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Charlotte Russe Holding, Inc.

F3Q09 Earnings Call

July 21, 2009 4:30 pm

Executives

John Goodman – Chief Executive Officer

Frederick Silny – Chief Financial Officer

Emilia Fabricant – President, Chief Merchandising Officer

Analysts

Elizabeth Pierce – Roth Capital Partners

Anna Andreeva - J.P. Morgan

Betty Chen – Wedbush Morgan

Adrienne Tennant – FBR

Jeffrey Van Sinderen – B. Riley

[Alex Farman – Raymond James]

Robin Murchison – SunTrust

Dana Telsey – Telsey Advisory Group

Operator

Welcome to the Charlotte Russe third quarter 2009 conference call. With us on today's call are John Goodman, Chief Executive Office, 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 at Charlotte Russe Holdings or future results or events constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

Such forward-looking statements involve known and unknown risks including but not limited to general economic and business conditions and conditions in the specialty retail industry. There can be no assurance that the actual future results, performance or achievements express 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, managements discussions and analysis and the company's latest report to stockholders, the company's filings on Form 8-K and other Federal Securities Law filings for a description of other important factors that may affect the company's business, results of operation 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 on the investor relations section of the company's website at www.charlotte-russe.com. And now I will now turn the call over to Mr. John Goodman.

John Goodman

Good afternoon everyone and thank you for joining us today. In today's extraordinarily difficult environment we are managing the business conservatively. In a quarter that was characterized by inconsistent traffic patterns and sales trends across much of the retail sector, we tightly controlled inventories and managed mark down levels which drove 85 basis points of year over year gross margin improvement.

We also maintained strict cost controls. This operating discipline enabled us to deliver non-GAAP earnings per diluted share of $0.33. Our team is continuing to execute well against our five prong strategy. Our task remains challenging given today's difficult environment, but the opportunity to drive improvement in the business is substantial and we're pleased with the progress we've made to date.

Let me briefly recap the five strategies we've been focusing on for the past eight months. Number one, refining our brand position through enhanced design, quality and style. Number two, enhancing our merchandise assortments to improve planning, production, design and execution.

Number three, improving our buying process and bringing a greater level of discipline to inventory planning and allocation. Number four, maximizing the productivity of our real estate and number five, employing a return oriented approach to capital utilization.

We've moved quickly to deliver better product, elevate our styling and digital imagery, improve the presentation in our stores and communicate Charlotte Russe's brand position to the customer. This back to school season, our product offerings and store presentation will begin to more fully reflect the impact of the strategic and operating initiatives we have been implementing in fiscal 2009.

Initial back to school delivers began arriving in stores July 12 and we will continue to flow goods through this month and next. Our new collections are on trend, well styled, well edited and provide the value our girl is looking for. When you visit our stores in the coming weeks, you will see product that conveys a distinct fashion perspective that we believe will resonate with our 16 to 29 year old target customer.

Despite the highly promotional selling climate, we have begun to drive gross margin improvement. This is a result of a few key factors. First, we are tightly controlling inventories. Second, our new mark down strategy is enabling us to move through trends more quickly and ensure that we are profitably exiting each collection.

Third, we have brought discipline to the planning and allocation process. As you'll hear from Emilia, we are current piloting new assortment process and tools which will roll out chain wide later this fall. And finally, we're enhancing our sourcing strategy. The third quarter our direct import presentation was 18% which is up from about 15% historically.

As we mentioned last quarter, our goal is to bring direct imports up to 30% in the future. This ratio will allow us to take advantage of margin opportunity while maintaining the speed and flexibility needed in fast fashion.

We are also continuing to focus on driving improvement in store level profitability. We're making progress with our landlords towards executing advantageous deals, primarily in A mall locations and premium outlet centers, both with smaller footprints. Our size and strong financial position continue to work in our favor, making us an attractive tenant as we negotiate both new and existing store leases.

To date we have negotiated $3.7 million in annualized rent reductions. Additionally, we currently have 11 signed leases for A mall and outlook locations in fiscal year 2010.

Our plans to roll out an outlet strategy in the first quarter of 2010 are on track. We have assembled a strong outlet team committed to developing this business and we continue to see substantial opportunity to drive unit growth and improve upon our existing store economics.

As the back to school season begins, and we look ahead to holiday, we are prepared to react to inconsistent market conditions based on macro trends. While sales patterns continue to be inconsistent throughout the retail sector, the shorter lead times of the fast fashion business affords the luxury of nimble and fast.

We are managing our inventories tightly, keeping them current and leaving dollars open to buy in order to chase the goods when needed. This model and flexibility should provide us with the opportunity to drive continued margin improvement going forward.

We're extremely pleased with the accomplishments of our team thus far. We refined our brand positioning, improved our processes and developed a culture of accountability that is marked by collaboration and entrepreneurial spirit.

We're ready for back to school. We're staying focused on the things we can control and we're managing the business prudently to preserve cash, control cost and drive long term profitability.

Before turning the call over to Fred to review the financials, I'd like to note that we will not be commenting or answering questions on our ongoing sales process on today's call. I can tell you that the process is continuing and we will update you when appropriate.

I will now turn things over to Fred Silny.

Frederick Silny

Hello everyone. Total revenues in the second quarter increased 4.9% to $202.7 million. Comp sales of negative 3.6% were at the low end of our anticipated range and primarily reflect the current retail climate.

By geographic region, we performed best in the northeast and Midwest, while the southeast and west remain our most challenging markets. Despite the difficult selling environment, we were able to improve gross margins, control costs and deliver non-GAAP diluted earnings per share of $0.33.

In the third quarter we incurred cash charges of $1.3 million for expenses related to proxy solicitation, the recent management transition, severance costs and the review of strategic alternatives and subsequent sales process. 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.

Turing the comp store transaction metrics for the quarter, average unit retail was down 5.5% to $10.79. Comp store transactions were down 1.6% and units per transaction increased 4.2% to 2.72. Comp store inventories declined 10.4% which primarily reflects the challenging selling environment.

After reserves, including mark downs, comp store inventories were down 3.1%. As you may recall the third quarter of last year was a difficult time for the company. Market conditions were tough and inventories were building. Mark down reserves in Q3 of last year were large and reflected that.

Importantly, our inventories at the end of this year's third quarter were clean and both mark downs and mark down reserves for the period were at normalized levels.

Non-GAAP gross profit for the third quarter increase 8% to $55.9 million while gross margin improved 85 basis points to 27.6%. The increase primarily reflects the improvement of 122 basis points related to product gross margin partially offset by 59 basis points of rent and occupancy deleverage.

Non-GAAP SG&A expenses came in at $43.8 million or 21.6% of sales. This compares to $41.3 million or 21.4% of sales last year. The increase of 20 basis points can be traced to planned marketing expenditures largely offset by lower corporate expense.

Strong gross margins and cost controls drove a 17.1% increase in non-GAAP operating income to $12.1 million. That compares to $10.4 million in the third quarter of fiscal 2008.

Non-GAAP net income for the third quarter increased to $7 million or $0.33 per diluted share. That compares to non-GAAP net income of $6.6 million or $0.31 per diluted share in the same period of last year.

Turning to the balance sheet, the company remains in strong financial condition. As of June 27, 2009, we have $60 million of cash and no debt. The business continues to be a strong cash flow generator, providing us with ample funds to support our working capital need and planned capital expenditures.

During the first nine months of the year, we generated cash flow from operations of $31.6 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.

Third quarter depreciation was $11.4 million. Capital expenditures in the third quarter totaled $5.3 million. Of that amount, $3.7 million was deployed to new store openings and $1.5 million to corporate IT and other. That brings year to date CapEx to $17.2 million including $8.3 million for new stores and $9 million for corporate IT and other. Our anticipated capital expenditures for the year remain unchanged at approximately $30 million.

We opened seven new locations in the third quarter to bring the total number of stores opened year to date 16. We also closed two locations during the period. Total square footage as of June 27, 2009 was 3,545,581. For fiscal 2009, we remain on track to complete 20 new store openings.

For the fourth quarter we anticipate comp store sales will be in the negative low to mid single digits and expect to report non-GAAP diluted earnings per share between $0.18 and $0.26. We also expect to end the fourth quarter with comp store inventories down in the low single digits.

Our anticipated tax rate is 41.5% for the fourth quarter and 43% for the full year.

Given the uncertainty of today's retail climate, we plan to continue to operate the business conservatively. We're committed to preserving our strong cash position by controlling costs and making prudent investments that we believe will generate positive returns, drive growth and create long term shareholder value.

Now, I'll turn things over to Emilia.

Emilia Fabricant

Good afternoon everyone. Our merchandising organization has continued to make progress towards refining the Charlotte Russe brand, improving our merchandise assortment, developing aspirational marketing and creating a compelling shopping environment for our customers.

There is no question the macro environment is unstable which is fueling a highly promotional retail climate. We were able to improve our gross margins during the third quarter while utilizing strategic promotions to help drive traffic and engage the customers. This strength was driven by our ability to generate higher IMU's, control inventories and manage mark down levels.

During this time, we're focusing on the critical areas of product, marketing, store execution and profits. We're offering trend like products with a fashionable point of view. We have elevated our styling and digital presentation. We're making Charlotte Russe a fun place to shop and we're providing our customer with the value she relies on us for.

In the third quarter, we saw strong performances in dresses, sweaters and women's tops. We also saw strength in men's tops which is a category we have been working to improve and recently turned the corner.

Our back to school hit stores in early June and initial reads were positive. Following a successful test in expanded denim sizes, we're currently rolling that out chain wide. Our footwear and jewelry categories continue to be strong businesses for us, both of which are trend right and offer compelling value to the customer.

As we talked about in recent quarters, we've been implementing systems and tools that will allow us to operate more efficiently and profitably in the future. Our new hand held technology is now in all stores. This is enabling us to take mark downs in place within trend groups and achieve our target of 30% off at first mark.

Going forward, this technology coupled with our new mark down optimization software will foster more profitable overall mark down strategies, allowing us to maximize gross margin capability.

Additionally, our new assortment planning processes and tools will be coming on line in the fall which will be an important contributor to achieving the right balance of inventory among stores, ultimately enabling us to move through goods more profitability.

Another key element of our strategy is to ensure that our customer understand who we are and what the Charlotte brand represents. We have started speaking to the customers through marketing and PR initiatives. We're giving her more reasons to come into the stores and are reaching out to her through a critical medium, the internet.

This includes an engaging e-commerce site, a social media strategy and grass roots efforts to drive traffic such as email and text campaigns. Our goal is to make the Charlotte Russe website a main destination for young hip shoppers. Our customers are extremely knowledgeable about fashion and trends and we're finding they want interactivity and freshness as they shop online.

We've added new features to this site that are being embraced by our customers including Design Your Outfit and Shop Together which allows friends to have an interactive fun shopping experience while they're socializing online. We believe the addition of engaging interactive shopping experiences will drive more customers to the online store and increase site conversion over the long term.

Last month we launched Redesign pages on our website for My Space, Facebook, Twitter and U Tube as part of our social media strategy. This fall, Eric Damon will be launching his favorite style picks and picks on the Charlotte Russe site, while Suzy Castillo will be starting a blog on positive self image, confidence and well being.

We view these as important and credible avenues for us to reach the Charlotte Russe customer. Its part of our efforts to further increase brand awareness and foster enhanced credibility with the customer. We will be testing advertising in key publications this fall.

Charlotte Russe ads will be appearing in teen Vogue which has an elevated aesthetic that is consistent with our new position. We'll be in Lucky which is among the most shopped for fashion magazines today, and you'll see us in Marie Claire which showcases a broad range of price points.

We believe this initiative is particularly timely given the value added programs that are available to advertisers in the current environment, coupled with the Charlotte Russe's fine brand positioning, improved product assortments and elevated fashion point of view.

As our back to school force in surviving stores, we feel enthusiastic about the products, while remaining tempered about the overall retail climate. The new collections are on trend and offer an exceptional value to the customer.

As John mentioned, this season marks the first time our strategic and operating initiatives are beginning to come together. While we are executing what we set out to accomplish, there is certainly more opportunity ahead of us as we continue to implement our plans and provide the customer with new reasons to shop the Charlotte Russe brand.

We look forward to keeping you updated on our progress. Thanks for your participation today. Now I will ask the operator to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Elizabeth Pierce – Roth Capital Partners.

Elizabeth Pierce – Roth Capital Partners

My congratulations in a very, very tough environment. What I really wanted to hone in on is the gross margin. Obviously this is what's been positively surprising and what you think as we look forward, the opportunities are on the gross margin side as you move not just through the second half of the calendar year but really into '010.

John Goodman

As we look at gross margin, it really reflects first of all, our ability to get, generate higher IMU's. Part of that is also controlling inventories and managing the mark down levels. As we look forward into the balance of the year, as we said to you last quarter and we still believe this is true that margin is a very important thing for us to manage as well as inventory, and if we manage those two things well within a difficult macro economic condition, we should be successful.

So I would say we believe that the margin will continue to improve. Obviously as we generate more of an import penetration, but also from just how we manage the business from a mark down and inventory perspective.

Elizabeth Pierce – Roth Capital Partners

Is it too early to start looking at perhaps some of the historical numbers that you've had as a benchmark on what you could reach on an annual basis, 29% to 30%? Understandably the environment isn't the best to offer this kind of guidance.

John Goodman

I would say it is too early. I think there's a lot of moving pieces, things that are being worked out during the course of this year as well as the most troublesome is the economy right now and the traffic patterns that we're seeing throughout the whole retail space, not just us but from our competitors as well.

So I would tell you that once there's more consistency, we feel like we're on the right track, but I would tell you it's too early right now.

Elizabeth Pierce – Roth Capital Partners

Emilia, what's been the reaction, and I realize again it's been just a couple of weeks on the People's Liberation product and what's your sense of, has it met your expectations on how you thought it would be etc.

Emilia Fabricant

It's really too early. It started coming in on the 12th, so we were just getting to see it hitting the stores on a full time basis, but we had a soft launch and by the end of the month, the boutiques and the 100 Go Forward stores will be up and running and we'll be able to comment on that further.

Operator

Your next question comes from Anna Andreeva - J.P. Morgan.

Anna Andreeva - J.P. Morgan

I had a question on SG&A, very good to see strong expense controls this quarter, and I believe you were expecting double digit dollar increase originally when you provided guidance. Could you talk about some of the buckets that you were able to flex on the SG&A side and should we expect similar maybe 6% SG&A dollar growth for the fourth quarter? It sounds like you're thinking about investing in marketing for back to school.

John Goodman

As we said to you last quarter and we really believe this, that we are committed to operating with discipline which our third quarter represents and clearly demonstrates. As we look to refine our SG&A that will continue to be a focus of our business currently, and Fred will give you a little bit more color, but we do believe that we will continue to manage SG&A tightly.

Frederick Silny

That's exactly right. The focus will be on managing SG&A tightly and then I think the second part of your question was what we might expect for the fourth quarter. For the fourth quarter, we see SG&A expenses year over year in dollars rising by about 10%. And in terms of the buckets that you also asked for, most of the increase is structural and it's because of the increase in new stores.

Part of the increase is also planned and it's planned for some increased marketing support that we're going to have in the fourth quarter.

Anna Andreeva - J.P. Morgan

It sounds like you were able to have some strong controls at the store level with the payroll side so we should expect that to go forward.

Frederick Silny

That is correct.

Anna Andreeva - J.P. Morgan

I also wanted to double check what is your exposure to CIG? Were you able to [inaudible].

Frederick Silny

In terms of CIT about 16% of our vendors do business with CIG.

John Goodman

We don't anticipate any material risk particularly in light of yesterday's announcement by CIG at this point regarding financing.

Anna Andreeva - J.P. Morgan

Emilia, you had talked about serving the current customer while also capturing the broader base of the 23 to 29 year old demographic. Could you talk about some of the learning's from that? Where do you think the older customer is coming from? Is it the forever 21's of the world? Is it department stores? Any color there would be helpful.

Emilia Fabricant

We think it's both. She's shopping our malls and we are actually seeing her in our stores. Now our job is actually to convert her, and I think with the elevated style and merchandising, we're definitely grabbing her attention at this point.

Operator

Your next question comes from Betty Chen – Wedbush Morgan.

Betty Chen – Wedbush Morgan

I was wondering if you could talk a little bit about the back to school calendar. We keep hearing about tax free holiday shifting out of July into August and then also later back to school maybe by a week or so because of Labor Day. How have you adjusted inventory flows perhaps to better meet the calendar change and so that we can better track what we should be seeing in the stores.

John Goodman

As you know, we're on a different calendar than the NRF calendar so ours is where it falls into place, the timing of it, it still falls within the quarter that we're talking about. That being said however, there is a concern because of some of the tax free weeks being pushed and some of them being cancelled this year due to obviously the economic conditions that are out there in the states and cities.

So we look at stuff. We're look at it very closely. We also believe that the back to school season will probably be a little later this year, but it will occur in August and we will be ready for it.

Betty Chen – Wedbush Morgan

I was wondering if you can again remind us about the outlet strategy. These are going to be outlet specific merchandise. How will they be priced and how will they be marketed? Any additional color would be great.

John Goodman

As we talked about last quarter, we have 47 stores that are in outlet malls today or hybrids I should say. We will be launching the outlet in the first quarter of 2010. It will be different product. There will be some categories that will be similar. We will be able to give you more information on that next quarter, but we do believe that it will be initially priced lower than our existing product and it will be different product. So you won't see the same product in both the outlet and the retail channel.

Betty Chen – Wedbush Morgan

I wanted to clarify, in terms of the Q4 guidance, in terms of the comps strategy, did you say that we should be looking for negative low single digit comps or what was the comp range that we should be looking for?

Frederick Silny

That's right. We said negative low to mid single digits.

Betty Chen – Wedbush Morgan

Is that based upon anything you're seeing right now?

Frederick Silny

That's really our view for the full quarter and so that's how we see the business, and that's how we're planning the business currently for the full quarter.

Operator

Your next question comes from Adrienne Tennant – FBR.

Adrienne Tennant – FBR

On the new stores, how many of the stores do you have in the 5,500 square foot format and what is the sales productivity that those are coming through at versus the average.

John Goodman

If I could just clarify the question. You're talking about current or future stores?

Adrienne Tennant – FBR

If you can give both, if you can give what your prototype is and then if you can actually give how many actual stores are in that 5,500 and what they're actually doing.

John Goodman

I can tell you we have approximately 15 stores today that in the 5,500 square foot blueprint. As we said before, the dollars per square foot based upon our 7,200 to 5,500, the 5,500 square foot stores are more profitable in terms of productivity.

As we look going forward into the end of this year, and then certainly Q1 of next year, I would say the bulk of those stores would be in the average of 5,500 square feet.

Adrienne Tennant – FBR

Can you give any quantification of how much better the productivity is versus the norm average?

John Goodman

What I would say is what we said last time. Based upon our dollars per square foot at $252 roughly, we believe that we should be able to perform in the $300 range for dollars per square foot and part of that strategy is to look at our existing store base, looking at our new stores and looking at the types of malls we're in whether it be A malls or outlets, etc.

Adrienne Tennant – FBR

I take it those, the ones you're opening are gravitating toward the A mall location so when you do that is the floor model substantially better as well?

John Goodman

As we said, the A malls have performed better than the base line of our stores so we know that will continue and it should improve based upon a smaller square footage.

Adrienne Tennant – FBR

On the IMU for the quarter, how much benefit did you have from the IMU?

Frederick Silny

It was about 84 basis points.

Adrienne Tennant – FBR

So it was almost all the gross margin improvement?

Frederick Silny

Yes, it was the biggest part of it, that's correct. And there was also improvement from mark downs and some off sets but IMU was substantial.

Adrienne Tennant – FBR

What's the time period to get to the 30% penetration on direct and is there any way that we should think about a percentage move toward direct or a 10% toward direct, how we should think about the net differential in margin? Did that make sense?

Emilia Fabricant

Right now we're targeting 30% over a certain amount of time, but we have not at least expressed what that time frame is, but we are moving towards it. And it's a very strategic move with keeping the nimble, flexibility that we have in fast fashion and balancing that with the IMU increase that we could get.

Adrienne Tennant – FBR

Is there from a direct to agent, is there a basis point spread?

Emilia Fabricant

We don't comment on that, but yes there is. There is improvement.

Adrienne Tennant – FBR

Is it fair to assume that the comp trends, April is obviously the best because of the shift and then with June being the weakest?

John Goodman

What we can tell you about the quarter is that what we saw from our competitors, it was consistent with us in terms of the traffic patterns that are in the malls at this point in time.

Operator

Your next question comes from Jeffrey Van Sinderen – B. Riley.

Jeffrey Van Sinderen – B. Riley

I have a follow up on the question on comps. Since you're guiding to negative comps should we assume that comps are still running negative so far this quarter? And then also, how are you thinking about the Labor Day shift and its impact on your business?

John Goodman

As we talked about, in terms of looking at it directionally where our quarter end and where directions where our comps are going, we're not going to comment on where we're at at this point in time. We gave you the guidance which was low to mid negative single digits and that's where we see the world today.

In terms of the shift again, as you look at it from our perspective, we have a shift that will be between the two months, so we are planning accordingly, but it is well within the quarter.

Jeffrey Van Sinderen – B. Riley

If you can just touch on your denim penetration this year versus last year for back to school and then I guess how you see yourself competing or what your competitive edge is in denim this year. Any highlights there would be helpful.

John Goodman

Denim is still one of the most important categories we have. We believe in the Refuge brand. It will be a big penetration for our fourth quarter. If you go in the store now, you should see the walls, should be set up at this point in time. That will be continuing.

We will also make a bigger presentation of denim starting at the end of this week as we launch into the fall selling season.

Jeffrey Van Sinderen – B. Riley

Do you feel like you're competing more on price or do you feel you're competing on washes, style, what do you think the edge is there this year?

Emilia Fabricant

Actually, we compete on all of the above. We have the best fit, the best quality, the best washes out there, especially in our Refuge brand. We now have People's Liberation which brings us into the premium brand category and we also have a mid range selection in the $48 to $58 price point to actually create a stepping stone up to the People's Liberation. So we're very excited about our denim offerings for back to school.

Jeffrey Van Sinderen – B. Riley

I know you touched on the real subject a little bit and you've undertaken a fairly comprehensive project to downsize your store base. I'm just wondering if you can give us any more color in terms of how some of those early discussions are going with landlords and then what you're finding out there.

John Goodman

As we said earlier, we have negotiated $3.7 million so far in annualized rent reductions. It's a partnership between the landlords and Charlotte Russe. We continue to see opportunities and working with them to get advantageous sites, advantageous deals, and certainly looking at where we think we can get the biggest bang for our buck which is in the A malls, some of the B malls and certainly in the outlook malls as we look at how we're strategically going to go after the business.

Also by having 5,500 square foot box, it's opened some doors to us in some malls that otherwise we wouldn't have been able to get into.

Jeffrey Van Sinderen – B. Riley

So we look at that $3.7 million in rent savings, how much of that is associated with down sizing your stores or existing stores in those malls?

John Goodman

We're not going to break it out by category, but the total is $3.7 million at this point in time.

Jeffrey Van Sinderen – B. Riley

In terms of your SG&A dollars, I know you mentioned that will be up roughly 10% in Q4. How should we think about SG&A further out? Are there other areas that you've identified to cut?

Frederick Silny

We're always looking at ways to run the business more efficiently and so that's something that we do here every single day. As far as giving guidance for the future beyond the fourth quarter, we're not ready to do that just yet. We'll be giving additional guidance at the time of our next quarter's release.

Operator

Your next question comes from [Alex Farman – Raymond James]

[Alex Farman – Raymond James]

Just working through your guidance for the quarter, it looks like if SG&A is going to be up about 10% on a dollar basis, it looks like then we're seeing probably gross margin in line in the ball park of 4Q '07, and I'm just kind of thinking as we move through 2010, are the 2007 quarterly gross margin estimates, those are reasonable target as it we move through 2010?

Frederick Silny

What we can tell you is that as we stated last quarter and we are really focused on it, margin is an important tool for us during this uneasy or unsure economic time in terms of traffic pattern. So as you look at the business and you look at SG&A being up 10%, as you look at the sales guidance we gave you, we certainly believe by managing inventory and managing margin, that's the most effective way to deliver results. So that's really where we're focused on.

How you look back on the quarters is how you look back on it, but we will continue to get improvement over our line in terms of gross margin.

[Alex Farman – Raymond James]

So you're looking to get up to 30%. You've got 13% now. Has that so far been enough to move the needle? Is that a big part of the 84 basis points in IMU increase for the quarter?

Emilia Fabricant

Actually, we're at 18% now, up from 13% and it will continue adding to the IMU. We're not going to specify how much but it will be an increase.

[Alex Farman – Raymond James]

About the major market advertising that some of those higher profile magazine that you're looking to get into, does your guidance that you gave prior for less than 1% of your net sales be spent on marketing, does that still hold?

Emilia Fabricant

Yes it does, and we're excited about it.

[Alex Farman – Raymond James]

I know it's kind of too soon to get a real read on it, but with all of your new e-commerce initiatives, the Shop Together, the outfit building, have you started to see an uptick in traffic or sales yet?

Emilia Fabricant

We continue to see an uptick in traffic and growth in our e-commerce business.

Operator

Your next question comes from Robin Murchison – SunTrust.

Robin Murchison – SunTrust

Going back to the SG&A and the 10% increase for 4Q, it was mentioned that some structural and some planned and I assumed that the planned is the magazine placement?

John Goodman

That's correct. It's the marketing.

Robin Murchison – SunTrust

If I could just real quickly review the metrics, I think you said AUR was down 5%, transactions were down 1.6% and units were down 4.2%.

John Goodman

Yes. Actually, AUR was down 5.5%.

Robin Murchison – SunTrust

I wanted to ask you, the outlet strategy, will the private label percentage be similar or is it going to be similar to the regular stores or is it similar to the regular stores, is it more private label? How does that work out?

John Goodman

We look at the product. It will be how we do the product, it will be whether it's delayed from the regular stores into the outlet stores, being delayed by we'll have a new flow into those stores or whether we have specific product just for the outlet stores that is different in design. Those are really the two things we're looking at.

Robin Murchison – SunTrust

So there's the assortment with non core store merchandise.

John Goodman

There will be some product that will be specially made for outlet. There will be more basics in the outlet than in the regular stores

Robin Murchison – SunTrust

Emilia, I'm wondering what you're seeing in terms of denim, what silhouettes are working? If you could comment on also your colored denim, the reception to that?

Emilia Fabricant

We still, the bootleg is always our true fit, but the skinny right now is our number one fit on the floor in all the washes quite frankly. As far as color denim, we do have a selection in stores. We're seeing gray. I know it's not technically a color, but the gray denim is very strong and Refuge by all means, it was just voted teen votes best denim brand this year, so we're very exited about that. The skinny and the bootleg in that Refuge is by far our number one right now.

Robin Murchison – SunTrust

If you could also comment, and maybe you've mentioned this before so forgive me if you have, but the Refuge versus the People's Liberation denim, if I'm looking at a store and all denim is represented including the People's Liberation, have you taken some of your SKU, are you increasing the overall penetration of denim or are you supplanting some of the Refuge denim with People's Liberation and keeping the ratio consistent?

Emilia Fabricant

The Refuge in itself is growing especially the wall denim. So we are continuing to drive that business independently. People's Liberation would be just added on.

Robin Murchison – SunTrust

Absent the People's Liberation product, how you're approaching pricing, how you're currently approaching your pricing strategy. Is it even with history are you bringing your price points up or down or what's going on there.

Emilia Fabricant

We're not raising prices at all. We're raising them just to the level of quality and style as we've consistently said. The only increase in price in the store is really People's Liberation and we're bringing the mix in other categories within the People's Liberation that's within out price range. So it's really just the denim that's elevated.

So we are continuing the strategy on pricing as always with Charlotte Russe being of value to our customer.

Operator

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

Dana Telsey – Telsey Advisory Group

Can you talk a little bit about shrinkage, what you're seeing there? As you think about new store productivity what have you seen there, and how are you adjusting for wall operating expectations both for existing stores and for new stores?

John Goodman

Let me tackle the shrink issue. On shrink, that's been an area of focus for us and so in terms of what we're seeing, shrink is very much under control. We have a task force handling that issue and for us, things here are very much under control.

Frederick Silny

I think if you look at new store productivity, the new smaller footprint, the 5,500, we will start opening those stores in September. We have our first one in Danbury, Connecticut, so we will see that going forward.

In terms of productivity, a lot of the leases were signed previous so you won't see the new 5,500 boxes at this point in time.

Dana Telsey – Telsey Advisory Group

As you look out towards the holiday season, are you adjusting any flows of merchandise? I know the first back to school floor set in July. Is there any timing changes of merchandise product delivery this year compared to last year?

John Goodman

As I said earlier in the call, we feel like the back to school season is going to start a little later this year. We are looking at obviously the weather and the economy at this point and making appropriate determinations about when to promote some of the key points in the month of August. Obviously August is a very important time for us so we look to capitalize on that.

Operator

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

Elizabeth Pierce – Roth Capital Partners

I wanted to verify the G&A is off the $43.5 million in Q4 last year, right?

Frederick Silny

Yes, that's correct.

Elizabeth Pierce – Roth Capital Partners

Store openings for the fourth quarter and do we have any indication on openings for next year?

Frederick Silny

The store openings in the fourth quarter, we're going to have four bringing the total to 20 for the year. What was your next question?

Elizabeth Pierce – Roth Capital Partners

For next year, any thoughts on store openings, what we should be using?

Frederick Silny

We really don't have a forecast for next year. We'll give you more of a view of 2010 at our next earnings release, but we can tell you that we already have 11 signed deals for next year.

Elizabeth Pierce – Roth Capital Partners

What about the tax rate for next year?

Frederick Silny

The way taxes work for us, as our income goes up, our tax rate goes down slightly and so I think what will happen is we should see a tax rate running at a lower rate than we have, at a slightly lower rate than we have in the fourth quarter, and we gave you guidance of the 41.5% for the fourth quarter.

Elizabeth Pierce – Roth Capital Partners

Emilia, I don't know if you have this kind of information available, if you look at the number of styles and color choices where you were for the fall season last year, do you have any sense just on order of magnitude how much lower it is?

Emilia Fabricant

We were running at about 30% less SKU's on the floor and I haven't updated that in the last month or so, but 30%.

Elizabeth Pierce – Roth Capital Partners

Any comments about those CR signature line and the Blue Chip line?

Emilia Fabricant

The CR signature line we're going to be continuing it with the travelers at different links and so forth. It's been fit for us and we'll actually grow that business. As far as the Blue Chip, that's lingerie and lounge. We have a brand new collection coming out for holiday and we're looking forward to that.

Elizabeth Pierce – Roth Capital Partners

Will it be under the same logo or a different logo, or you don't want to say?

Emilia Fabricant

Not yet.

Elizabeth Pierce – Roth Capital Partners

I have a question on the mark down strategy. When you bring the new collections and then the new themes and they move to the mid part of the floor, is that when we should be seeing the first hit at 30% off and then when it moves to the back of the floor, if you could just refresh my memory how the cadence is.

Emilia Fabricant

We're actually looking at the collections for maximum profitability so if there are styles that are not performing right off the bat, we are going to drop them almost immediately, within two weeks to three weeks. So you'll be seeing in shop mark downs happening as soon as two or three weeks into the group, and once they go towards the back of the store, the first mark down will happen in trend zone, and then in the second mark down they'll move on to clearance and so forth.

Elizabeth Pierce – Roth Capital Partners

Did you say UPT was up, right?

Frederick Silny

Units per transaction were, were you asking about average unit price?

Elizabeth Pierce – Roth Capital Partners

Maybe I misunderstood. Just UPT.

Frederick Silny

It increased 4.2% to 2.72%. I think Robin was asking about average unit retail if I remember.

Operator

There are no further questions at this time. I'll turn the conference back over to Mr. Goodman for any further remarks.

John Goodman

I'd like to thank everyone for their participation today. We appreciate your time. Look forward to talking to you next quarter. Thank you.

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Source: Charlotte Russe Holding, Inc. F3Q09 (Qtr end 6/27/09) Earnings Call Transcript

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