lean, that's a matter of looking really at the inventory turns and then how many markdowns we might have taken if we had more inventory. Could we have used 5% more? You could probably make an argument, yes, that we could have. But I feel comfortable returning the merchandise a little bit faster than we did a year ago. And given the really tough environment we're in, I'd rather be a little bit more cautious and bring in newness and take advantage of the traffic, the little traffic that's there, and not show a wall from one side to the other of full complete stock in core items.

Liz Dunn – Thomas Weisel Partners

Okay. Thank you.

Tom Reinckens

All right.

Operator

The next question is from Maria Vizuete with Piper Jaffray. Please go ahead with your question.

Maria Vizuete – Piper Jaffray

I actually just have one housekeeping question to start off. How many Caché Luxe stores are you guys currently operating?

Maggie Feeney

Eight.

Tom Reinckens

There's eight Caché Luxe currently.

Maria Vizuete – Piper Jaffray

And are you guys planning on closing some more of those?

Tom Reinckens

There will be one Caché Luxe closing I believe this Saturday, and there's one or two others that will be closing soon.

Maria Vizuete – Piper Jaffray

Okay. And then following up from there, what is the thought process exactly behind opening more new stores? Is that you guys getting favorable lease terms? Or is it – I mean, just trying and keeping your store balance?

Tom Reinckens

I think right now, as we said earlier, we're planning three to five stores. And quite honestly, we have no real appetite to really start to open stores in this environment. We want to take a wait-and-see approach. But obviously, if a premier center in a premier location came up, we would certainly entertain it. We wouldn't say no, but we're not really in an expansion mode until we start to see some favorable signs of recovery.

We have a lot on our plate with merchandising initiatives. We have a lot on our plate to really make sure we protect the balance sheet in this difficult time. And hopefully, as we get forward and maybe we see some sense of recovery, whether it's in the back half of this year or whenever it is, then we'll be really ready to take advantage of the initiatives that we're taking in the merchandising to expand the brand to other locations.

Maria Vizuete – Piper Jaffray

Got it. So then I would assume there are more stores that could be closed beyond what's been planned for this year?

Tom Reinckens

There's a couple, not many. We really addressed store closures last year. But each time when – each month that goes by when business is tough, obviously it makes it difficult in your store base. So we have to be careful and make sure that we maintain cash flow profitability at as many stores as we possibly can. So if there's a store that's under performing and we take a look at it six months from now, if we don't see any reason to keep that store open, we'll close it.

Maria Vizuete – Piper Jaffray

Great. Thank you.

Tom Reinckens

Okay.

Operator

You have a follow-up question from Robin Murchison with SunTrust Robinson Humphrey. Please go ahead with your question.

Robin Murchison – SunTrust Robinson Humphrey

Tom, I'll make it quick. The Luxe, you said they were still eight Luxe stores?

Tom Reinckens

Yes. Oh, I'm sorry – there's seven Luxe.

Robin Murchison – SunTrust Robinson Humphrey

All right, seven Luxe – right, absent one.

Tom Reinckens

And then six after this week, and then I think we have two more planned to close.

Robin Murchison – SunTrust Robinson Humphrey

So how different – we don't have one in this market any more. I'm just wondering how differentiated the product in a Luxe store is vis-à-vis a core – a regular Caché?

Tom Reinckens

There really is no difference today, Robin.

Robin Murchison – SunTrust Robinson Humphrey

Okay. So there are not – like if the six were to close, there wouldn't be any particular benefit at this point from reduced efforts to generate new merchandise and such?

Tom Reinckens

Not really, no.

Robin Murchison – SunTrust Robinson Humphrey

Okay. All right, that's what I wanted to be clear on. Thank you.

Tom Reinckens

Okay, thank you.

Operator

There are no further questions in queue. I'd like to turn the call back over to management for closing comments.

Tom Reinckens

Thank you very much, and thank you for joining us. We look forward to speaking with you when we report our first quarter results in May.

Operator

This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.

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Source: Cache, Inc. Q4 2008 Earnings Call Transcript

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