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Chico's FAS, Inc. (NYSE:CHS)

Q2 2014 Earnings Conference Call

August 27, 2014 8:30 AM ET

Executives

David Slater - VP, IR

Dave Dyer - President, CEO and Director

Todd Vogensen - SVP and CFO

Analysts

Simeon Siegel - Nomura

Greg Baglione - Barclays Capital

Tom Filandro - Susquehanna Financials

Anna Andreeva - Oppenheimer

Susan Anderson - FBR Capital Markets

Jennifer Black - Jennifer Black & Associates

Pam Quintiliano - SunTrust Robinson Humphrey

Kimberly Greenberger - Morgan Stanley

Neely Tamminga - Piper Jaffray

Jessica Schmidt - KeyBanc Capital Markets

Paul Lejuez - Wells Fargo Securities

Richard Jaffe - Stifel Nicolaus

Betty Chen - Mizuho Securities

Brian Tunick - JPMorgan

Operator

Good morning, and welcome to the Chico's Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) At this time, I would like to turn the conference over to David Slater. Mr. Slater, please go ahead.

David Slater

Thanks, Keith and good morning, everyone. Welcome to the Chico's FAS second quarter earnings conference call and webcast. Joining me today at our National Store Support Center in Fort Myers are Dave Dyer, CEO, and Todd Vogensen, CFO.

Before Dave begins his executive overview, we would like to remind you that our discussion this morning includes forward-looking statement and quarter-to-date data points, which are subject to and protected by the Safe Harbor statement found in our SEC filings and in today's earnings release.

These forward-looking statements are subject to a number of factors and uncertainties that could cause actual results to differ materially. The Company does not undertake to publicly update or revise its forward-looking statements, even if experience or future changes make it clear that projected results expressed or implied by such statements, will not be realized.

And with that, I will turn it over to Dave.

Dave Dyer

Great thank you, Dave and good morning to everyone. Well I am pleased to announce that the second quarter comp has improved into positive territory for Chico’s FAS led by Chico’s and Soma. The total company comp for the quarter was 0.3 versus a negative 2.6 in the second quarter of 2013, while not as robust as we would like, we certainly will celebrate victory wherever we can get it. Heavy promotions in the quarter resulted in increased transaction count which was partially offset by a lower average dollar sale.

Overall our results for the second quarter fell short of where would like them. Certainly when you look at our earnings per share for the quarter which were $0.20 down from $0.27 in the second quarter of 2013. Despite the top resale landscape at Chico’s FAS we have what it takes to prevail in this competitive environment. We have loyal customers, we have great talent, we have four strong fashion brands all is open in the highest ideals of customer service.

Before diving into the second quarter results I want to provide an update on our quarter-to-date sales. Through yesterday, total company sales are up approximately 3%, reflecting a comp sales that are down 1% on our unaudited daily flash sales report. As we discussed in last quarter’s call we carried more inventory into the second quarter than we would have liked and we remain approximately 5 million to 10 million higher in inventory at cost that we would like. We intend to aggressively manage inventory in the back half of the year and Todd’s going to discuss the steps that we’ve already taken in a moment.

The good news is that White House’s comp the trend improved in the first quarter to the second quarter. Also much progress has been made in returning to a more proven balance between couture-like fashion and basics. As White House centers the back half, the brand is better positioned and we are seeing encouraging signs. Our Saint Honoré Jean Collection is performing very well, our Genius dress launch is breaking records in terms of unit volume and early reads in our fall fashions are very positive.

Turning to the Chico’s brand, their positive comparable sales for the second quarter were driven by print, pattern and color. Category strengths included woven tops, golf, denim and the resurgence of our knit tops. The continuation of long-over-lean trend plays well into our assortment of tops and bottoms. Our TV spots airing right now are focused on leggings and our So Slimming knit pants some of the season’s biggest trends.

At Boston Proper, progress is being made on their merchandise architecture. The team is targeting historical levels of catalogue based density, price points and color and print diversification in order to deliver the assortment balance in line with Boston Proper’s DNA. These changes are taking hold we have seen a return to positive sales growth in our last three mailers. While some will tell you that there is nothing going on in fact and I disagree. Our customer’s focus on fashion remains as strong as ever. Right now there is a shift in proportion long-over-lean especially leggings. Long duster jackets and long woven tops, prints, fringe and boots are also performing very well. We are seeing these fashion statements perform at all three of our apparel brands. As I mentioned before you will see leggings, jackets and woven tops highlighted in our television advertising this fall.

Soma continues to deliver consistent and strong results as evidenced by their 21st consecutive quarter of positive comp growth. In July the much anticipated Love Soma Rewards loyalty program was launched to a positive response. This marks the first time that Soma will have a loyalty plan suffered from the Chico’s Passport program. The program is points based and provides incentives for her to spend more her reward is in the form of dollars of future purchases, which in turn rewards us with an additional visit back to our boutiques.

Love Soma Reward is tier based suspending more elevator status for preferred the gold to ultimately platinum with increasing benefits along the way. It’s too early to measure a financial impact but the feedback from our existing customers has been extremely positive. The industry leading loyalty programs at Chico’s FAS have resulted in a very healthy customer file. Our active loyalty files are an all-time high for Chico’s FAS with over 9 million customers and we have seen an increase in customer retention rate.

Both Chico’s and White House had some of the highest growth rates in retail Facebook fans and now both have over 1 million Facebook friends. Using the strength of this extremely loyal and growing customer base, we have been making significant strides in personalizing how we communicate with her. We’re delivering coordinated messaging via direct mail, television, email, e-marketing and calling campaigns. This alignment has resulted in continued increases through our multichannel customers who are by far our most valuable and loyal customers.

Next, I would like to update everyone on our progress internationally starting with Canada. I just attended the grand opening of our first new Chico’s boutique in the Toronto Area. The crowd was impressive. There was clearly a large amount of enthusiasm for our entrance into the market. The grand opening volume exceeded our expectations as one of our best grand openings ever with two additional new Chico’s boutiques opening in Toronto in the next several weeks. The brand will finish the year with three Canadian stores.

White House Black Market opened its first Canadian outer location in Niagara during the second quarter. We couldn’t be more pleased with those results as well. While House will open one additional Canadian boutique in the third quarter and will finish the year with four frontline boutiques and one outlet in Canada. In Mexico, we remain delighted with our partnership with Liverpool. The sales productivity of the Chico’s standalone boutiques in Mexico is in line with our best performing domestic locations. Print, pattern, and color are truly resonating with the American customer. We will continue to work with Liverpool on site selection and anticipating doubling the current footprints in the back half of the 2014.

Before handing the call over to our new CFO, I want to express the enthusiasm that the Board of Directors and I shared about Todd’s elevation to this role. Todd is a seasoned financial executive who began his career as a CFE with Pricewaterhouse, he has found success in every finance function as controller, financial planning and analysis, investor relations, strategy and tax not only does he bring with him the respect earned with those of you outside the organization from his time in IR, he has also earned the respect of all of us inside the Company. He has a deep understanding of the internal workings of our organization. I could not be more excited about how he will impact the organization for many years to come.

I will be back after Todd’s presentation to provide an update on the progress of our omni-channel strategic initiative. In the meantime here is Todd.

Todd Vogensen

Thanks, Dave, and good morning everyone. I would like to provide additional details on our second quarter financial results. Net sales were $671 million, an increase of 3.3% compared to 650 million in last year’s second quarter, reflecting 98 net new stores in a comparable sales growth of 0.3%. The return to positive comp for Chico’s FAS was led by Chico’s and Soma for the second quarter as the combined Chico’s Soma brands comparable sales increased 1.4%. The Chico’s brand experienced a positive comp increase of slightly less than 1% and comparable sales of Soma were a mid single-digit increase. As Dave mentioned, this does mark an impressive 21st consecutive quarter of positive comps for Soma.

White House Black Market brands comparable sales decreased 1.9% reflecting significant improvement in trend compared to the first quarter. For the second quarter, gross margin was $352 million compared to 356 million last year. Gross margin rate was 52.4% of net sales, a 240 basis point decrease from last year. The decline in gross margin rate was driven by the themes we discussed last quarter, the overall promotional environment excess inventory at White House Black Market exiting their first quarter and the migration of White House’s assortment including a better balance of basic merchandize.

Total inventory for selling square foot increased 2.5% excluding in-transit inventories. The increase reflects a moderately higher average unit cost for our on-hand inventory and forward fabric commitments. In-transit inventory increased 11 million reflecting an increase in both the amount and timing of shipping our fall product via ocean compared to the same-time period in 2013 and for your planning purposes, please be aware that a similar impact for in-transits will repeat itself at the end of the third quarter.

SG&A expenses for the second quarter were $305 million compared to 286 million last year. SG&A was 45.4% of net sales, 140 basis points increase from last year primarily reflecting sales deleverage of store expenses, costs associated with new store growth and the impact of approximately $5 million in strategic initiatives, total SG&A less strategic initiative spending increased 4.7% over the same time period last year compared to square footage growth of over 6%.

Capital expenditures totaled $28 million in the second quarter primarily comprised of new stores and our strategic initiatives. We opened 32 new stores in the quarter and we remain on-track to spend between $125 million to $130 million in capital during 2014. Capital spending on our strategic initiatives totaled approximately $6 million in the second quarter and we remain on target to spend to $25 million to $30 million on these initiatives for the full year.

As a reminder, our strategic initiatives are omni-channel capabilities, international expansion, testing at Boston Proper stores and updating our loyalty programs, all of which are expected to fuel our future growth.

Even in this tough environment, I am pleased to report that our operating cash flow increased in the second quarter and in the first half compared to last year allowing us to both fund our operations and to return excess cash to our shareholders in the form of dividends and share repurchases. As we enter the fall season, the retail environment remains a challenge and it is not improving as quickly as we all would have anticipated. Even in this environment, we are anticipating total company positive comp sales for the second half with slightly negative comps in the third quarter followed by positive comps in the fourth quarter.

We expect the promotional environment to persist in the second half and as a result we have planned promotional events to remain competitive which may pressure gross margins in the short-term. However we have bought and ticketed e-merchandize categories in a proactive manner that will allow us to protect our gross margin rate more than we experienced in the first half. We anticipate that the gross margin rate decline in the back half will be less pronounced than the front half when comparing to last year.

And now I would like to briefly share some of my top priorities and how these priorities are likely to impact our results as we go forward. In my mind, one of the most important responsibilities as the CFO is to manage resource allocation. Whether our resources are investments in capital or expense, inventory or talent just to name a few, I believe in allocating resources based on a thorough review of the expected return on investment in this ever changing retail environment we cannot simply do the same thing that we’ve always done. I believe in making educated decisions utilizing a test and learn approach whenever possible.

As we look forward some of the guard rails that we have in place related to longer-term resource allocation are as follows: one, inventory growth in line with sales growth; two, capital expenditure spending lower than depreciation dollars; and three, SG&A dollar growth in line with our square footage growth and some of these measures can be impacted in the very short-term while others will take a little while longer but all of them will be central to how decisions will be made on a go forward basis.

To dig one layer deeper on these guard rails let me first discuss inventory management. As it is a primary focus for our organization currently, many steps have already been taken to ensure that as we exit the fall season, our inventory is in better shape than when we entered it. Admittedly as we wrapped around on a soft 2013 we entered spring with undue optimism and bought inventory to comp assumptions that ended up being overly aggressive.

Going forward, we are adjusting our purchase plans through based off of a much more conservative financial plan resulting in a reduction in receipts of over $80 million at retail versus the original second half plan with the majority of the reduction in the fourth quarter. Our strong preference is to buy tightly in shape if necessary rather than buying too much and clearing excess goods at the end of the season. At a high level, this is how we will manage our inventory ensures that it grows in line with our sales.

Second for our capital expenditures as we enter our annual budget cycle and review of our long range plans, we are evaluating our store opening teams for the upcoming years. As Dave will discuss in a moment, we are in a revolutionary time in retail. We continue to evaluate what this means to Chico’s FAS as we balance the need for investment in brick and mortar locations with the need to further invest in technologies related to the customer experience, not to steal Dave’s thunder but we still believe strongly in the need for a physical boutique presence. Note that we are scrutinizing and analyzing our capital allocations ensuring that these investments make sense for the future of retail and are appropriately conservative given the current retail environment.

In this thing we anticipate opening 70 to 80 new stores in 2015 as we balance our new store capital with the roll out of new point of sale systems next year. We still believe firmly in our long-term store growth opportunity especially with the initial success of our concepts internationally.

And finally, SG&A, in the near-term SG&A increases will be driven by previous commitments to store growth and strategic initiatives. SG&A is one area where every company always has a room for improvement and Chico’s FAS is not an exception. That said there’s also the potential for investment in areas that will drive sales. We will continue to use the length of the customer when evaluating our SG&A. Now more than ever she is in control and our job is to serve per under her terms in this omni-channel environment with the extensive amount of information we have on our customers, we are in a unique position to provide her with the most amazing personal service that she has come to expect from us.

Now I’d like to pass the call back over to Dave so that he can discuss how we are thinking about operating in this evolving omni-channel retail world.

David Dyer

Thank you, Todd. Yes, it’s been a tough retail cycle we’d looked inward as well as outward in order to react to the environment and to correct some of our missed steps. Even in this tough environment we have continued to invest in the long-term so that when the cycle turns and it will, we are well positioned. Today, I’d like to take some time to further explain what’s driving our strategic thinking related to omni-channel.

It is by now a cliché and when we hear all the time our retailing is changing right before our eyes. A change even greater than back in the 50s and 60s when we moved from mom-and-pop stores to Giant Mall and then onto suburban big boxes while as someone who has lived and worked through this in our industry through all these massive changes on the floor of the department store, the lanzen and the birth of online commerce to this age of omni-channel, I absolutely agree that we are very much living through a major revolution.

There are those out there, perhaps some of you among them to maintain the brick and mortar stores are dead, absolute dinosaurs on the brink of distinction. We disagree we believe that stores will always be a critical and growing part of our business. We do recognize that there are some challenges, declining mall traffic, changing customer behavior, where how and even why she shops and of course sales and margin pressures. Here at Chico’s FAS we prefer to think of all of the above not as threats but as opportunities.

Opportunities to leverage the resources, we’ve been putting in place these last five years, up-to-date technology, a state-of-art distribution center and a healthy and growing customer file with rich data to be mined. We didn’t make these considerable investment simply to beef up the all important digital channel we made them on behalf of all channels, including stores, stores are where you go for expert advice and service, to try things on and to build wardrobes, which for all of us are competitive advantages.

Technology of course will act as an accelerator to the customer experience, wherever he chooses to engage with us. So whether we’re in the new normal or tomorrows normal what are we doing about it. We believe this about giving customers all inclusive experiences with our brands that put her in control. This means that her interaction with mobile devices, products, marketing our services and community must all be consistent and engaging. It is important to keep our sales agile as possible, giving her easy to use customer compound center.

The lion’s share of our efforts have centered on creation of an integrated cloud-based platform that will service the foundation for future digital capabilities, both in boutiques and direct to consumer. This integrated platform will house data related to purchase orders, product attributes, customer attributes, sales history, inventory tracking as well as boutique online and mobile transactions. Housing all of this information in one place allows for a truly holistic view of our business and will enable deeper analysis, customized marketing and personalized customer service.

The most important step we’re taking right now is transferring that knowledge to our sales associates, we’re developing and testing several boutique technologies that will enable us to exceed customer service expectations and drive sales. A new state of the art point of sale system is in development of roll out planned in early 2015 it will integrate with our cloud-based data and accommodate mobile payment. We’re also accelerating the use of iPads by the end of the year iPads with customer focused applications will be in the majority of our stores. These devices empower our sales associates with customer information and tools to enhance and deepen our customer relationships.

Purchase history, style preference and personalized recommendations are just some of the information available in our digital client books. And the tool will allow our associates to communicate directly with their clients through email and text messaging, making it easier to book styling appointments and to allow for mobile check out. Yet another tool for our stores is the digital signage that is being tested in some of our boutiques, these high definition screens engage customer attention with video and dynamic images. And they have the potential for interactive capabilities going forward. Signage can be managed from Fort Myers down the e-digital sign within a boutique allowing for instant shifting of messages and offers, when you add up these and many other efforts I think you can see how determined we are to keep Chico’s FAS agile and on the leading edge of omni-channel retailing.

We have terrific partnerships in place with technology leaders such as Apple, Google and Fujitsu. I would also like to recognize the hard work and innovation coming from our cross functional team led by our CIO, Eric Singleton. Eric by the way is himself an industry leader in this area and was recognized with the CIO 100 Award this year. This is a huge honor for Eric, his team, and our company as an independent validation of the leading edge advances we’re making in technology, and we’re in even a stronger position with the recent hire of Miki Berardelli in the newly created position of President of Digital Commerce and Chief Marketing Officer. Miki as you know is a widely respected and dynamic industry leader. In short, we’re very confident the Chico’s FAS is an enviable competitive position in this rapidly changing environment and we couldn’t be more excited about our place in the evolving retail landscape.

And with that, I will turn back over to Dave Slater for Q&A.

David Slater

Thank you, Dave. That concludes our prepared comments. At this time, we will be happy to take your questions. In the interest of timing consideration, I request please limit yourself to one question.

And with that, I will turn the call back over to Keith.

Question-and-Answer Session

Operator

Thank you. At this time, we will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Simeon Siegel with Nomura.

Simeon Siegel - Nomura

Good morning guys and congrats Todd.

Todd Vogensen

Thank you.

Simeon Siegel - Nomura

Can you contextualize the gross margin pressure by concept and then just maybe any segment colors Dave for the quarter, the top-line trends you mentioned? Thanks.

Todd Vogensen

Why don’t we do the gross margin side there, I mean gross margin pressures the promotional environment is effecting us across all the brands. One of the things that we have done and certainly worked on our average unit cost and pricing certainly as we move into fall we want to make sure that we have the ammunition to compete in this promotional environment without effecting our margins as much as it did last fourth quarter and maybe in the early spring, but do you have any other color on that.

Dave Dyer

You know the only thing I would add is, we did talk about last quarter having the pressure White House Black Market as they had shifted a little more heavy into the couture-like items and they have worked through that as we’ve gone through the second quarter. Q3 and Q4 will see it back to a much more normalized level so we’d expect to see that pressure ease as we go into the second half.

Todd Vogensen

And I think that there are some fashion trends that are emerging that are really helping drive our business. I mean we’re seeing some really positive results to some of the new falls fashion. One of the things that we’ve talked about when we started in spring was the long over lean and that trend really is continuing. There really is a shift of proportion where that long over lean has really taken hold and when that trend happens generally you see very-very strong results and so I think that we are kind of on the verge of that happening. You will look at our TV commercials for both Chico’s and White House Black Market are both have leggings commercials as we think that is just a huge trend. And we love to have bottoms working. When you have bottoms in this working, you really have a business and we’re seeing both of this come back.

Initial results for the Chico’s for their patent pants that five pocket Ponte, knit pants and the leggings are doing very-very well, and I think Donna’s TV and White House skirt is on that next week and then she has TV running right now some of the wovens and the dresses which are again performing. So some of those categories that have been tough for awhile, knits are coming back, dresses are coming back. We certainly have reacted to get the balance in our assortments. We see the prints and pattern happening. So it’s beginning to feel like that we’re on the verge of seeing some things change again.

Operator

Thank you. And the next question comes from Matthew McClintock with Barclays.

Greg Baglione - Barclays Capital

Good morning, everyone. This is Greg Baglione on for Matt. First, Todd, congratulations, just wondering, Soma, solid growth again I was wondering if you could parse out the performance of the older versus newer stores? And then maybe across the entire portfolio if you could just talk a bit about trends in the A, B and C malls? Thanks.

Todd Vogensen

So for Soma, we would say it’s consistent with how we’ve talked about it in the past. Soma has a little bit different model where they opened as a lower level, but see consistent growth trends across many-many years as they build the customer base and that is just the nature of intimate. We’re seeing that stores that are I would say more mature, I don’t know if we have any stores that are totally mature yet. The stores that are more mature older than four to five years have a four wall profitability rate that is right in line with our apparel brand, so still seeing good positive trend.

Dave Dyer

It just takes some time to build. But I think we are encouraged by the results and we’re beginning to open Soma stores in some of the larger A malls where we get a lot of traffic. So certainly Lenox mall was one that we would be opening this fall and just opened another one that is doing very well.

Todd Vogensen

We have Tysons Corner.

Dave Dyer

Tysons Corner yes, which is doing fantastic. So that’s again just our strategy where we’ve kind of been dancing around some of the larger malls, we now think that we can kick and drive and sales in Soma and we’ve been really pleased with the results. But they do take the time to build I mean that’s the problem with the Soma brand is when you are trying to get a women to switch her intimate apparel royalty. It takes a while and you really have to build that brand. So it’s a two or three year process of building but once you do, it but again as Todd said is a very, very profitable business.

Operator

Thank you. And the next question comes from Tom Filandro with Susquehanna Financials.

Tom Filandro - Susquehanna Financials

Thanks. Welcome, Todd, and thanks both Dave and Todd for that comprehensive call and the details. Two questions if I could. Todd, could you expand on that comment you made about purchasing and ticketing product to protect margins? And then, Dave, I have just a general question for you. It looks like the economic data for your customer broadly seems pretty positive. So I'm kind of curious what your view is what is happening in the core customer base? Is there something outside of the typical things that you look at that are impacting the customer or do you simply think it is fashion and some self-inflicted drivers that are making the business more challenging? Thanks.

Dave Dyer

I would say that the biggest thing that’s been affecting our customer has and I think a lot of people have talked about, it really is a shift to durables, it’s not hard to look again high-end auto dealers like kids own now, auto dealers and we’ve never had better business it’s been record months, month after month, so I think that that’s happening and if you look at home purchases and Loews and Home Depot and all of those things it is really still that shift. I think she is buying other things. I do believe that that’s been probably one of the biggest things that has affected her purchases. I also think that when you look at our customer, I mean we have some very positive things going on. We have more transactions we have an all time high with our customer file. We are attracting new customers, our reactivation rate is good. So when you look at the normal customer metrics, everything looks very positive except for one thing and that is averaging at retail and average dollar sale and that’s where we are feeling it and that’s driven largely by this promotional environment that we have been in. And I think that we have not been traditionally a very promotional brand. And I think that our reaction to try to be competitive has certainly cost us in margin and I think that that’s probably that average dollar sale and the resulting margin are the two big things that we are working on right now and I do believe that we are going to be able to overcome at least some of it.

Todd Vogensen

Yes. And to just answer specifically your question about purchasing and ticketing items to competing the promotional environment, we really have gone into planning for the second half with the anticipation that the promotional environment will continue in building I am using too our product to make sure that we can compete promotionally as well. Making sure that we have a good balance of assortment so that those categories that do respond well to promotions we’re setup in a position to be able to put those front and center and to highlight those promotions.

Tom Filandro - Susquehanna Financials

And Todd is that across the brands?

Todd Vogensen

Well absolutely. Yes.

Dave Dyer

Long-term we believe when we are in a short-term durable cycle I’ve seen it before, long-term we believe she is going to come back. And so what we have done and I think that everything that we’ve done is try to position this company to be ready when she comes back and that’s why we’ve stacked up the investments, that’s why we are investing in the technology and our future because we believe that she is going to come back, it’s a temporary cycle and we want to make sure that we’re in a leadership position when things return to the normal.

Operator

Thank you. And the next question comes from Anna Andreeva from Oppenheimer.

Anna Andreeva - Oppenheimer

Great. Thanks. Good morning, guys. Thanks for taking my questions and congratulations to Todd as well. I was curious on the cadence of the second quarter. Was July the weakest month for you guys out of 2Q? And I think you mentioned you were evaluating a store opening cadence. Should we expect to pull back in-store openings for next year perhaps? And maybe remind us, how do you guys think about the store potential by concept? Thanks.

Todd Vogensen

Sure. So in terms of cadence for the quarter we started out and when we had this call for Q1 and said that our sales were -- comp sales were running up 1%, we finished quarter with them up 0.3% so really directionally consistent across the quarter. In terms of store opening cadence we are looking at balancing our capital spend between stores and some of the technology we are investing in, in particular next year having a little bit of a lump with systems being rolled out. We are going to have a little bit lower new store opening for 2015. We’re targeting about 70 to 80 new stores.

As we look over the longer term we still see plenty of opportunities for upside both in, really in all of the brands, you’ll probably see more emphasis on some of our merging brands, be it Soma as we move into further into test process with Boston Proper, as we prove out exactly what we want to roll there. And internationally we’re getting great response internationally so you should continue to see an emphasis on those areas.

Operator

Thank you. And the next question comes from Susan Anderson with FBR Capital Markets.

Susan Anderson - FBR Capital Markets

Good morning and congrats also, Todd, on a well-deserved new role. Quick question on the new DC, maybe if you could update us on when you think you will start to leverage that. And then also it sounds like you are looking for comps in the third quarter kind of to be in line with current trends. Would you expect that all to pick up in September or October, given August is not a big missy month? Thanks.

Todd Vogensen

You’re right, August is not a big missy month but we still have nearly 80% of the quarter yet to go at this point. And we do see a lot of positive signs out there. I think at this point our overwriting theme across the organization is plan conservatively and if demand materializes be in a position to react to it. And that’s what you’re seeing in our guidance really or commentary. And I am sorry I had one more question in there?

Susan Anderson - FBR Capital Markets

Yes, on the DC. Do you expect to start to leverage it in the back half or is it a little further off than that?

Todd Vogensen

We’re beginning to see some real strong leverage in the distribution center, some of the technology we’ve put in is finally bringing down that unit cost as we up to speed and working it and so I think that we’ll continue to see leverage from our distribution center on a cost per unit basis.

Dave Dyer

Yes. And remember we build that DC to be able to handle growth in volume for many years to come. So as we continue to go into the future we do see more and more opportunity there.

Operator

Thank you. And the next question comes from Jennifer Black from Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

Good morning and thanks for taking my question and congrats, Todd. I wanted to know how you are going to balance the assortment at White House | Black Market into holiday. What will we see for example with occasion dressing? Will we see more in the way of higher level couture for this customer? If you can also speak to the balance of casual versus the WorkKit, that would be great and how will we see that evolve? Thank you.

Todd Vogensen

Yes. I don’t think that you’re going to see this go overly into special occasion as we get into fourth quarter. I mean actually from a business that was kind of built on special occasions and now our brand and it’s total lifestyle brand it will still be a part of our business, but I don’t think that that’s what we’re hang our head on in the fourth quarter. I think it’s probably more of a dressy holiday look but not necessarily special occasion dresses even though that will be a small part of it. WorkKit is something that we under emphasized for spring I think that we went a little too far the other way, it’s back in our assortment it is performing well. So again it’s that balance I mean what happened is we raised our average unit costs and average unit prices of the company we wound up with not having enough basics. So while a lot of people have to not -- not enough fashion and too much basic we actually went the other way which affected our WorkKit.

I think it’s the line really is back in balance and we’re viewing their assortment I think it’s a fashionable it looks good. There is some new ideas I think this whole iconic collection that they’ve done in the white shirts has been terrific. The iconic dress that we’re running the little black dresses have been very good and the genius dress which is one that you can wear some amazing ways, has really to exceed our expectation. So I think the White House is back in balance again and they have made sure that if they have to promote that is not going to historic margin to the level that it has in the past. So I feel really good about where they are now.

Operator

Thank you. And the next question comes from the Pam Quintiliano from SunTrust.

Pam Quintiliano - SunTrust Robinson Humphrey

Thanks so much for taking my question and let me add my congratulations to you, Todd. So just a few quick ones for you, you mentioned you cut receipts and I was just wondering if that was across divisions equally or if it was there was an emphasis on one more than the other? Also you mentioned your ability to react to trends. Can you just remind us open to buy ability to chase, how we should think about that as we go into the back half of the year and where you really can flex that?

Todd Vogensen

Yes. I would say, in terms of looking at receipts it really hasn’t changed in philosophy across the Company I would say that Soma probably has more of basics in replenishment type business would have impacted them a little bit less, but for our other brands it really was a change in philosophy that cut across every brand. In terms of ability to chase I’d say there are always going to be elements of our assortment that are very unique and have a lot of unique embellishments and prints and things that don’t lend themselves to chasing but that’s also part of the reason that we’re able to generate the margins that we do. And then there are some items that do lend themselves to chase and we’re putting ourselves in a position we’re already do that, yes leggings being one of those.

Operator

And the next question comes from the Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger - Morgan Stanley

Thanks and I will add my congratulations to you Todd as well.

Todd Vogensen

Thanks, Kimberly.

Kimberly Greenberger - Morgan Stanley

I was very intrigued by your inventory comments. You mentioned you would like to align inventory growth with sales growth going forward. I am wondering how you assess the correct sort of underlying level of inventory or the base of inventory that you ought to be growing from and then I'm just wondering if you can talk a little bit about the work being done at Boston Proper. I know 2013 was a tough year for the brand. We were looking or hoping for some kind of stabilization. Is there an opportunity perhaps in the second half of this year to deliver a little bit more stability or are you thinking more like a 2015 target? Thanks.

Todd Vogensen

I think talking about Boston Proper is I think that they have made the necessary corrections. As a matter of fact I think we said the last three of our books have had positive trends and August while again Boston Proper for the Company in terms of their sales is a rounding error, but they are up double-digit increases in August. So I think that, that really bodes well for where that brand as what they really done. They have put density back in the catalog. They have gone back to a lot of the old catalog traditional tried and true catalog techniques of picking up shops where they perform well of adding density. And adding back in the things of the customer want, we actually got cut out a lot of that Boho-chic which was really part of the D&A of the brand that is back prints and pattern and color.

And so I think we’re giving customer what she wants and using tried and true direct marketing techniques and it is working. As a matter fact the increases in August are on circulation decreases, so they’re really performing very-very well. And while one month doesn’t make a seasonal trend, if it’s any indication certainly on the last three catalogs we’re believe they have turned the corner. And there was another question in there somewhere too.

Dave Dyer

Yes, in terms of inventory in line with sales that’s probably the easiest way to look at it and kind of everybody get their heads around, but I rest assume we’re looking at and we go back multiyear and we do our buys to look at density in store, inventory turns, Jim Roy on the inventory and effectively looking to get a good balance through all of those. At the end of the day, we’re looking to improve our inventory turns in that what you should see.

Todd Vogensen

I think when you look at in spring, we thought it was going to be better and we planned for it to be better than it was. And we took a shot in some areas and unfortunately that retail sometimes it works and sometimes it doesn’t. We’re now certainly planning our inventory a lot more conservatively and making sure that we get a read on trends and items before we react rather than taking the upfront shot. And I think that we’re well positioned, I think that we have taking steps to have quick replenishment and fast reorders and the things that we believe. So I think it’s a better healthier way for us go right now and so we see really the positive momentum that we have been used over the last I guess up for 2012. When we get back there again then we’ll be able to take a few more shots but until then we’re going to be a little more conservative.

Operator

Thank you. And the next question comes from the Neely Tamminga from Piper Jaffray.

Neely Tamminga - Piper Jaffray

I am going to congratulate Todd, Dave Slater, Miki and Eric. How about that? So all four, so a question for Dave, a question for Todd, Todd, you outlined -- thank you very much, kind of the key things that are on your dashboard what you care about. Have you thought about taking this further into the employee comp bonus structures and base around really kind of realigning maybe some of the 2015 bonus structures to make sure that you achieve what you just set out to Wall Street? That is question number one. Number two, on the tech side for you Dave, we are obviously very pleased to see the focus on tech and not ignoring stores it is the whole thing it is not just one thing. But wondering what you think are really the key friction points right now with your consumer that you can very explicitly address in the next six to nine months? Thank you.

Dave Dyer

Well I think the key purchase with the consumer with any consumers is just being relevant. I mean they are just bombarded with so many messages and so many people and how do you make those messages relevant. If you can talk to the consumer about something that’s she is interested in or something she wants, she’d have a much higher ability to actually have that converted to purchases. And I think that that is what does holds data architecture is that we have put in. There are just some tremendous things that we’re going to be able to do with our data and our data collection. We have very, very rich filed transactions going back many years and I think we’ve really figured out how we can bring that to life right on the selling floor. We can bring it to life in the messages that we have with the customers, whether it’s in the catalogue giving her a message that is right for her, or giving her a coupon and something that she is interest in whether it is in our e-mail marketing where we talk to her about products or categories that she is interest in rather than a blanket, rather than blanket one size fits all.

I think that when we look at our best customers and we’ve done a lot of research our best customers are less interested in sales and promotion as a matter of fact. The promotional environment is kind of confused them and turn them off a little bit. They are interested in newness and fashion. How do we talk to her? How do we get her the advance of new arrivals? So it really is looking at each customers DNA and figuring out how we speak to each customer as an individual rather than as the masses. And so I think that’s one of the biggest breakthroughs that we are working on and we will have the biggest reward. It is just amazing how many messages. I mean I don’t know you probably looking your e-mail box and see how many messages get a day from retailers. It’s almost overwhelming. So how do we make our messages relevant, I think that’s the biggest switching point and again…

Todd Vogensen

In terms of bonus structures, I think at this point it’s probably a little bit early to get too far, but I rest assured bonus are something that touch everybody very, very personally, it’s that something that would be a big focus and take a lot of discussion before we would make any massive changes. What I can say is the goals that we outlined are very much the starting point for how we are looking at our business, not only for 2015 but over the longer term. So that kind of construct is something that really is going to be pervasive through the planning processes that we do have.

Dave Dyer

And I could say that certainly was the bonus plan as evidenced last year it kind of works. We didn’t perform and we did get paid. We didn’t make a bonus and the performance shares that were awarded, weren’t awarded either. So from that point of view, from the shareholder point of view I think that we are perfectly aligned and while there may be some individuals waiting as we get into the stores or by division by division that we can do better. I’d say overall when we perform, we get paid and when we don’t, we don’t.

Operator

Thank you. And the next question comes from Ed Yruma from KeyBanc.

Jessica Schmidt - KeyBanc Capital Markets

This is Jessica Schmidt on for Ed. You mentioned that you expect to remain promotional at least in the fall. Do you think the consumer is demanding promotions or is it that they are looking for lower prices? And is this a permanent shift? And then just on your pricing structure going forward, how should we think about that?

Dave Dyer

I don’t think that consumer is demanding promotions. I think that what they are demanding is that you be competitive in the marketplace and when you have got everybody else that is doing it, we tried to be standalone and have less promotions and it didn’t work. We have to do enough to be competitive. I don’t think that we have to do go as deep as perhaps some of our competitors have gone. I think that we can be more categories oriented and there is different ways for us to promote but we have to be in the game and I think that that’s what she is saying. I think that the trend of promotional seems to be -- it seems to have been prevalent but I think as more and more people understand what it’s done to margin and what it’s done to their average dollar and average unit sale, I think you will see inventories across the apparel industry get more inline where you don’t have to give it away and you can have more logical and reasonable promotions with a normal promotional cadence. I just think this has been crazy in the last year and probably we will continue through this fourth quarter.

Operator

Thank you. Our next question comes from Paul Lejuez with Wells Fargo.

Paul Lejuez - Wells Fargo Securities

Hey, thanks, guys. Can you talk about the gross margins in the Soma business relative to the rest of the chain? As that chain grows, is that putting downward or upward pressure on your gross margin? Todd, I am not sure if I missed it but the CapEx number associated with those store openings that you mentioned for 2015, if you could share that with us as well. Thank you.

Dave Dyer

Gross margin at Soma is very similar to the other brand as the stores mature. As the matter of fact gross in Soma is not much different than the other brands and the total store profitability is similar to the other brands as the store matures. Gross margin is very similar.

Todd Vogensen

We found overtime is that, there’s a better presence for Soma in brand awareness and as we are on TV that the brand does not need to be as promotional as it might once been. And so that’s really helped on the margin side.

Dave Dyer

We have unique products and desirable products and I think that we have all the raw launches that we’ve had and the new product introductions that we have it really driven a lot of those sales, I mean we really has some items that are just incredible.

Todd Vogensen

And in terms of CapEx, we said one of our guidelines is going to be CapEx that is in line with our depreciation and our depreciation this year on the run rate were between 120 million to 125 million. So it’s really good starting point for next year for you.

Operator

Thank you. And our next question comes from Richard Jaffe with Stifel.

Richard Jaffe - Stifel Nicolaus

Thanks very much, guys. And while you have mentioned international, so far international would be confined to Canada. I'm wondering if you have thought more broadly about international or globally and perhaps proceeding on a franchise route and or an e-commerce route before bricks and mortar?

Todd Vogensen

Yes. So we do have franchise agreement in Mexico that is off to a, actually fantastic start with Chico’s and so we have started with franchises I think at this point international is one of the things where we want to make sure that we get it right. And so we’re growing slow in other to be able to go faster between through building learning and building capabilities and expect to have more opportunity in the future.

Dave Dyer

And we will look at both of the franchises and its own store, Canada is own store, Mexico is franchise I think it all depends on the market that we would go in.

Richard Jaffe - Stifel Nicolaus

And the e-commerce component, as you go international?

Dave Dyer

Well, what we’ve done is we have used border free right now, I think 127 or something like that countries…

Todd Vogensen

A little over 100…

Dave Dyer

That we were in to make it easier, I think as we get a large enough business in a particular country then we would consider having an in country method we’re doing e-commerce hopefully someday Canada would be at that level.

Operator

Thank you. And the next question comes from the Betty Chen with Mizuho Securities.

Betty Chen - Mizuho Securities

Good morning and I would like to add my congratulations to Todd as well. Congratulations on a well-deserved post. I was wondering, if you can talk a little bit more about SG&A. It was really helpful to hear about your guideposts in terms of the business looking forward. Can you remind us the strategic investments planned for this year I think roughly $25 million? Should we expect some of that to continue in 2015 and perhaps in what bucket? And then also a clarification regarding gross margin, I think the magnitude of decrease in the back half should be less than the first half. Should we assume that the third quarter could see some gross margin pressure but the Q4 timeframe could see some opportunity against last year's erosion? Thanks.

Todd Vogensen

So in terms of SG&A on the strategic initiatives the answer is going to be kind of, yes and no, so there are some of those strategic initiatives that are going to cross years, prior most notably our omni-channel investments particularly the POS system. And you’re right we are targeting $25 million to $30 million in SG&A and $25 million to $30 million in CapEx this year. So there will be a little of that that we’re following through next year most of the baseline feel it for royalty programs, Boston Proper, international stores should be a part of our baseline growth really as we go forward. And in terms of gross margin for the back half we’re quite getting about one layer deeper than I can really get, clearly as we look to last year, Q4 was a challenging quarter for gross margin and that should present relatively more opportunities in the third quarter and that’s pretty about further I can go.

Dave Dyer

From a key side, I think we have time for one more call.

Operator

Okay, very good. And that comes from Brian Tunick with JPMorgan.

Brian Tunick - JPMorgan

Thanks. Good morning, guys. I guess one for Dave and one for Todd. Dave, on priorities and uses of cash, maybe just wondering in lieu of what seems to be like heightened investor activism out there, has the Board changed its view of the balance sheet, appetite for buybacks, etc.? Just curious your thoughts there and maybe Todd can talk about the buckets for merchandise margin recapture longer-term beyond just inventory and hoping the promotional environment gets better, are there positive mix shifts happening for omni-channel, outlet, supply chain work -- just maybe talk about other things that can help you as well. Thanks very much and congrats, Todd.

Dave Dyer

I don’t think there has been any change in our outlook of returning cash to shareholders. I think that what we’ve done some $790 million over the last three years, I think we have a track-record of dividends and share repurchases of returning excess cash to the shareholders. So I would say that we have a $300 million authorization that is outstanding. I think some 290 that’s left open. So I think that as we see excess cash and we can put it return for shareholder, we don’t have a good internal use then that’s our plan. And obviously when we look to capital, we’re bringing capital down to depreciation where we’re running $140 million to $150 million a year with we’re now bringing it down to 125 million a year, so that will give us a little bit more excess cash.

Todd Vogensen

And in terms of gross margin, so I’ll start by saying yes the single biggest opportunity is of course going to be promotions and buying inventory more conservatively. But there are a host of things that we’re working on. We’ve touched earlier on the distribution center and getting better leverage as we have higher volumes going through the distribution center. I also in our commentary we’ve talked about inventory in transits increasing for shipping that goods via ocean that’s a direct result of us figuring out way that we can even be more efficient and how we get product to market. And then from a sourcing perspective, we do have a sourcing office just relatively new over in Asia that’s really directly working with our vendors directly and I expect to see benefits out of that.

Dave Dyer

It’s like a technical office, not a sourcing office. We are still using mass, William E. Connor and others. This is a technical support office that when we’ve been problems with deliveries there we need technical expertise in the factory to get a garment done. These are guys that are on site they can spring into action to make sure that the quality and the production will be timely and correct.

David Slater

All right, well that concludes our call this morning. We apologies to those questions that we were not able to get to in the little over an hour on the call, but as always I am available for any follow-up questions as necessary. Thanks to everyone for joining us this morning. And we appreciate your continuing interest in Chico’s FAS.

Operator

Thank you. The conference is now concluded. Thank you for attending today’s presentation. We will now disconnect. Have a nice day.

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Source: Chico's FAS's (CHS) CEO Dave Dyer on Q2 2014 Results - Earnings Call Transcript
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