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Coldwater Creek, Inc. (CWTR)
Q2 FY07 Earnings Call
August 29, 2007, 4:45 PM ET

Executives

Marie Hirsch - Director of IR
Daniel Griesemer - President and COO
Mel Dick - EVP and CFO
Tim Martin - VP, Finance
Georgia Shonk-Simmons - President and Chief Merchandising Officer

Analysts

Lizabeth Dunn - Thomas Weisel Partners
Margaret Mager - Goldman Sachs
Mark Montagna - C.L. King & Associates, Inc.
Elizabeth Pierce - Roth Capital Partners LLC
Richard Jaffe - Stifel Nicolaus & Company, Inc.
Susan Sansbury - Miller Tabak & Co., Llc
Crystal Kallik - D. A. Davidson & Co.
Marc Bettinger - Stanford Group Company
Lyn Walther - Wachovia Securities
Roxanne Meyer - CIBC World Markets
Christopher Kim - J.P. Morgan

Presentation

Operator

Ladies and gentlemen good day and thank you for your patience. I'd like to welcome you to the Coldwater Creek Second Quarter Earnings Release Conference. As a reminder today's call is being recorded.

Now with us today we have Mr. Dan Griesemer, President and Chief Operating Officer; Ms. Georgia Shonk-Simmons, President and Chief Merchandising Officer; Mr. Mel Dick, Executive Vice President and Chief Financial Officer, and Mr. Tim Martin, Vice President of Finance and Ms. Marie Hirsch, Director of Investor Relations.

At this time, I would like to turn the conference over to Ms. Hirsch. Please go ahead.

Marie Hirsch - Director of Investor Relations

Thank you, Dollier. Good afternoon and welcome to Coldwater Creek's fiscal 2007 second quarter earnings release conference call. If you have not received a copy of the release distributed this afternoon, please contact our office at 208-265-3977 and we will send one out to you immediately.

We will begin with a few formal comments from management and then open up the lines for your questions. During the course of this conference call, we may make forward-looking statements regarding future events or performance of the company including forward-looking statements and projections about our operating results, business initiatives, growth opportunities and prospects. We want to emphasis that any projections involve judgment and that individual judgments may vary. Any projections we make today are based on information available to us now which is subject to change as the quarter progresses.

Actual results may differ substantially from what we say today and no one should assume later in the quarter that the comments we provide today are still valid. Moreover, we are not undertaking any obligation to provide update in the future. The documents the company files from time to time with the Securities and Exchange Commission including our most recent Form 10-K and Form 10-Q contain and identify important factors, including the risks and uncertainties described under Risk Factors that could cause actual results to differ materially from those contained in any forward-looking statements.

This call will be archived from approximately 1 hour after the conference call until 10 PM Pacific Time on Wednesday, September 5th 2007. The replay can be accessed by dialing 719-457-0820, and giving the pin number 9104008. A replay and transcript of the call will also be available in the Investor Relations section of the company's website.

And now I'd like to introduce Daniel Griesemer, President and Chief Operating Officer.

Daniel Griesemer - President and Chief Operating Officer

Thank you, Marie, and welcome ladies and gentlemen. Dennis is traveling in Southeast Asia and is unable to join us. So I'll be leading today's call.

Our second quarter results were at the low end of our expectations. As we discussed with you in the last earnings call lower traffic trends and highly promotional summer season and a challenging macro-economic environment all impacted our results. Net sales increased more than 17% to $253 million. However, net income decreased approximately 28% to $8.7 million or $0.09 per share.

Notwithstanding the current difficult business environment, we expanded our market share significantly, and we saw continued strength in our financial condition. As we proceed with successful execution of our retail store rollout in 2007, we have added a total of eight stores in the second quarter giving us 260 premium stores at the end of the period. With these locations in place, we are on target for a total of 304 stores supporting the brand in key national markets as we enter the 2007 holiday season.

Same-store sales decreased 6% for the quarter compared with an increase of 13.3% a year ago. This decrease was the result of a mid-single digit decline in retail store traffic, a highly promotional environment, and a slight decline in average transaction value offset by higher conversion rates and improved IMUs resulting from our direct sourcing program.

I am happy to report that we maintained a strong current ratio of 2.1 at the end of the second quarter of 2007, which improved from 2.0 at the end of the second quarter 2006.

Cash flow from operations for the first six months of 2007 increased $11.7 million versus the comparable period in 2006. And our cash on hand grew from $113 million at the end of second quarter of last year to $130 million at the end of second quarter this year.

Net sales in our retail stores increased more than 23% and represented approximately 70% of our total net sales in the second quarter of 2007 compared with approximately 66% for the same period last year.

In the direct segment, overall net sales increased more than 4% in the second quarter. Internet sales increased nearly 10% compared to last year and now represent over 21% of the company's net sales. Catalog sales decreased approximately 7% for the quarter and represented about 8% of total sales for the period.

In our last call, we talked about the implementation of several important new creative initiatives in the first half of 2007. We remain confident in our ability to react to the business environment and have now updated all three sales channels. In our stores, we have rolled out a fresh new creative look, which included an innovative sales floor layout and complimentary signage that highlighted the merchandise and presented a more compelling shopping experience.

On the Internet, initial test results of our updated website were positive and the new website went live at the end o May. For a first hand look at what's new, we invite you to visit our website at coldwatercreek.com.

We also tested a newly designed Coldwater Creek catalog, our primary vehicle for driving traffic towards retail stores. Customers' response to this new catalog was positive and we plan to fully implement the new design later this fall.

As we have discussed on previous calls, we have begun several major IT initiatives. We recently completed the initial conversion of our accounting and HR systems to the SAP platform on time and on budget. We have since the launched the project to replace our core merchandise systems with SAP. The continued development of this integrated platform will better position us to support our long-term growth.

Another highlight of the second quarter would be opening of our New York store 68 and Third. Our arrival in Manhattan represents a true landmark of Coldwater Creek brand. With the addition of the Manhattan store, we now have 14 stores in the New York market, including Long Island, New Jersey, and Connecticut.

This is the first opportunities we've had to speak with you since announcing onecreek, our unique new loyalty program designed to further enhance service and reward our most valuable customers. After testing in selected markets, onecreek is scheduled for a full rollout in September. Benefits will include unparalleled service, sneak peeks at upcoming trends and new merchandise, onecreek customer service specialists who can find exactly what our customers want, a personal shopper at her favorite Coldwater Creek store, exclusive onecreek savings and promotions, free shipping on returns, and a special gift to help her celebrate her birthday. Customers will automatically be enrolled in Coldwater Creek's onecreek loyalty program upon meeting eligibility.

While many retailers have used their loyalty programs to capture customer names and addresses, we are optimizing the use of our existing customer database to identify and immediately enroll approximately a 0.25 million of our very best customers in onecreek. The program is designed to improve retention and overall spend within this very important and profitable segment of our customer base.

Customers enrolled in onecreek shop approximately three times more frequently and spend approximately four times more than an average customer. Additional details of the program are available on our company website under the Investor Relations link.

In closing, we remain confident in our business model. Our growth strategies, our merchandise, our people, our overall long-term market opportunities, and our increased brand awareness. It is these strengths that will continue to differentiate Coldwater Creek within the competitive landscape. We will continue to focus on performance during these challenging times to emerge as an even stronger competitor in our sector.

Now I would like to turn the call over to Mel for a detailed review of the second quarter financial results. Mel?

Mel Dick - Executive Vice President and Chief Financial Officer

Thank you, Dan. Turning now to a detailed look at our second quarter financial results. Net income for the second quarter decreased $3.3 million to 27.6% to $8.7 million or $0.09 per diluted share from $12 million or $0.13 per diluted share that we reported in the second quarter of last year.

Our consolidated net sales for the second quarter increased 17.1% to $253.5 million, up from $216.4 million in the same period last year. Excuse me. Net income for the six-month period ended August 4, 2007, decreased $2.9 million or 12.1% to $20.7 million or 22%... $0.22 per diluted share from the $23.6 million or $0.25 per diluted share that we reported for the first six months of last year.

Our consolidated net sales in the first six months of fiscal 2007 increased 23.9% to $534.8 million, from $431.7 million in the same period a year ago.

Retail segment net sales, which includes the company's premium retail stores, outlet stores and six test spa locations, increased 23.5% to $177.7 million in the second quarter of 2007 from $143.8 million in the second quarter of 2006. Retail segment net sales represented 70.1% of the company's total net sales in the second quarter, compared with 66.5% in the second quarter of 2006.

We opened eight premium retail stores during the second quarter, giving us a total of 260 premium retail stores in operation at the end of the second quarter, compared with 196 premium retail stores at the end of the second quarter of 2006.

Same-store sales decreased 6% in the second quarter, compared with a 13.3% increase in the prior year period.

Direct segment net sales increased 4.5% to $75.8 million in the second quarter compared to $72.6 million in the second quarter of 2006. Direct segment net sales represented 29.9% of the company's total net sales in the second quarter compared with 33.5% for the same period in 2006.

Internet net sales increased 9.8% to $54.8 million in the second quarter compared with $49.9 million in the same period last year. Internet net sales represented 72.2% of the direct segment's net sales in the second quarter compared with 68.7% in the same period a year ago. Internet net sales represented 21.6% of the company's total net sales in the second quarter compared with 23% in the same period a year ago.

Catalog net sales decreased 7.3% to $21 million in the second quarter from $22.7 million in the second quarter of 2006. Catalog net sales represented 27.8% of the direct segment's net sales in the second quarter, compared with 31.3% in the same period last year. Catalog net sales represented 8.3% of the company's total net sales in the second quarter compared with 10.5% in the second quarter of 2006.

Gross profit for the second quarter was $110.2 million or 43.5% of net sales. This compared with $100.1 million or 46.2% of net sales in the second quarter of 2006. The decrease in gross profit rate was primarily due to increased promotional activity partially offset by higher merchandise margins associated with the direct sourcing program.

Selling, general and administrative expenses for the second quarter were $98.1 million or 38.7% of net sales compared with $82 million or 37.9% of net sales for the second quarter of 2006. The $16.1 million increase in selling, general and administrative expenses was driven primarily by marketing, personnel and overhead costs associated with company's retail expansion.

Income from operations for the second quarter decreased $6 million or 33.4% to $12 million or 4.8% of net sales. This compared with $18.1 million or 8.4% of net sales for the second quarter of 2006.

At the end of the second quarter the company had no short or long-term borrowings and a cash position of $129.9 million compared with a cash position of $113.5 million at the end of the second quarter of 2006. The company's working capital increased to $188.9 million at the end of the second quarter from $148.2 million at the end of the second quarter in 2006.

Once again the effectiveness of our triple channel business model allowed us to end the quarter with a clean and current inventory position going into fall. Premium retail inventory per square foot, including retail inventory at the distribution center decreased 14% compared with the prior year period.

Total inventory increased 29.7% or 24% to $153.6 million at the end of the second quarter compared with $123.9 million at the end of the second quarter in 2006. This increase is primarily attributable to the addition of 64 premium stores at the end of the fiscal 2006 second quarter.

In summary, we were disappointed with the second quarter results. The difficult retail business environment coupled with lower than anticipated customer traffic, continued to negatively impact gross margin and earnings for the recent period.

In closing, I would like to say that I am very pleased with our recent announcement that Tim Martin will be our new Chief Financial Officer effective September 1st. Tim has been a key figure in the development of our finance team over the past year. He brings great skills and experience to the CFO role and we are planning for a smooth transition. Tim?

Tim Martin - Vice President, Finance

Thanks Mel. I am excited about this new challenge and I feel fortunate to be taking over the finance and accounting team that has been assembled under Mel's leadership. In the coming months, my primary focus will be ensuring a smooth transition. But over time, I look forward to meeting or reacquainting myself with all of you.

Mel Dick - Executive Vice President and Chief Financial Officer

Now I'd like to turn the call over to Georgia for a discussion of our second quarter from a merchandise perspective and what's in store for the fall season.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Thank you, Mel. Good afternoon everyone. As Dan and Mel have discussed, the business environment has been challenging. With continued softness and overall traffic and a highly promotional environment, we were unable to build on the very successful same-store sales increase of 13.3% that we delivered in the second quarter of last year. Despite the lower traffic, we believe our merchandise remains on target. We saw increased units per order and higher conversion rates in our premium stores during the second quarter, and the brand continues to gain more than its fair share of traffic in our sector.

We have continued to transition our merchandise to fit her lifestyle and we believe our product coupled with outstanding customer service remains an effective catalyst for taking market share especially in these times.

In our stores, customers have responded to color and freshness for summer which was highlighted by innovations to our sales floor layout and signage. These creative changes presented the merchandise in a more compelling overall perspective. This is all about keeping the brand relevant to this customer.

That being said, due to the highly promotional environment, we experienced resistance to full price spending in the second quarter. However, our cropped pant business in both novelty and basic as well as our T-shirt program have proven to be wardrobe essential. Also, our white ground printed jackets have stood out as a new addition to her closet.

Moving into fall, we are committed to gaining additional market share as we grow our retail store base. As always, we will build on success of our core products by adding newness and freshness to the brand while continuing to improve in all areas of our overall assortment.

We began our transition to fall by featuring rich vibrant colors with touches of shine and our first delivery of this merchandise was set in stores at the end of last week. Although it is still too early to comment on customer response to the new assortment, we remain confident in the merchandise direction, holiday and high level of brand awareness.

I am pleased to announce that just after Labor Day, we will be introducing our new pant initiative, the right pant, the right fit, showcasing new styles, new colors, more fabric options and sizing to fit any silhouette and lifestyle.

Turning to Spirit, we continue to test this collection through the all important holiday season. The pants and jacket categories remain our best performers, offering her a more elegant and sophisticated look.

As Dan mentioned, the Coldwater Creek catalog, our title featuring merchandise that can be found in our stores, presents a new creative approach that is tied even more directly to the retail locations and is more closely reflective of our customers' lifestyle. We successfully tested the new look of this catalog in June and plans are in process to roll this out, the new design starting in November.

From our last call we committed to you that inventory would remain clean and current, as well as in line with current market demand. A highlight of our second quarter performance was the retail inventory came in under plan as we saw in premium store inventory decrease of 14% on a square foot basis, compared to prior year, including inventory at the distribution center.

We remain on track to meet our goal of direct sourcing 50% of our merchandise by the end of the fiscal year. And we continue to create new efficiencies and strategic opportunities as we further coordinate the New York design studio with our offices in Hong Kong and India.

The opening of our flagship store in New York City was another highlight this past quarter. The location is strategically situated on the Upper East Side of 68 and Third where we have a high concentration of customers.

In summary, we believe in the strength of our merchandise and the look and feel of the brand. We continue to update our product and provide fresh new ideas that are designed to keep our brand absolutely relevant to this customer and her lifestyle.

That concludes my formal remarks. I'll now turn the call back over to Dan. Dan?

Daniel Griesemer - President and Chief Operating Officer

Thanks Georgia. Based on current business conditions, we now believe our earnings for the second half of 2007 will be approximately flat to the second half of last year, and we anticipate sales for the second half of the year will be in the range of $720 million to $735 million.

While it is too early to see the results of the fall selling, based on August business to date, we believe the third quarter will be particularly challenging. As such, we have reduced our guidance to reflect the current business environment.

We will continue to execute on our retail expansion plan, staying focused on the things we can control, including improving the overall customer experience in our stores, controlling our inventories, managing our margins and controlling our expenses. We continue to believe we are on the right track and the initiatives we are undertaking will enable us to enhance value for our shareholders over the long term. Thank you.

Now I would like to turn the call over to open it up for your question.

Question And Answer

Operator

[Operator Instructions]. First question coming from Liz Dunn with Thomas Weisel Partners.

Lizabeth Dunn - Thomas Weisel Partners

Hi good morning. I am sorry good afternoon. Just one point of clarification and then my real question. Did you mention how negative traffic was in the quarter?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

No.

Lizabeth Dunn - Thomas Weisel Partners

Are you prepared to provide that?

Daniel Griesemer - President and Chief Operating Officer

Mid-single digits. It's down mid-single digits.

Lizabeth Dunn - Thomas Weisel Partners

Okay. It did show some improvement. I guess my question is, do you still feel confident that the ultimate margin potential for this business is 15% given that it looks like the environment will be significantly more promotional for the foreseeable future? And why not pursue a more measured taste of growth given the dynamics that we're seeing in the industry, I am not sure you've had a chance to see. But Chico's announced that they are reducing growth. Why not at this point reduce growth so that you can measure and monitor the business in growing a healthy way?

Mel Dick - Executive Vice President and Chief Financial Officer

Yes this is Mel. I'll take the margin question and then perhaps Dan can comment on the growth. In terms of the margin we've said in the past that we believe we have the opportunity to get to a mid-teens operating margin primarily through continuing our direct sourcing program and leveraging our SG&A as we get our store base larger.

Clearly the challenging environment that we are facing as you mentioned Liz, I think will impact that for us to get to that mid teens and we do believe we can get there ultimately. We would have to recover... recapture some of the gain in the IMUs that we were able to get from our direct sourcing program, during the latter half of last year and the first half of this year. And obviously that will depend on the overall macro environment, the promotional environment which as I think you mentioned has been challenging here.

Daniel Griesemer - President and Chief Operating Officer

Yes on to the growth rate, we have about 260 stores open today, we believe that the chain threshold is somewhere in the neighborhood of 500 or a little bit above that. We are only halfway through the store rollout. Our new stores are coming out of the box as well if not better than the new store group have year-over-year. We are committed to opening about 65 stores a year for the next several years, and we've been kind of talking like that for a couple of years. This is not going to stand in the way of that. We are about grabbing market share and taking advantage of the demographic growth that's happening in our sector to position us for long-term growth. So, we are appropriately moving ahead at the rate... current rate.

Lizabeth Dunn - Thomas Weisel Partners

Okay. Thank you. Good luck.

Daniel Griesemer - President and Chief Operating Officer

Thank you.

Operator

Thank you. And our next question now comes from Goldman Sachs' Margaret Mager.

Margaret Mager - Goldman Sachs

Hi. Okay. With regard to the outlook for revenue in the second half, it looks like you are forecasting a 16% increase in total revenue at a $725 million level, so mid point of your range. Based on your comment I would... about third quarter looks like you would expect it to be below 16% and below the 17% top line growth rate you achieved in 2Q. So, just help me make sure I am interpreting that correctly and that would imply down same-store sales. Against the inventory levels up 14% in total, would you be expecting continued markdown pressure with any carryover inventory out of this summer season into fall? Can you give us some insight on that? And then separately with regard to the question of full price selling Georgia, you said that there is resistance from your consumer to buy at full price. Can you give a little more color as to why you think that's the case? And were there any merchandise misses, things that you felt you could have done better in your offering in the second quarter that may have also contributed to the disappointing results? Thanks.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Okay, great. Let me start with the inventory. We came out of the summer season. We will be very clean in inventory. So we feel very strongly about that. And looking forward to the fall season, we still believe that we will be able to bring our inventory in dollars per square foot down, about 9... between 9% to 14% for both Q3 and Q4. So, inventory I think we are controlling it very well. We understand it. We know the environment is difficult, but we are taking steps to really make sure that we again bring inventory in for ourselves and the shareholders.

When it comes to the full price, last year, we sold in Q2 a little more than 70% of our merchandise at full price. This year, we were about only 65% at full price. I would have to say that I think besides the traffic, we are not walking in the door, having a very, very promotional environment all the way around this. So there was no reason for her to think she had to buy anything at full price. And if I had to say that I had a disappointment in product, it would be print skirts.

Margaret Mager - Goldman Sachs

Okay.And any way to help us understand the 3Q, 4Q split on revenue and thought process on same-store sales?

Mel Dick - Executive Vice President and Chief Financial Officer

Well, in terms of the revenue and as Dan mentioned, based on business to date in August, we expect that the third quarter could be particularly challenging. That said, August is the smallest month in the third quarter and should we see some uptick in business, I think we have some opportunities for the third quarter. But right now at this point in time, we really expect that the back half of the year as Dan said, to be flat in terms of earnings and what our revenue projections are. And I think that will be more weighted towards the fourth quarter than the third quarter given current conditions.

Margaret Mager - Goldman Sachs

Okay. Good luck.

Mel Dick - Executive Vice President and Chief Financial Officer

Thank you.

Daniel Griesemer - President and Chief Operating Officer

Thank you.

Operator

Our next call... actually, our next question comes from C.L. King & Associates, Mark Montagna.

Mark Montagna - C.L. King & Associates, Inc.

Hi, just a quick question about... with the store expansion, it seems every quarter one of the comments is that part of the reason why the expenses go up is because of increased personnel and overhead costs associated with the retail expansion. I'm trying to understand what exactly those costs are because if every year at 65 stores, it seems like it should just be roughly the same costs every year. So I'm wondering if you could just kind of walk me through why... what are those components that keep going higher?

Mel Dick - Executive Vice President and Chief Financial Officer

In terms of the costs associated with that it is the personnel and costs associated with the field retail organization as you have more stores, more districts, more regions. Also the home office expenses associated with supporting that retail expansion as we've grown our revenues up 17 plus percent. You're going to have growth in your merchandising, your back office support functions, etcetera. And that's what we mean when we say to support the retail expansion.

Mark Montagna - C.L. King & Associates, Inc.

Okay. And then last question just dealing with the catalog. Are you seeing a significant increase in your mailing expenses like, just kind of curious what percentage that might be up? And then are you seeing an increased amount of people redeeming the $25 off purchase coupons? And I'm just wondering if there is too much dependency on those coupons that perhaps it would make sense to pull back on a promotion like that?

Mel Dick - Executive Vice President and Chief Financial Officer

In terms of the costs associated with catalog and increased mailings, as I think you are aware there was an increase in postal rates.

Mark Montagna - C.L. King & Associates, Inc.

Right.

Mel Dick - Executive Vice President and Chief Financial Officer

Assumed that there was going to be an increase in postal rates and have built that into our plans. So I don't think that's had a significant impact on us this year from that standpoint.

Mark Montagna - C.L. King & Associates, Inc.

What about the coupon that you typically have in those ads? Is that... are you seeing increased redemptions on that? Is there any thought of maybe trying to pull back on that to protect margins?

Daniel Griesemer - President and Chief Operating Officer

Yes we are seeing a slight increase in the redemption but we are not planning on pulling back as those coupons... I know you know we put a unique offer code on each coupon. It tracks the effectiveness of each issue of each title that we are advertising in and we are watching that the new to file has remained constant. And we absolutely note that the resulting transaction is in excess of transaction. They do not use the redemption. They don't have that as discount associated with it. We are pleased with the effectiveness and are not backing off on that. It works at driving traffic to brands.

Mark Montagna - C.L. King & Associates, Inc.

Okay. Thanks.

Mel Dick - Executive Vice President and Chief Financial Officer

I might add to that. We did see a slight decrease in the percentage of our total marketing spend to our total revenues, so very slight leverage during the second quarter.

Mark Montagna - C.L. King & Associates, Inc.

Okay. Can you tell us what your expense leverage point is on comps?

Mel Dick - Executive Vice President and Chief Financial Officer

We have not discussed that in the past.

Mark Montagna - C.L. King & Associates, Inc.

Okay. Would you... can you possibly do it now or you just that's just something that you want to talk about?

Mel Dick - Executive Vice President and Chief Financial Officer

Not at this point.

Mark Montagna - C.L. King & Associates, Inc.

Okay. Thanks.

Operator

Moving on, we'll take our next question from Liz Pierce, Roth Capital Partners.

Elizabeth Pierce - Roth Capital Partners LLC

Good afternoon everyone. And one clarification for Georgia on the skirts you said you were disappointed. You didn't like the product, not enough of it came out just if you could just add a little bit of more clarification to that?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

And we came off, at basically a year and a half of very, very strong skirt business. And all through early spring and into very, very early summer we still saw a tremendous response to it. As of hitting really the end of May into high summer we saw a major slowdown in skirt selling and actually a higher response to our cropped pant.

Elizabeth Pierce - Roth Capital Partners LLC

So perhaps that was a seasonal shift just [indiscernible] the cropped?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

You are breaking up. Could you try that again?

Elizabeth Pierce - Roth Capital Partners LLC

I am sorry, I am on a cell phone. Yes, do you think Georgia, it was just more of a seasonal issue or just ready for a change of pace?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Well I definitely believe we'll be moving back into the pants business in a very big way. I think skirts and dresses have been very strong. You're still going to see, and we are not going away entirely but I do believe there will be a move back to pants with some new jacket shape then and some new bodies and opportunity in the pants business.

Elizabeth Pierce - Roth Capital Partners LLC

Okay. And did you guys provide any kind of a detail on the impact of spa for the quarter? I didn't see it in press release, but I scanned it quickly.

Daniel Griesemer - President and Chief Operating Officer

No, it was approximately a little over a penny in the quarter. So, that as little over penny in each quarter first and second and we didn't include... I didn't include that in my remarks.

Elizabeth Pierce - Roth Capital Partners LLC

Okay. And then in terms of the new catalog format which you are going to roll out in November, correct?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Yes.

Elizabeth Pierce - Roth Capital Partners LLC

What were some of the key takeaways? I mean obviously, the productivity of the catalog, was there anything that she responded to or that you could call out that reasonably this is the right? I mean, I thought it looked great. I am just curious what are the feedback you got about the catalog?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

I think the things that we have heard about the catalog is that it not only helped our customers but it also helped even our sales associates on how to put more items together for her. And how to build a weekend wardrobe and the mix and match and they must have for the season. I think that she looks to us to truly tell her what we are seeing and how we are feeling about it. And the response was really, really good. So we are going to continue that same format as we roll it out in November.

Elizabeth Pierce - Roth Capital Partners LLC

It seemed like the outfitting was more impactful and helped on both the sales side and the customer side.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

And that we... certainly the creative did what we ask it to do and she was pleased with it so that's the win that we will be able to look forward to from November forward.

Elizabeth Pierce - Roth Capital Partners LLC

And then Georgia on the inventory, I think it makes total sense to be down and be conservative. But did you put yourself in a box if maybe traffic did pick up that could be maximized, on the earnings side above a flat to LY [ph]?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

WellI think as I look forward to Q3 and Q4, we still have open to buy, and we still have opportunities as we are looking at photography to do, what we call booster buys and things we really believe in. So, I believe that we are putting our money onto the products we really believe in and being more conservative on some of the other products.

Elizabeth Pierce - Roth Capital Partners LLC

So as she comes in perhaps, traditionally the customer seems to shop more in September, you still have some time then to respond actually you had into the holiday. Because I think you are staging holiday a little different this year.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Yes, we are and... that's the exact strategy we have going in.

Elizabeth Pierce - Roth Capital Partners LLC

Okay, great. Thank you guys and good luck.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Thank you.

Mel Dick - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Moving on taking the question from Richard Jaffe with Stifel Nicolaus.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

Thanks very much guys. I guess two questions. One is in regard to ad spend and the commitments you guys made to increase ad spend this year. And also the circulation of catalog, particularly the new book. And so if you could talk about the second half in regards to those ads spend in your direct investment and then a follow-on question as well.

Daniel Griesemer - President and Chief Operating Officer

Richard, I am assuming you are referring to the national magazine ad spend. We've tested television in the first half of the year where we are not going to be spending money on television in back half of the year, and we've directed some of that money that we've planned on television and to magazine ad spend and those spends are approximately flat this year with last year. We are doing the 8-page and 4-page national magazine ads and two-in-one, where appropriate in holiday and we are pleased in confident about that strategy. So it's about a flat spend in the back half of the year for national magazine ads.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

And the direct... particularly the new book, the direct... or the investment in the direct...

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Richard, for the back half of the year, we have actually added a Coldwater Creek book. And so what we are going to do is take circulation. Last year in the back half, we were about 12 million in circulation for the Coldwater Creek book and this year we are going to be about 16 million.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

16. And the difference being this new book that's just getting launched now?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

That is the circulation for the new book. If I look at North Country and Spirit, our regular catalog, they are only up slightly. The big increase in all of our catalog circulation is really coming from the Coldwater Creek book.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

Got it. I guess the follow-up question is really the source of confidence given the, I think each speaker has used that word and yet given the trends quarter to-date and the very defensive inventory position, it's hard to understand what the confidence is based on. But if you could provide some clarity, either merchandising or from a sort of crystal ball perspective what could... what fuels the second half confidence for you guys from a finance and operations and obviously merchandising standpoint?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Well, let me take it first Richard. I'd have to say that fall really just got on the floor. So what's happened so far with the August environment hasn't really had really much to do with fall merchandise. So we still believe in the fall merchandise going forward. We also believe we will pick up share. And we have been really touting managing inventory for almost six months now. So I am not concerned that managing inventory means that we won't have enough inventory to meet the sales. I think there is a difference between managing and pulling way back.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

I'm not afraid of too light [ph] an inventory. I am afraid of having inventory that requires markdown or reduced prices that contributes to earnings declines rather than earnings improvement.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Well again I think that is why we've taken a different inventory approach and the inventory approach that we've taken is really looking at all the products keeping us into buy really taking very strong positions on the items and the categories we really believe in. So, very comfortable how we are managing the inventory and quite frankly not as concerned about the markdown pressure as of yet.

Daniel Griesemer - President and Chief Operating Officer

Yes. And I would build on that Richard also saying that we were just out in the stores at the end of last week. We looked at our products as compared to the competitive environment out there, we still feel here from our stores and here from our customers that the product is right on that's that the first thing that gives us confidence. But we are continuing to open stores at a prudent aggressive rate as we are grabbing market share. We are absolutely controlling our expenses and managing the inventory. So even in a difficult macro environment we are taking control of our own destiny here, and we are not just sitting back. We are being very proactive on how we are going to manage the next several quarters.

Richard Jaffe - Stifel Nicolaus & Company, Inc.

Thank you.

Mel Dick - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Next we'll hear from Susan Sansbury of Miller Tabak.

Susan Sansbury - Miller Tabak & Co., Llc

Hi. Thanks very much. With respect to August are you willing to make any comment of that how it is trending from a comp store sales standpoint? I am assuming that the rate of decline has accelerated. Is that a fair statement?

Daniel Griesemer - President and Chief Operating Officer

No, we are not going to comment on that as we have not really commented ever on kind of forward-looking comps. I would say we were out in stores. I am sure you're out in stores, you see a challenging traffic environment that some of our peers have alluded to it. But again August is not the primary determining factor at least for our business. We are not a teen retailers. So for our business fall is really determined by September and beyond. So we are going to look to that period to really dictate how this season will come out.

Susan Sansbury - Miller Tabak & Co., Llc

Okay, fair enough. Second question is with respect to the... can you comment about the markdown rate versus the higher IMU on a cost basis?

Mel Dick - Executive Vice President and Chief Financial Officer

Yes, I will take that one. On an overall IMU basis, we were up about 200 basis points in IMU, probably 75 to 100 of that basis points was as a result of the direct sourcing initiative. We've also I think had some great cost negotiations relative to our domestic vendors.

In terms of the offset to that, our markdowns were up about 170 basis points over the previous year quarter and our discounting was up about 130 basis points as well. And then we had some de-leveraging of our occupancy cost of slightly less than 100 basis points, all of which net down to our gross margin going down about 170 points.

Susan Sansbury - Miller Tabak & Co., Llc

Okay. And the third question is given the more difficult environment in the third quarter and/or the second half, is it fair to say that you won't get any SG&A de-leveraging? I am sorry, yes, de-leveraging... part of the leverage [ph] in the second half.

Mel Dick - Executive Vice President and Chief Financial Officer

I think in terms of looking at the second half as Dan mentioned, expecting flat earnings, I think a lot will depend on the strength of our selling and where that comes out as a result of some of the macro economic conditions to see really whether there is any opportunity to leverage our SG&A in back half of the year. Certainly, if there would be an increase or the traffic would come back, I think we are well positioned to take advantage of that with the strength of our merchandise and our marketing initiatives. But I think we really need to wait and see.

Susan Sansbury - Miller Tabak & Co., Llc

Okay. So you haven't told... you haven't made any... advertising expense is going to be flat but beyond that all other normal operating expenses within SG&A is going to increase.

Mel Dick - Executive Vice President and Chief Financial Officer

From a percentage standpoint, I wouldn't necessarily say that. We are looking at all of our controllable operating expenses, and making appropriate adjustments, if necessary. That being said, in terms of supporting our strategic initiatives, the rollout of our stores, our direct sourcing program, continuing our resource investments in our IT initiatives and our design and merchandising... design and product development area we will continue to focus our resources towards those initiatives.

Susan Sansbury - Miller Tabak & Co., Llc

Okay, great. Thanks ever so much.

Operator

And from D.A. Davidson, we have a Crystal Kallik.

Crystal Kallik - D. A. Davidson & Co.

Good afternoon. You know, Georgia, I mean if you could just comment.. you have always had been very successful to staying away from those promotional environment, really not entering into that phrase too quickly. I think obviously it sounds like environment is changing quite a bit. How do you approach that this year versus how you played it the past several years?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Well I would still say that if you look at what we sold 65% in Q2 was still at regular price. That's still a very high percentage although it was less of a percentage in the prior year. I definitely think the environment has changed. It has changed with traffic and other macro issues that are keeping her away from stores and in fact shopping. So, for us, it will mean again, keeping it really close handle and watching those sales very carefully on a day-to-day basis from a reaction perspective. Now, again we have been conservative with our inventory, and we have instituted cost controls. And so we are feeling that we are doing the things that we need to do to protect our business against this environment.

Daniel Griesemer - President and Chief Operating Officer

I'll add on that to Georgia. We as you know our model is really four sale periods a year. We as planned are at full regular price now. There is no sale in our stores. We have the power of the gift with purchase promotions that we have interjected into the fall and holiday seasons. We have various promotions that accompany our national magazine advertising spend and then we have the sales period that comes up in the fall sale which is... as planned we'll be going on sales this fall at some point. And we have the opportunity there to react to the business climate and to price appropriately but all within the overall model. So there is lots of things that we have at our disposal to manage through the environment.

Crystal Kallik - D. A. Davidson & Co.

Okay. Great. That's really helpful. Georgia, any updates on... is there anything different? I know you're always out there doing customer research and monitoring this. Is there anything that's changed maybe from Q1 research to Q2 research?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Again I think there will be more emphasis on her wearing pants and I think then that changes how she feels about what she wears on top whether it be more jackets again and more prints. So I think that there are some changes in thought, I think she has plenty now of print skirts in her closet. And she will be looking for other changes. And as I said in my comments we are really excited about some of the products that we have with shine. And that shine and glimmer seems to be working because she doesn't own a lot of that. So I think we must always be looking at when there is a saturation point of what she owns.

Crystal Kallik - D. A. Davidson & Co.

Okay. Great and then just finally I know in Q4 one of the big surprises that came out was just how significant your gift card business increase in that timeframe. I think it was up something like 70%. I know you have been working through how to strategize that and you talked perhaps about a greater emphasis on what she herself... what she is buying for herself and less on kids or, could you talk to us a little bit about your thinking specifically for Q4 and the gift card opportunity?

Daniel Griesemer - President and Chief Operating Officer

On gift cards, we rolled out in April a gift card fixture in our stores that carries 96 different graphics and carriers, envelope carriers. We are pleased with what that means to the business and how we are seeing increased start of sales and redemption. I'm not sure about the 70% increase in holiday. That would have largely come from additional locations selling gift card versus on a third location basis. But we've seen increase on a per location basis and gift cards do play an important role in the holiday gift-giving season and we are very aware of that and have strategized for it. But it is not what is going to determine the overall success of the season. It will be the product and the great customer experience she has come to know and love.

Crystal Kallik - D. A. Davidson & Co.

Thank you very much and good luck.

Daniel Griesemer - President and Chief Operating Officer

Thank you.

Mel Dick - Executive Vice President and Chief Financial Officer

Thank you.

Operator

And next we'll hear from Margaret Mager with Goldman Sachs.

Margaret Mager - Goldman Sachs

Oh, hi. I've got a follow up but the... one of the things I wonder about your... the way you do your business where you normally have certain periods where you are on sale. Do you think, or do you see from your traffic data, that your traffic really picks up during your sale events and are you training your customers to wait, and that could be one of the issues with how the business is mapping out over the course of the quarter into a greater promotional cadence? So that's one question. I have one more.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Well. I think if you really look at the... I mean, I think you have to say we strategically would like to do obviously more of our business at full price. And so as a company we've made the decision that we would only be on sale four times a year. We are not alone in that decision. There are some other competitors out there that do that, not many. I do believe that if we stick to our meeting and we believe in that strategy that it will come back to us in full price. People that are on sale 365 days a year, which actually is promotional activity really started last September happening, I think it will be more difficult to lean them off that when the environment improves.

Margaret Mager - Goldman Sachs

Okay. And then the... the whole... looking at this year guiding to flat second half earnings that means that that 2007 looks like it's going to be a down year versus 2006, which was a disappointment in its own right. And you have materially more stores opened today than you did two years ago, so your company is becoming less profitable as it gets figuring new gain market share. How concerned are you about that? It seems like you should be scratching your head about your strategy in light of what unfolded over a two-year time horizon. So if you could just talk me through how you are thinking about it in light of what has now become a multi-year record of disappointment? Thanks.

Mel Dick - Executive Vice President and Chief Financial Officer

Yes, I am not sure I necessarily agree on a multi-year record, just one that we have record earnings last year vis-à-vis the previous year and our earnings were $0.58 per share last year. This year with the flat second half, we would be somewhere in the neighborhood of $0.55 to $0.56, and I think given the current conditions, well, we are not pleased with that and we would like to do better than that. I think we are striving to improve and are really taking control of those things as we can control at this point in time.

Margaret Mager - Goldman Sachs

So I agreed, the numbers on the numbers and they were up on '06 versus '05, but the second half didn't meet expectations and that, now we are well into... 2007 is going to be deforming. And then the point of the company becoming less profitable, the... you were 8.4% operating margin and then 8% and now we are looking at 6.7%. Do you think there has... maybe there are some rethinking strategically that needs to be... need to be done at this point or is it really just completely things that are out of your control whether that are causing this to happen to you?

Mel Dick - Executive Vice President and Chief Financial Officer

No, again I would say relatively to last year, we had a disappointing fourth quarter and we commented on that earlier in the year. Also earlier in the year, we gave guidance. We indicated that we were expecting a challenging first half of the year, in terms of inventory positions that we were committed to coming in in the first half of the year given that we were seeing traffic patterns being down, from where they had previously been when we made those buys. The current economic environment I think is well known to every one out there. So from a strategic standpoint, I would say when we look at the demographics of the really 35 plus market that we're after we think there is a great opportunity and that's why I think Dan mentioned, we expect to continue to expand our retail stores to take advantage of that. And you know, we have a great understanding of this 35 plus customer, there have been a number of others that has come into the space and have stumbled, while we are down slightly as we mentioned I think we are holding our own and we are taking market share, and Georgia's comments about the merchandise, the inventory controls and things like that, well, none of us are probably is pleased as we'd like to be in terms of our overall performance. Clearly, we think we are well positioned and our strategy still on point.

Margaret Mager - Goldman Sachs

Okay. Well the demographics are definitely in your favor so I will just... hopefully that will play out positively over time so. Okay. Thank you.

Operator

And next we'll hear from Marc Bettinger with Stanford Group.

Marc Bettinger - Stanford Group Company

Hi, everyone.

Mel Dick - Executive Vice President and Chief Financial Officer

Hi, Marc.

Daniel Griesemer - President and Chief Operating Officer

Hi, Marc.

Marc Bettinger - Stanford Group Company

Mel, one question, do you have any sense of what the industry sales, what the change has been?

Mel Dick - Executive Vice President and Chief Financial Officer

I don't have a sense from the overall sense what the change has been, I guess as I reflect on reported comp stores sales, I think everybody has been down somewhere in the neighborhood as of mid to maybe high mid... high single-digits from a comp store sales standpoint. We do know, at least our belief was earlier this year based on data that we were seeing is that the specialty retailers focused on 35 plus we are actually taking more market share for the first time ever last year than what the department stores were. We continue to believe that our market share does come from department store sector.

Marc Bettinger - Stanford Group Company

Okay. So, do you think on a same-store basis you are still picking up share?

Mel Dick - Executive Vice President and Chief Financial Officer

On a same-store basis?

Marc Bettinger - Stanford Group Company

Well, in other words, you are up 17% in sales, because you have opened up more stores, but on the same-store basis you're down 6%. Do you think the industry is down 6% as well?

Daniel Griesemer - President and Chief Operating Officer

I think that... yes, that would be hard to nail that exact number, but I will say from all of the reports from people who are visiting our stores, the analysts and investors, our field organization what I see and the executives here that are on stores were seeing, it looks like the rest of the sector is having a harder time as we continue to believe we are seeing more that our fair share of the traffic and our stores appear to be the busiest of all of our peers. So department store sector is really the large place where the customers spend the majority, that we are stealing the share from our top line growth is greater than what the comp decline of many of our peers. So, we know we are grabbing it from some of our peers that it really is department stores and their inability to deliver the great quality product and the service environment that we are able to deliver that's making us feel that we can continue moving forward.

Marc Bettinger - Stanford Group Company

Okay. And Mel the conversion rate was up slightly or --?

Mel Dick - Executive Vice President and Chief Financial Officer

Conversion was up 230 basis points on a quarter-over-quarter... on a year-over-year basis.

Marc Bettinger - Stanford Group Company

Okay. So year-over-year up 230, and utilities [ph] also what?

Mel Dick - Executive Vice President and Chief Financial Officer

Up slightly.

Marc Bettinger - Stanford Group Company

Okay. And again, just a question on the guidance, I mean you did 17 and 17 in the third and fourth of last year, if based on the revenue number that you are giving and I assume all the SG&A that it will ramp up with the new stores. I am not quite sure how you get the flat in third and fourth quarter. Is there any sort of guidance you can give for the gross margin or for the SG&A adjusted? I assume we are going to have things like de-leverage in the second half and not quite sure how you get back to those... how you get back to flat?

Mel Dick - Executive Vice President and Chief Financial Officer

Yes, we are... I guess we mentioned, we think the third quarter will be challenging, given where business has started out in August here. In terms of the SG&A rate, I think if you were to look at where we were last year and look at that fairly closely, I don't anticipate that we'll have significant changes there. We do have cost controls that we are looking at plan on implementing that are under our control. So at this point in time, I don't have a lot of details to share with you, Marc. We aren't as you know any longer giving out quarterly guidance. As Dan mentioned, we are expecting a flat earnings for the back half of the year.

Marc Bettinger - Stanford Group Company

Okay. Good luck everyone.

Mel Dick - Executive Vice President and Chief Financial Officer

Thank you.

Daniel Griesemer - President and Chief Operating Officer

Thanks, Marc.

Operator

And from Wachovia, we'll hear from Lyn Walther.

Lyn Walther - Wachovia Securities

Hi, guys, couple of questions. Just following up on the cost cutting, last quarter you talked about, I guess 50 basis points benefit in Q1; can you quantify the impact this quarter if any? And can you talk about just generally, I know you don't give monthly comps, but how the quarter progressed, was it fairly difficult throughout the quarter or did you get progressively worse, just a little bit more color there. Thanks.

Mel Dick - Executive Vice President and Chief Financial Officer

I don't recall a comment on the 50 basis points in terms of the expense savings initiatives that we put in early in the year. I do believe that we continue to see... the expense savings we are getting in the first quarter, we continue those on into the second quarter and we are taking a look at the entire cost structure and another round of potential expense savings to the extend we can on our controllable expenses. We've not commented previously on how things went throughout the quarter. And at this point in time, we don't have any comments.

Lyn Walther - Wachovia Securities

Okay. And then Georgia, can you give us an update on sport, how that's progressing if you happy with that? Thanks a lot. Good luck guys.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Areyou just telling the Spirit or Sport?

Lyn Walther - Wachovia Securities

Sport?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Sport we did some integration, some of the set into our retail stores and that really goes away for summer, but we call it back in for fall in holiday, and that's when really we see the sales there. So, you will see some of it on the sales more for the fall and more for holiday.

Lyn Walther - Wachovia Securities

Okay. Thanks.

Mel Dick - Executive Vice President and Chief Financial Officer

Thank you.

Operator

And from CIBC, we'll hear from Roxanne Meyer.

Roxanne Meyer - CIBC World Markets

Hi, good afternoon. Just to I guess sum up on the product side, if I from the callout on your skirts otherwise will you happy with the products balance, the fits and the color or were there any other product callouts that you think there could have been a bigger opportunity in?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Yes. I think that if I look at it that the new... you've really gravitated to the newness and the newness that was there were really in the white-brown prints. So, that really appeared certainly in the jacket, all of our color actually though did do very well. I would have to say that our solid jacket weren't as strong as I had hoped they would be because they are... those are vehicles that against you would work the print skirt.

Roxanne Meyer - CIBC World Markets

Okay.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

That makes sense?

Roxanne Meyer - CIBC World Markets

Yes. And then I guess just going back to the question on marketing, in pulling back on TV advertising in the back half and reallocating it to magazines, is that... is that a reaction to the environment or is that a signal that perhaps TV isn't a great medium with which to advertise?

Daniel Griesemer - President and Chief Operating Officer

We were testing television in the first half of the year. We hit it late last year. We've really been in the test mode. We were pleased with what we learnt from our testing and if there is a significant leverage opportunity that happens when you get through a certain critical mass of stores and you can just begin by national stock versus local. And so where that really starts to happen for us next year versus now, so it is being mindful of putting our money with the tried and true and proven in the places where its most efficient and that's why we are directing it towards magazine ads, but I wouldn't read it as anything other than that.

Roxanne Meyer - CIBC World Markets

Is there but the potential to either take up the amount that you are investing in magazines up or down based on the environmental and what would your I guess inclination be to do?

Daniel Griesemer - President and Chief Operating Officer

Yes, sure. There is a potential and we weigh that based on the environment, based on the strength of the creative and how we are feeling about the product and the whole lot of different factors. So we feel very good about where we are today, and the spans that we have and the titles that we're in and the cadence that we are planning for the back half.

Roxanne Meyer - CIBC World Markets

Okay. And then on the loyalty program, can you say what percentage of sales your top 250,000 customers account for? And how long you think it could take before once this loyalty program is rolled out when you start to see the benefits from that?

Daniel Griesemer - President and Chief Operating Officer

Well, they are somewhere in the 15% to 20% range of the sales base and it's something we would be tracking immediately. You know we are heavy into our customer metrics and watching what she does and how she behaves so we would continue to track that. But it's a long-term program focused at this very critical customer base that we want to make sure we retain and further enhance. So investments in this area always... in this customer segment always pay off and so we'll be watching it closely and able to achieve no more in the future.

Roxanne Meyer - CIBC World Markets

Okay, great. And then just quickly last, it looks like in the second quarter of last year, you may have restated some items and shifted it between cost of goods and SG&A. Just wondering if you could say what that is and if you are going to be filing anything to restate third and fourth quarter as well?

Mel Dick - Executive Vice President and Chief Financial Officer

I think we had a change in maybe some pre-opening costs from an occupancy standpoint. I think shift between SG&A and our gift with purchase as well we had down in SG&A, I think we now have that. I am sorry our gift with purchase is in SG&A, last year it was in cost of goods sold, our pre-opening occupancy cost was in SG&A, and now it is in cost of goods sold. But very minor impact of either... both of those items.

Roxanne Meyer - CIBC World Markets

Okay. Thanks and good luck.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Thank you.

Operator

And from J.P. Morgan, we'll hear from Chris Kim.

Christopher Kim - J.P. Morgan

Hi. Thanks guys. Georgia, just going back to your commentary on the sensitivity to full price, it sounds like you are not really going to change your overall sales and strategy, but in terms of whether looking at opening price points or other plans, promotion in terms of like the twofer deals or what not; any commentary or change in thoughts around that?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Twofers continue to be very strong for us, and so we have continued, we actually have probably a small percent higher in twofers going into the fall season than we did prior years based on their success, so feeling good about the twofers. And as far as the sales strategy, I think based on what Dan had answered earlier I think September is a month that we look to, for doing the big sales and so and then we can adjust... we need to adjust then the sale month of October.

Christopher Kim - J.P. Morgan

in terms... I am sorry. Go ahead.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

You go ahead.

Christopher Kim - J.P. Morgan

Just in terms of the opening price points and the opportunities there, the aversions you full prices that predominantly in the higher ticket or example, jacket categories?

Georgia Shonk-Simmons - President and Chief Merchandising Officer

No, actually it wasn't, because the prints actually they sold very well in summer, are actually higher priced than the solid. So, our opening price points we have not taken an increase in our opening price points in T-shirts, and things of that sort. And we have been maintaining those prices. So, really I think what you were looking at is that we are conscious of our opening price points, we have held tight to those and we have increased that twofers slightly.

Christopher Kim - J.P. Morgan

Okay.Dan, and Mel just in terms of the spa, is it safe to assume that that will be a drag, continue to be a drag to EPS in the back half? What's the fair kind of timeframe that you kind of think about whether or not you will be going forward with the spa launch, in a bigger way?

Daniel Griesemer - President and Chief Operating Officer

Yes, sure. We have six spas opened today. This was sixth we opened last summer. We are about to open 20 more here as just the first one these new spas with pass throughs adjacent locations with pass-throughs between the spa and the retail store. The first one opens tomorrow. We've got two more to open by the end of the third quarter. We expect about a two to three penny a share impact in the back half of the year due to all the spas. And what we are going to do is get these next three opened which are reprogrammed, redesigned to reflect what we learnt out of the first six and have passed throughs to the retail space, we are going to get them open and run them through the ever important holiday time period and holiday gift card giving time period and then watch them in the first half of the year and then look for some direction in the middle of next year.

Christopher Kim - J.P. Morgan

Okay. Thanks and best of luck.

Mel Dick - Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Instructions]. And we'll take a question from Liz Dunn with Thomas Weisel Partners.

Lizabeth Dunn - Thomas Weisel Partners

Hi. Just one follow-up question, I think the question that many of us are sort of dancing around is your stock price reflects the earnings power of the company and is there a way that you could potentially maximize earnings or have a better earnings number with lower top line growth. You keep emphasizing taking market share and that's all well and good, but if it's to the detriment of profitability, then that's not good. And so how internally are you thinking about your need to maximize profitability versus gain market share and why is it the appropriate thing to go after market share to the detriment of profitability? Thank you.

Mel Dick - Executive Vice President and Chief Financial Officer

I think that's a very good question. Again, as we look at our strategy and we look at our growth opportunities and the opportunity to take market share, well, we have had some challenges. It has been a challenging fourth quarter and first half of this year. On the long-term basis, we clearly believe that we are well positioned that we understand this market space and that it's a growing demographic. So our store economic model has been to build stores that are about 6000 square feet, achieve sales of $500 a square foot at maturity which is three years down the road and those stores pay back from an economic or cash standpoint in less than 12 months. So, we continue to believe in that model and in that strategy. I would say rest assured that if for some reason we saw some thing that would suggest that it didn't make economic sense from both company standpoint and our shareholders' perspective, we would adjust our plans accordingly.

Lizabeth Dunn - Thomas Weisel Partners

Okay. Thank you.

Daniel Griesemer - President and Chief Operating Officer

I think we have time for about one more question.

Operator

And that will be from Susan Sansbury of Miller Tabak.

Susan Sansbury - Miller Tabak & Co., Llc

Actually my questions have been answered. Just to follow up on some of the other question that your stock is trading down 13% to $15.10 in the after market today. It's just an observation. Good luck and thanks very much.

Mel Dick - Executive Vice President and Chief Financial Officer

Thank you.

Georgia Shonk-Simmons - President and Chief Merchandising Officer

Thank you.

Daniel Griesemer - President and Chief Operating Officer

Okay. Thank you. Thank you ladies and gentlemen.

Mel Dick - Executive Vice President and Chief Financial Officer

Good bye.

Operator

Ladies and gentlemen that does conclude today's presentation. We thank everyone for your participation. Have a wonderful day.

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