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Executives

Allison C. Malkin – ICR – Senior Managing Director

Thomas E. Reinckens - Chairman of the Board, President & Chief Executive Officer

Margaret J. Feeney - Chief Financial Officer & Executive Vice President, Finance

Analysts

Neely Tamminga – Piper Jaffray

Margaret Whitfield – Sterne, Agee & Leach

Jeff Van Sinderen - B. Riley

Liz Pierce – Roth Capital Partners

Eric Beder – Brean Murray, Carret & Co.

Chris Kim – JP Morgan

Robin Murchison with SunTrust Robinson Humphrey

Bill Strauss – Thomas Weisel Partners

Mark Montagna – CL King & Associates

Harry A. Ikenson – Ikenson Research & Consulting

Brandon

Cache, Inc. (CACH) Q4 2007 Earnings Call February 6, 2008 9:00 AM ET

Operator

Ladies and gentlemen thank you very much for standing by and welcome to the Cache, Inc.’s fourth quarter fiscal 2007 results conference call. During today’s presentation all parties will be in a listen-only mode and following the presentation instructions will be given for the question-and-answer session. As a reminder this conference is being recorded today February 6, 2007. I would now like to turn the call over to Allison Malkin from ICR. Please go ahead, ma’am.

Allison C. Malkin

Good morning. Today’s conference call includes comments concerning Cache’s business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call that are not based on historical fact are subject to risks and uncertainties. Actual results may differ materially. Additional information concerning a number of factors that could cause actual results to differ material from the information that will be discussed is readily available in Cache’s filings with the SEC including Cache’s report on Form 10-K for the fiscal year ended December 30, 2006. And now I’d like to turn the call over to Tom Reinckens, Cache’s Chairman and CEO.

Thomas E. Reinckens

Good morning and thank you for joining us. Here with me today are Maggie Feeney. I will begin today’s call by providing an overview of our fourth quarter results and fiscal year accomplishments as well as outline the priorities for the business as ewe begin fiscal 2008, then Maggie will review our financial highlights and I will provide closing comments and then turn the call over to the Operator to conduct the question-and-answer portion of the call.

The fourth quarter was difficult for our company driven largely by the effects of a sluggish economy which led to a highly promotional environment in retail. While we were prepared for this planning a reduction in expenses and managing our inventories very tightly which enabled us to report earnings above a year ago, the holiday season did not develop as we expected. Total fourth quarter net sales declined by 6% to $78.5 million and comparable store sales decreased 7%. Net income for the fourth quarter totaled $4.9 million or $0.32 per diluted share which compared to net income of $4.2 million or $0.26 per diluted share last year. For fiscal 2007 net sales declined by 2% to $274.5 million and comparable store sales declined 1%. Net income totaled $6.5 million or $0.04 per diluted share which compares to net income of $8.3 million or $0.51 per diluted share last year.

The quarter and year did include several noteworthy accomplishments. The end of the year with a very strong balance sheet cash totaled $50.1 million even as we utilized $24.2 million during the year to fund the repurchase of our stock and inventory was below last year period at $30.5 million as compared to $34.8 million last year representing a decline of 12%. More importantly when you include the 2007 piece goods inventory and you really just look at finished goods only on a per-store basis inventories were down almost 20% year-over-year. In addition during 2007 we made significant progress on our strategic goals executing to our initiatives of vertical integration, expansion of our product offering and intensifying our marketing. We believe these initiatives will lead to improved results in the future at Cache. To this end through vertical integration we have reduced product costs while improving consumer acceptance of our offerings through the creation of cohesive assortments. We now control all aspects of the process from designing, resourcing and merchandising following our July acquisition of Adrienne Victoria Designs. We are certainly pleased with the performance of the acquisition. Adrienne and her team have made tremendous progress and we expect this effort to continue to reduce product costs and improve consumer acceptance of our assortment this year.

Expansion of our product offerings is also an integral to our strategy of improving our sales productivity. In September we introduced our Cache Contour Line to all doors which is allowing us to address more of our customers’ lifestyle needs. With Contour we also expect to reach new customers. As many of you are aware, Contour’s appropriate for work settings while continuing to appeal to our customers’ needs for sophistication in our Missy fit. We have also added a casual offering such as our spring assortment of Cache Tee’z and selling has started off very well. In addition we are focused on optimizing our marketing strategy which is currently centered on our direct mail pieces that include prominent offers. This strategy combined with our loyalty program which was launched in the second quarter last year is working to generate increased traffic and transactions at our store.

Furthermore we are pleased to return value to our shareholders through our chair repurchase program. During the year we repurchased 1.7 million shares for $24.2 million of cash. At year end we had 1.8 million shares remaining on our current buy back program.

As we begin fiscal year 2008 we recognize that the environment remains challenging yet we believe we are positioned for improved performance driven by our current merchandise strategies that are aimed at increasing market share and sales productivity. We also believe our efforts to contain expenses and manage inventory provide us with greater resiliency if the environment worsens. Our organization’s number one goal in 2008 is to increase sales productivity. Sales results at Cache over the last five years have been consistently around the 440 to 460 sales per square foot level well below the best of our peers.

This presents us with a great opportunity to achieve our goals in improved sales productivity for 2008. We are focused on the following. First, we’re going to introduce opening price points on selected core tops and bottoms to entice more outfit buying and generate increased sales. We want Cache to be at the attainable price point for more consumers and we expect this move to advance our goal. Our merchandise assortments and any merchandise assortment must have the proper relationship of selling price to value perceived by the customer especially core product offerings. In essence we will continue to expand our assortments to generate increased traffic and sales. Our Contour line is certainly gaining traction with our core customers. We are also attracting new customers. With Contour Sport we are filling a void for sophisticated casual apparel in our unique Missy fit and we fully expect to build upon this on positive performance in the months ahead.

Third, we believe we are poised to continue to excel in the dress market. Cache is a top destination for sort and long special occasion dresses. Last year we intensified our daytime dress assortment and we expect both categories to remain solid performance this year.

Fourth, we expect our direct marketing and loyalty programs to lead to increased visits and increased transactions at our store. We have learned a great deal since launching our loyalty campaign and believe we will continue to perfect this effective tool. We are, however, planning our sales expectations prudently and currently expect comparable store sales to range from flat to low single digits for the first quarter of fiscal 2008. We will also manage our expense growth to be in line with comparable store sales gains this year. With regards to new stores we are planning to open between 10 and 12 new stores this year expanding square footage growth by approximately 2%.

Finally we will aggressively repurchase shares under our current authorization as we believe strongly that our near-term and long-term prospects remain bright. A 7% increase in our January 2008 comparable store sales demonstrates that our initiatives are working. While January is typically a promotional month we were pleased with our performance as it was driven by regular priced sportswear offering and continuing strength in our dresses. We also received a favorable benefit of one additional day sales in the pre-New Year’s eve period in early January as compared to last year. I’m also pleased to report that the first nine days of fiscal February sales are positive and are on plan.

Now I would like to turn the call over to Maggie to review the financial highlights and our guidance in more detail.

Margaret J. Feeney

Beginning with the income statement the fourth quarter net sales decreased 6% $78.5 million from $83.6 million in the prior year period. Including the $600,000 in sales from last year sales were down [inaudible] for Lillie Rubin were down 5%. Comparable store sales declined 7% with average transactions down 6% and average dollars per transactions down 1% primarily due to higher markdown activity in the quarter.

During the quarter we opened two stores and closed one location. Gross profit total $36.4 million or 46.4% of net sales as compared to $40.4 million or 48.3% of net sales in last year’s fourth quarter. We were successful in reducing prop costs and increasing initial markup, however this is more than offset by our higher markdown rate and contributed to 190 basis point decline in gross profit margins for the quarter.

Now turning to expenses. In total operating expenses were $29.6 million or 37.8% of net sales compared to $33.6 million or 40.2% net sales in the fourth quarter of last year. Now breaking this down further store operating expenses decreased by $3.9 million to $24.3 million or 31% of net sales from $27.5 million or 32.9% net sales from the quarter of last year representing an improvement of 190 basis points. This decline was primarily driven by a reduction in circulation of our direct mail pieces based on response rates from the fourth quarter of last year. This led to a $677,000 reduction in marketing expenses versus the same period last year. General and Administrative expenses declined by $580,000 to $5.3 million or 6.8% of net sales compared to $5.9 million or 7.15 of net sales in the fourth quarter last year. This was trough primarily driven by lower professional fees which included fees related to audit, implementation of Sarbanes-Oxley and our stock offering cost. Also included in last year expenses was a $159,000 charge related to the end of our Lillie Rubin business.

Operating income totaled $6.7 million and operating margin rose 50 basis points as compared to last year. Other income which is primarily interest income for the quarter remained unchanged at $672,000. Net income totaled $4.9 million or $0.32 per diluted share as compared to net income of $4.2 million or $0.26 per diluted share from last year’s fourth quarter. Net income in the fourth quarter last year included $159,000 or $0.01 per diluted share related to the exit of Lillie Rubin business and $422,000 or $0.03 related to Lillie Rubin’s operating losses.

Now turning to key balance sheet highlights. We ended the year with a strong balance sheet. Typically at December 29, 2007 cash from market maturities totaled $50.1 million as compared to $61.5 million on December 30, 2006. As Tom mentioned, we utilized $24.2 million in cash to fund the buy back program of 1.7 million shares during the year. As of January 31, 2008 we had 500,000 shares remaining under our current 3.5 million share authorization buy back program.

Inventory at December 29, 2007 was down 12% from the prior year period at $30.5 million as compared to $34.8 million on December 30, 2006. The current year is not comparable to last year as we now include piece goods following the July acquisition of Adrienne Victoria Designs. Average inventory at cost on a per-store basis excluding non-comparable Lillie Rubin from last year declined 23%. We continue to prudently manage our inventory levels and are pleased with both the level and composition of our inventories [inaudible] for 2008.

Also at December 29, 2007 the company had $5 million in debt relating to the installment payment for Adrienne Victoria Designs acquisition and no outstanding balances on revolving credit facility.

Turning to our full year 2007’s financial results for the 52-week period ending December 29, 2007 net sales decreased 2% $274.5 million from $279 million in 2006. Comparable store sales for the year declined 1%. Excluding the $13.1 million dollar in 2006 sales from the Lillie Rubin business fiscal 2007 sales rose 3%. Gross profit decreased 4.6% to $127 million or 46.3 % of net sales from $133.1 million or 47.7% of net sales in fiscal 2006. Operating income totaled $7.3 million or 2.7% of net sales as compared to $11.6 million or 4.2% of net sales in fiscal 2006. Net income totaled $6.5 million or $0.40 per diluted share. This includes $78,000 related to the reversal of Lillie Rubin exit costs and $1 million or $0.04 per diluted share related to legal settlement costs and compares to income of $8.3 million or $0.51 per diluted share last year. Fiscal 2006 net income included costs of $5.7 million or $0.20 per diluted share related to the exit of the Lillie Rubin business and $3.2 million or $0.20 per diluted share of Lillie Rubin operating losses. During the year we opened a net of one new Cache store ending the year with 297 Cache locations.

Now regarding our outlook. At this time we are introducing guidance for the first quarter of fiscal 2008. We currently estimate net sales in the range of $65 to $66 million compared to actual net sales of $64.4 million in fiscal 2007. This assumes comparable store sales of a flat to an increase in the low single digit range. We expect the first quarter 2008 earnings per share be in the range of $0.03 to $0.04 as compared to actual first quarter fiscal 2007 earnings per diluted share of $0.01. We expect our shares outstanding to be approximately 13.3 million for the quarter. Regarding the full year we expect to open 10 to 12 new stores with approximately eight stores in the first half of the year. During the year we also expect to close approximately five locations. At year end we expect to operate approximately 303 locations increasing our square footage by about 2% to 613,000 square feet. For capital expenditures which fund our new stores and remodels we are expecting to spend in the range from $8 to $9 million for fiscal 2008. Capital expenditures for 2007 totaled $11 million.

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

Thomas E. Reinckens

In conclusion it is an exciting to take on the role as Chairman and CEO of Cache as I believe very strongly that the strategies that we are implementing advance our goals of increasing sales, expanding our market share and increasing profitability. I remain confident in our long-term ability to achieve sales per square foot in excess of $500 and operating margins in the double digit range and we fully expect to advance shareholder value in fiscal 2008.

On a personal note and as well for the entire company I also want to take this opportunity to thank Brian Wolfe for his tremendous contributions to the company over the last seven years and I know, speaking for the entire organization, we’re going to miss him.

With that I’d like to turn the call over to the Operator to begin the question-and-answer portion of the call.

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Neely Tamminga with Piper Jaffray.

Neely Tamminga – Piper Jaffray

My congrats to Tom as well as my best wishes to Brian as well. I think it’ll be clearly a very seamless transition. Tom, in terms of Cache Luxe, how should we be thinking about that in this oncoming year? Is this a division that’s performing to your expectations or is this something that you could maybe see come under review or just repurposing of your real estate?

Thomas E. Reinckens

I think Cache Luxe is not performing to the level that we expected it to perform. We actually closed two Cache Luxe stores in January. We’re going to take a wait-and-see approach. We’re trying some new things at Luxe. We’ve reorganized and have a different eye on the mindset of purchasing for Luxe and we have some other things that we’re going to try throughout this year. But clearly this will be a make or break year for Cache Luxe and we’ll see how it goes. Right now we have no plans to do anything other than that.

Neely Tamminga – Piper Jaffray

Can you help us understand the impact then on the panel? Is it something that’s still weighing on your panel by a $0.05, $0.10? I think Lillie at its probably worst performance was closer to $0.12 to $0.14. I’m just wondering how much of a drag it’s going –

Thomas E. Reinckens

It’s not anywhere near $0.05 but it’s not positive. It’s below that.

Neely Tamminga – Piper Jaffray

Then in terms of opportunities, as we look at the quarter and I appreciate obviously the – it’s tough to give guidance in this sort of environment right now but I mean clearly you’re on track I think for Q1. Just wondering in terms of as we look through each of the quarters this year which quarter do you think or maybe one or two quarters do you think are the key quarters of opportunity particularly with respect to markdown rate comparisons? Is it really about the first half, is it the second half or is what we just saw in the fourth quarter really the big quarter of opportunity in terms of improvement on the markdown rates?

Thomas E. Reinckens

Clearly I think when you look at our inventory levels and we really took hard markdowns and deep markdowns to clean out a lot of inventory and reduce our first door inventories by over 20% on a unit basis, on a retail basis as well as the [inaudible] basis, our backrooms are empty. I think our opportunities really have to turn the inventory faster. We need to be more current with markdowns. Just for instance last week we took a markdown on some of the early Cache Tee’z that we bought in on selected styles and that’s going to be the cadence that we follow throughout the year to try to be more timely on markdowns. What I will tell you is that I think with our strategies of trying to increase our market share, increase our sales per square foot, particularly in the opening price point arena, I think we have an opportunity that our first markdown will be cheaper in a sense that it, you still have to do your normal markdowns, but we’ll be able to clear those goods faster. We also believe that our opportunities are probably greater in the first half from a standpoint of earnings and that’s because we’re up against some weakness, particularly stronger weakness in our sportswear arena last year. You may remember our trend of long over skinny did not really pan out to the degree it should have and that really hurt us from a standpoint on possibility with higher markdowns. So saying that I think our best opportunity right now as I see it is in the first half but certainly I think with the initiatives we discussed earlier that we have a significant opportunity in the second half because we’re not up against bigger overstated inventories or higher inventory levels as we were in 2007.

Neely Tamminga – Piper Jaffray

Two more questions related to that then. As we think about the calendar shift in terms of Easter, not that you’re necessarily specifically an Easter business, but just wondering if we should be mindful of a shift between Q1 and Q2 in the model because of the shift in the holiday?

Thomas E. Reinckens

I don’t think it’s going to affect us as much as it may others, but it will help us to a certain degree that with Easter being a couple weeks earlier this year it certainly will help us a little bit but I don’t think it’s going to be material difference quarter to quarter.

Neely Tamminga – Piper Jaffray

And then just another question here. In terms of the share count, Maggie, I know like end of this quarter 13.3, just wondering if with the cadence of share buy back, etcetera, should we be looking for a 13.3 on the year end and 13.3 on Q2 or can you give us a little bit of guidance on what share count we should be using?

Thomas E. Reinckens

I think the share count at 13.3 we still have room. I think it’s about another 500,00 shares that had been authorized so we expect to end the quarter around that 13.3 level which is roughly 3 million shares but we’ll obviously take opportunities to look at that other 500,000 shares the board authorized. We have internal tolerances of what price we’ll pay per share. But right now we’re sort of projecting 13.3 at the end of the quarter.

Neely Tamminga – Piper Jaffray

I guess one more in terms of regional performance. Can you give us a sense how as I think about some of the top four closure cities out there, Vegas and some areas in Florida, have you done a regional performance snapshot to see are you being impassive by some of those health related, home related pressure regions? Just kind of give us a little sense then I’ll hop off the horn.

Thomas E. Reinckens

I think obviously we’ve seen a little bit more weakness in the West Coast of Florida, the Naples area which had a huge run-up in housing prices. That’s been a weak area for us. Southern Florida, the Dadeland Miami area has been a little bit more resilient and I think that’s more in line with the South American tourist that dominates that market more so than any other area in Florida. Probably our weakest market to date is in the Midwest, in Detroit and those areas of the country. Some of it obviously weather related in the month of January but it was weak in the fourth quarter of last year. Surprisingly California has been stronger for us, above the chain average which I scratched my head a little bit on that one. But I think that we have some opportunities maybe from the year before that we didn’t capitalize on. The Northeast has been okay, nothing great. Look at it, it’s a very tough environment. You guys know it. The market’s not going to be increasing especially for the women sector, mall traffic has been down. We just need to get more of those customers that are walking through the mall to find Cache as a better value. That’s really our number one goal and I think we have a good strategy. I think we have an opportunity and hopefully we’ll succeed.

Operator

The next question comes from the line of Margaret Whitfield with Sterne, Agee. Please go ahead.

Margaret Whitfield – Sterne, Agee & Leach

Tom, I wanted more color if I could on the sales trends January here into early February if you could on a weekly basis and by category. I know you had an extra for New Year’s Eve to start the month but if you could provide a little more color I’d appreciate.

Thomas E. Reinckens

Clearly I don’t want to give anyone a false read. The first week of January was our strongest. We had two days prior to New Year’s Day in this fiscal year. I believe New Year’s was on a Tuesday and we had Monday and Sunday business which were very big for us pre-New Year’s Eve because obviously we’re special occasion and a dressier store for the most part. So we did some volume pickups there. However when you look at the entire remainder of the month and including into this month the balance of those weeks and days have been positive for us which is encouraging given what we’ve seen in mall traffic. Now as far as trends and classification our sportswear business has been a lot stronger and driven probably the biggest reason for our increases and that wasn’t the case last year. But we’re encouraged with Contour, the launch of our Cache fees at a $58 price point. Some of the other things that we brought in in our sportswear offering have resonated very well. I’m particularly excited about our March catalog because it repositions us even more and I think when that lands, that will land March 3rd, I’m anxious to see what happens there. But let’s be honest. The quarter is really all about March for us. It’s five weeks, each week from the January dull rooms it starts to pick up. We’re seeing the pick ups, we’re pleased with the performance in early February and dresses have been positive as well. We have some opportunities in our accessory area and we’re working on that right now, but really the drivers have been sportswear and dresses.

Margaret Whitfield – Sterne, Agee & Leach

And when will you introduce the lower price core products? I assume this is apart from Cache Keys. When will we see those items in the stores?

Thomas E. Reinckens

You’re starting to see some of them fall in with our February catalog. We took a hard look at some of the prices there and their performance has been very strong. On that cover we have a great floral top at $68 and it’s performing very well.

Margaret Whitfield – Sterne, Agee & Leach

And what is the marketing plan? I know that provided some upside to margins in Q4. What is your marketing spend as a percent of sales or in dollars and are you going to do the postcards combined with the catalog?

Thomas E. Reinckens

Yeah, I think our marketing spend we have opportunity in the first half. We got some pick up because we’re not going to spend at the same level that we did the year before. We were a little bit over 4% I think closer to 4.5% I think in fiscal 2007. I would expect marketing to be in that 4% range for the year so we’ll have a positive impact in the first half and it’ll be pretty equal leverage wise in the second half. We will continue to do direct marketing to our customers and to our loyalty members. It will be a combination of postcards and catalog offerings.

Margaret Whitfield – Sterne, Agee & Leach

And finally, the tax rate for the year was lower than I had expected. Is that a good rate to use for the 08 year?

Thomas E. Reinckens

No, I would say the rate 35.5% or 39. It’s going to be higher next year. I think it’s going to be closer to the 39%. The reason it was lower this year, obviously lower income but a larger percentage of our interest income was into municipal bonds which we get a very favorable tax benefit from state taxes. But with our stock buy back program our cash will be reduced so we won’t have as much municipal bond interest going forward.

Operator

Our next question comes from the line of Jeff Van Sinderen with B. Riley. Please go ahead.

Jeff Van Sinderen - B. Riley

I wonder in terms of planning inventory for spring, how should we think about that in terms of per foot at the end of each month? Maybe just give us a little more color on that.

Thomas E. Reinckens

We’ll drop the quarter I think then throughout the half we’re going to remain very resilient. We don’t want to build inventory in this environment. I would suspect that our inventories would remain at that 20% level on a per store basis for finished goods throughout the whole season. Until we have to turn the inventory faster. If we’re just not turning it fast enough, there’s no sense in keeping things in stock, hanging on shelves or in backrooms and tying up cash and not having the ability to get into new fashions and reorders. So we’re going to be very resilient and make sure that we keep our inventories lean. So our plans are at that 20% roughly on a per store basis below the prior year.

Jeff Van Sinderen - B. Riley

And then, Tom, I wondered as far as the catalog drop, I guess there was some question in December whether later catalog drop hurt your business, had a negative impact on December. And then I guess aside from spending metrics how are you looking at or how are you modifying your approach to the catalog this year?

Thomas E. Reinckens

Clearly when we drop a catalog it makes a big difference in an immediate result of pick up in sales and we did change the cadence. But I don’t think at the end of the day that it’s had a bearing in the overall impact of what our sales were. What I will say is that the shift of the extra day into January, fiscal January of pre-New Year’s business probably had a bigger impact than we originally anticipated but for the women’s apparel group in general the spending was down to almost mid-single digits. That consumer pulled back more than she did for her family and her children and I think the mall traffic numbers astounded me particularly for the weekend I think it was December 21st, the last Saturday before Christmas, they were down I believe the numbers that I saw were down double digit which really surprised me. So even though we did change up our marketing I don’t really believe that that overall had an impact on our business.

Jeff Van Sinderen - B. Riley

And then I wonder if you guys can update us a little bit on the loyalty program and how we should expect that to evolve this year?

Thomas E. Reinckens

I know we have the loyalty program, right now we have over 400,000 permanent members, 172,000 temporary members. We’re actually pleased with that performance. We’re going to use some of those customers to – Obviously we market with them all the time. We might have some special promotions for those loyalty customers. But the whole name of the game is to get more customers and hopefully the product offerings and some of the things I’ve talked about earlier will certainly help us to garner more customers to Cache.

Operator

The next question comes from the line of Liz Pierce from Roth Capital Partners. Please go ahead.

Liz Pierce – Roth Capital Partners

I wondered if you could talk on, when you talk about the evolution of the product, where does Contour stand right now as kind of percent of total in the mix and where do you see that going this year?

Thomas E. Reinckens

Contour’s really about a lifestyle and it’s made up of several different fabrics. I think we’re branching off now into casual Contour. We still maintain our stretch fabrics in Contour. We look at the trends in the spring. We’re looking at obviously casual props, shine might be an element of it. We’re looking at prints and bold and the geometric thing along with some great knits and wovens but the core foundation pieces of Contour are really a jacket piece, the bottom piece. I don’t really want to give exact percentage because I don’t really have it in front of me, but the main thing is the overall sportswear is really showing signs of improvement. I think it’s a great reflection on the AVD team and their ability to get more wearable clothes and desirable clothes for that Missy customer. I’ve seen some things that they’re planning for fall, some new fabrics that I think look fantastic and I think that’s really one of the major strengths of the organization is their ability to source new and exciting fabrics and they will be incorporated obviously into Contour. But again, more of a lifestyle where that merchandise can be worn to work and also worn for other occasions.

Liz Pierce – Roth Capital Partners

So, Tom, will everything necessarily say Contour in it?

Thomas E. Reinckens

No, I don’t think. I mean I don’t think it will say Contour. I think the structure more likely will have that stag in them and our stretch fabric will continue to have that. It will be a major player in the fall season. Contour becomes perhaps a little bit more heavier weight than when we launched it with all the labels, Cache Contour. So it’s probably not as dominant in the May-June timeframe even into July. But will come back in a major way in the fall season. Let July, August deliveries.

Liz Pierce – Roth Capital Partners

And in terms of the whole Adrienne Victoria Designs team and the integration, do you feel that you’re all the way done in terms of the transition or are there still some things that you guys are working on that could prove, some opportunity perhaps this year in product margins and sourcing?

Thomas E. Reinckens

Yeah, I think there’s definitely an opportunity for improvement. There’s been a large chunk of our product that’s been domestically produced and obviously there’s opportunities to move some of it offshore, we will always have a good significant portion of it or a portion of it domestically produced, it enables us to react quickly to trends and move piece goods from offshore to here to get products on quickly and when we see trends that warrant that we should do that. But we’re not 100% through the integration. We have some technical things that we have to work through with respect to systems and Sarbanes and some of the requirements that we have about a year to accomplish from when we bought the company. But for the most part I think the merchant team, we’re looking to beef up even improve by adding some key talent in that side of the organization, more creative talent. We’re looking to do that but we’re very pleased with what’s going on. It’s really showing in the numbers right now.

Liz Pierce – Roth Capital Partners

So when you talk about in terms of driving that productivity and I think that is the real critical question here, or the best strategy that you guys are focused on, if you take that markdown quicker or you’re more aggressive and you’re sourcing, you bring these two together, then hopefully some of these initiatives, you’re not going to lose the benefit, right, of the IMU increase that we’ve seen but don’t seem to get?

Thomas E. Reinckens

That’s exactly right. I mean what we’ve told the organization is, look it, we’re paying the same rent bills, we’re paying the same light bills and we generally have the same labor cost that everyone of our competitors have in the malls that we operate and for a lot of years, you can look at our 10-K and look at the five year stats on our sales per square foot, they’ve been pretty dormant. They haven’t made that leap to some of the best of our peers and what their selling levels are significantly higher. So how do we get there? I believe really strongly that the woman consumer for the most part is finicky and shops from, doesn’t have a lot of loyalty particularly in a tough environment. If she can find the right look at one of our competitors for 20 or 30% less than the value proposition is in that garment where we’re not going to get that sale. So while we’ve always been successful with color and unique prints and unique fabrics and really to have that best mentality covered, in order to be successful we need to make that change to get more market share and I think Cache Tee’z brought us something with that $58 price point and when you mark it down and see how it just performs it will get the velocity on the top line. That’s the secret. It has to be a value. You can put all the IMU you want into a garment but if it’s no value to the customer, you’re just kidding yourself.

Liz Pierce – Roth Capital Partners

Then just one final quick question, I know that you had some new accessory fixtures in certain stores over the holiday season. Any callout on the performance or actually also I was wondering about if there was any shrink because I’ve seen pretty open?

Thomas E. Reinckens

Our accessory business is still below where it should be. It should be stronger, low teens and you need to show the product, get the customer to touch and feel it. It was more intimidating when it’s been case lined at the counter, customers don’t like to ask to see things so we were pleased with the results of the accessory fixtures and what they did in the stores that we rolled it out. We are rolling it out to probably the whole chain right now.

Margaret J. Feeney

We didn’t see up tick overall in strength performance in those stores so it’s not a real concern.

Operator

The next question comes from the line of Eric Beder with Brean Murray. Please go ahead.

Eric Beder – Brean Murray, Carret & Co.

Could you talk a little bit about what categories you believe are probably the ripest for this little more aggressive pricing strategy?

Thomas E. Reinckens

I think it’s really the core items, the core basic items. Let’s classify core black pant as one of them. You have to be competitive. This does not include obviously any detail work on the pant but every fashion retailer for the most part carries a basic core pant. Layering pieces. We have to be competitive there and I think you’ll see that along with the new categories that Cache Tee’z, you’ll see some new tops that are I think fairly priced solids along with some of our prints. We’re not going to obviously take down price points across the board, we don’t need to do that. We’re going to just operate on a good, better, best mentality where good will be a certain percentage of our assortment in our sportswear offerings.

Eric Beder – Brean Murray, Carret & Co.

In terms of your [inaudible] what competitors do you look at and say that you can be as productive or as strong as they are when you look in terms of where you want to be, in terms of sales productivity on the pieces?

Thomas E. Reinckens

I’d rather not say that publicly. You know you can go through the numbers and look at people that are competitive to us and make your own decisions, but I’d rather specifically say which companies.

Eric Beder – Brean Murray, Carret & Co.

What’s your initial thoughts on prom fees for 08?

Thomas E. Reinckens

Prom fees in 08 it’s starting out a little bit slower than we anticipated but we think we have reasons for that. School shifts or opening shifts that last year in Florida and you may recall with the shifts in the tax-free holidays down in Florida they shifted their whole school openings about a month later almost so it’s affected the prom days in those markets which would typically open up for us right around mid-January. We haven’t seen it open up as strongly as it has but we expect that it will in a few weeks coming forward here.

Operator

The next question comes from the line of Chris Kim with JP Morgan. Please go ahead.

Chris Kim – JP Morgan

Is Adrienne on the call as well?

Thomas E. Reinckens

No, Adrienne is not here.

Chris Kim – JP Morgan

Then I was wondering if you could kind of comment just on the overall fashion environment? It sounds like there was really a lack of any sort of any dominant fashion leadership or trend outside of dresses in 07. Are we seeing an emergence of something here? Are the strong results in January and February kind of a testament to that? Any comment that you’d like to make?

Thomas E. Reinckens

I think you’re 100% right. Dresses really was the name of fashion last year and even back into 2006. Dresses have been strong throughout that whole period and we think that’s going to continue. The trends that we’re seeing now in spring are a little bit shine, we’re seeing bolder prints, we’re seeing some details, some subtle details in the garments whether it’s different trims on the garments or neat buttons and that we think clearly is part of the reason our sportswear is moving ahead. But we’re up against weak numbers from a year before. Let’s be honest. We weren’t on trend last year and I think it was a choppy year in sportswear for most everyone last year. But we think the casual looks, the bolder prints for the spring, we still think we’re going to see structure in the fall and we’re working on fall. There’s a couple other things I really don’t want to discuss that Adrienne’s shared with us but we’re working on those right now and some newness in the assortment and we still think we have opportunities in casual dresses as well.

Chris Kim – JP Morgan

And jewelry/accessories is a category in the fourth quarter, I guess early in the first quarter. How has that been performing?

Thomas E. Reinckens

It’s been a little bit tougher for us but we’ve got some strategies there and we’re working towards those right now. But mostly for us in the first quarter, into the second quarter, a lot of the jewelry went around prom for the bags or ears or earrings. The main trends I think right now in accessories as far as jewelry are more about the wrist.

Chris Kim – JP Morgan

And finally, it sounds like the AVD integration is going very smoothly. Could you kind of quantify the benefit on the IMU that you guys have been seeing? I know there’s more opportunity ahead but perhaps in the fourth quarter kind of quantify the IMU benefit?

Thomas E. Reinckens

We’re not going to get into specifics but I think in the fourth quarter it’s really what Maggie said that the major drivers in gross margin decline was reducing the inventories by 20% which translates to markdowns, significantly higher markdowns and then obviously de-leverage in occupancy was a big component when you looked at 6% decline in the comp store sales over that period. But as far as going forward we are going to get some benefit from it obviously in 08. We really don’t want to give you anything right now. See how things go.

Chris Kim – JP Morgan

Okay, but obviously it was up in the fourth quarter.

Thomas E. Reinckens

Yeah, IMU was better in the fourth quarter, absolutely.

Chris Kim – JP Morgan

No way to kind of give us a sense of 50 or even several hundred?

Thomas E. Reinckens

Let’s just say it was in a range between 50 and 150 basis points.

Chris Kim – JP Morgan

Okay and there’s more on the horizon obviously?

Thomas E. Reinckens

Yeah, obviously because it’s the retail method and we only had six months worth of purchases on the 12 months of purchases for the whole year.

Chris Kim – JP Morgan

Oh, you’re talking about the whole year?

Thomas E. Reinckens

Yeah. It’s a blended rate.

Operator

The next question comes from the line of Robin Murchison with SunTrust Robinson Humphrey. Please go ahead.

Robin Murchison with SunTrust Robinson Humphrey

I just had a few questions. One, did you buy prom similarly to last year in terms of quantity?

Thomas E. Reinckens

No. Prom receipts are less than last year. We planned it that way. We’re cutting it off earlier and earlier. Once you get out past that May 15th timeframe it’s pretty much over and the volume is completely gone so we planned it same way, the bulk of all prom receipts are received in the first quarter and a little bit comes in in April and then you’re basically finished.

Robin Murchison with SunTrust Robinson Humphrey

But all in it’s down year-over-year?

Thomas E. Reinckens

All in, it’s down year-over-year.

Robin Murchison with SunTrust Robinson Humphrey

Maggie, I apologize, could you just go over those January metrics one more time in terms of traffic, AUR and transactions?

Margaret J. Feeney

I don’t think I have January, I have fourth quarter.

Robin Murchison with SunTrust Robinson Humphrey

Oh, you just gave fourth quarter?

Margaret J. Feeney

Yeah.

Thomas E. Reinckens

We only gave fourth quarter. We’ll get those numbers.

Margaret J. Feeney

Yeah, I’ll get it to you.

Thomas E. Reinckens

Transactions were up though in the quarter.

Robin Murchison with SunTrust Robinson Humphrey

In January they were up?

Thomas E. Reinckens

Yeah.

Margaret J. Feeney

Yes.

Robin Murchison with SunTrust Robinson Humphrey

And then Adrienne has nothing to do with Luxe or is she doing any sort of design for Luxe?

Thomas E. Reinckens

We have a buyer that’s buying for Luxe. Obviously she’s responsible for it from a merchandising standpoint, but her focus has mainly been on improving Cache. We want to try and maintain that focus on the Cache brand.

Robin Murchison with SunTrust Robinson Humphrey

And then just last question, when I think back to the beginning of the fourth quarter and maybe going back to the third quarter conference call just in articulating expectations for how you all were planning to approach fourth quarter and so on, there was a plan in place to sort of cut back on I think, and correct me if I’m wrong, but leather and fur receipts, inventories were down going into the quarter. When you sit back and you think about how you guys planned fourth quarter which was more defensively vis-à-vis the year prior and then where you came out on the other end and the reduction in guidance ultimately in the fourth quarter, do you think that it was just primarily traffic driven or would you have offered your plans differently and how does it make you think about this year?

Thomas E. Reinckens

Clearly I think any time you experience a fourth quarter that all retailers experienced you have to say you would have altered your plan. I think hindsight is always better than sitting and deciding what to do. But saying that as far as leathers and furs goes I think we made the right decision to reduce the level that we had from the previous year. If we had it to do all over again we probably would have reduced it even to a certain degree, maybe not have as wide of an assortment at our selected concentrated leather and fur stores. We might have dispersed it more to the entire chain or a third more to the entire chain. But the main thing in leathers and furs we concentrate really in our better stores, our best stores and we might have had maybe too wide of an assortment in those better stores and wound up spending a little bit. But as far as tailoring for anything else I don’t know if anyone can predict the mall traffic declines that happened. I think the main thing you have to take from what we did in the fourth quarter is we did what was right for the business and came out still ahead of where we were last year but below our expectations. But I was sitting here with inventory equal to what it was a year ago on a per store basis I would have concerns and to be able to clean and to walk into the stores and not see product in the backrooms, that’s a very good feeling to be in right now because it gives us the ability to make those reorders and adjust our open to buy as we go forward. There’s not much more I can say about year other than that.

Operator

The next question comes from the line of Liz Dunne from Thomas Weisel.

Bill Strauss – Thomas Weisel Partners

Of the five stores that you guys are planning to close in 2008 can you talk about whether those stores are losing money and where they’re located and whether they’re located in any one specific geographic region?

Thomas E. Reinckens

We’ve actually closed four to date. We closed, as I said earlier, two Lillie Rubin stores one was Fifth Plaza and one was the Scottsdale Fashion Mall out in Arizona. Both those stores actually were positive contributors to the store operating income line. We also stored the close in the Atrium Mall up in Massachusetts and we had a kick out there and that store was negatively affected by the fantastic expansion at Natick Mall, so it was the right thing to do and we relocated and closed our Baton Rouge store and moved into a different mall in that area. Again that was the right thing to do for the business. We are probably looking at some other selective closings. One or two other stores that we’re looking at right now. We will be going through a complete store review sometime in February with our leasing department, our store operations and our financial folks to take a look at profitability by store and we’ll make some decisions then, but I don’t anticipate really a lot of store closures besides that right now.

Bill Strauss – Thomas Weisel Partners

And then just one other question, can you just update us on how much of the sourcing benefit is left and how much the value price strategy might eat into any of your sourcing gains.

Thomas E. Reinckens

That’s a good question and we’re looking at that now but clearly we think we have benefits and it’s not just – As I said earlier we did a lot our sourcing domestically and producing goods domestically so we do have opportunities offshore that I think are going to offset the value relationship in sourcing. But again it goes back to we have to give value to the consumer and I think we haven’t been successful at that and that’s why our sales are not at the level of some of our peers and regardless of what the IMU is it’s going to translate into markdowns and into your mainframe margin. The encouraging thing that we’re seeing right now is we’re getting broader acceptance and if I get more sales I’m going to leverage my expenses and leverage my particularly occupancy but we are getting stronger IMUs than we did previous to the AVD acquisition.

Operator

(Operator Instructions) The next question comes from the line of Mark Montagna with CL King. Please go ahead.

Mark Montagna – CL King & Associates

A few questions, with the marketing budgets for the first and second quarter, I’m wondering how much do you plan on cutting them versus last year?

Thomas E. Reinckens

I don’t have those numbers in front of me but it’s going to be close to 4% of sales. It’s probably an impact in the $2 to $3 million range for the first half, a positive reduced expense.

Mark Montagna – CL King & Associates

Also for the first quarter you plan on a comp of flat to upper low single digits. Can you leverage expenses on that?

Thomas E. Reinckens

No. Not occupancy obviously. You can in the low single digits, not a flat comp.

Mark Montagna – CL King & Associates

So you need probably closer to a 2 to 3 to leverage expenses?

Thomas E. Reinckens

Yeah, that’s correct.

Mark Montagna – CL King & Associates

And that would be for occupancy. What about SG&A?

Thomas E. Reinckens

SG&A you’re going to get a pick up because of the marketing so that’s going to change, a little different in the third quarter.

Mark Montagna – CL King & Associates

Then what’s your plan for DNA for the year? And then I also missed the cap ex numbers that I think you gave.

Margaret J. Feeney

Cap ex is $8 million for the year approximately.

Thomas E. Reinckens

Depreciation and amortization are probably in the $12 million range.

Mark Montagna – CL King & Associates

And then also you mentioned a big improvement in sportswear that you expect. What percent of total sales is sportswear?

Thomas E. Reinckens

Over 60% when you look at it on an annualized basis is in sportswear basis. Last year it was close to 60%.

Mark Montagna – CL King & Associates

And then for prom dresses, are you bringing in lower price points on those also in light of the economy?

Thomas E. Reinckens

No I don’t think so. I think our price points are fairly consistent with last year.

Mark Montagna – CL King & Associates

And then just lastly, with the lower price Tee’z and then the pant that goes along with that, how are you getting the message out on that to customers and how are you trying to get the message out on these newer opening price point items?

Thomas E. Reinckens

That’s where the direct marketing comes in. I think if you look at the February piece that we sent out you can clearly see some of the prices but more importantly we’re sending a big catalog out in March, on March 3rd, and you’ll see it there. We tried to make the font a little bit bigger for some of us old folks like me to see the price points, not that it screams at you but clearly it’s a little bit darker and hopefully we’ll do it that way. But even with the Cache Tee’z, which we’ve put in the marketing piece in the fall in our last catalog, the performance has been pretty good and very strong. It doesn’t take much. The customers who walk in and we’re converting them and visits to some stores that I made throughout the last couple months, all the store teams are very excited about that offering. An easy sale they tell me. It’s an add on to the wardrobe for their core customers and I think people come into Cache and shop and look and browse and they’ll find the price points, that’s what we pay exorbitant rents for, to put great product in the windows and they’ll find it. But the direct marketing is the prime vehicle to tell people about this.

Mark Montagna – CL King & Associates

Have you seen a reaction yet on the pants that you’re reducing price from $118 to $98?

Thomas E. Reinckens

We did some testing and we saw some very positive builds in unit sales and total dollar volume sales as a result of doing a couple different tests. That’s part of the reason why we’re excited.

Operator

The next question comes from the line of Harry Ikenson with Ikenson Research & Consulting. Please go ahead.

Harry A. Ikenson – Ikenson Research & Consulting

I just have a couple follow ons, it would be helpful I think if you can give us an idea on the lower price point strategy. Obviously you started it you mentioned the Tee’z and you talked a little bit about it but could you give us an idea of penetration, if not by category just maybe overall to what extent it’s going to be of the merchandise? And then number two could you talk about any other expense savings going forward other than those that you talked about? It seems like the company’s much more expense minded than it has been in the past? And then number three, could you also talk about process changes particularly on how you’re going to continue to monitor inventory and manage it better and take the markdowns earlier? Is it just going to be a calendar provided by Adrienne or have you put in other processes? And any other new changes on processes, on how you’re going to achieve some of these goals you talked about?

Thomas E. Reinckens

The first one I think was on the mix. I don’t really want to tell you what the overall mix will be but it will be enough for us to gauge how things are going and clearly with the Tee’z we’ve had some success. We did do some tests and had success in getting more unit velocity in dollar turn on the inventory and hopefully that will continue. Again I don’t want to give –

Harry A. Ikenson – Ikenson Research & Consulting

Let me ask you this then. Without you giving us a percent will it be something that’s meaningful overall or at least over 5%? Will there be –

Thomas E. Reinckens

I’ll you what. Take a look at the March catalog and you’ll be able to judge a little bit on your own when you see that. I really don’t want to go any more than that.

Harry A. Ikenson – Ikenson Research & Consulting

But it will be enough that the customer feels that they’re getting better value?

Thomas E. Reinckens

Yes, absolutely.

Harry A. Ikenson – Ikenson Research & Consulting

And not just in Tee’z?

Thomas E. Reinckens

That’s exactly right. I think you’re going to see it in tops and bottoms. It’s a great time to do it in spring because spring is almost in a way disposable clothing for most customers in a way. They view it that way. So we’re going to take advantage of that this time to do that. Your second question was again?

Harry A. Ikenson – Ikenson Research & Consulting

My second question was the percent savings. It seems the company is much more oriented on expense savings over the last three to six months. But can you talk about are there are other areas that you’re looking for to do expense savings? Go ahead. I’ll remind you about the third one.

Thomas E. Reinckens

Yeah, the third one I think was –

Harry A. Ikenson – Ikenson Research & Consulting

About the changes, how you’re going to manage [inaudible] markdowns.

Thomas E. Reinckens

Let me answer that one first. Clearly the way we manage markdowns is not going to change in the sense of what drives us to make the markdown. The markdown is really driven on the per style performance, what is the sell for percent, how many weeks it’s been in stock and is it tying up real estate and we have things in the backroom that need to come out. That’s really going to be the cadence. And if the style is bad, it’s bad and you have to mark it down and go on to something else. So that will continue. Clearly we have a good strong planning organization and they get involved in making some of those decisions along with Adrienne. We talk about that every day. We talk about -

Harry A. Ikenson – Ikenson Research & Consulting

Specifically how does that change versus before? Because the company gets the same data you got before.

Thomas E. Reinckens

It’s just I think in the mindset and in the ability of not building inventories to levels that are not needed to get the sales per square foot and the sales per store that we need. We consciously reduced the inventories by 20% which is your big number to get them cleaner and leaner and get them turning better so that we’re going to maintain that level. We have an open to buy process in place, that open to buy looks at receipt flow on a monthly basis by classification, by department. We’ll continue to do that, we’ll just be sharper and keep our eyes on it a little more keen. We’re not going to sit here and say we’re taking markdowns every Monday or every third Monday. It will be as we need it for the business.

Harry A. Ikenson – Ikenson Research & Consulting

I’m amazed at how well a job you did on the inventories. I just want to get an understanding that it’s going to be something you’re going to be able to continue to do to get to that quicker inventory turn.

Thomas E. Reinckens

The hope is that with the reduced inventory levels that the markdowns will just actually go down.

Harry A. Ikenson – Ikenson Research & Consulting

Right because you’ll move things faster.

Thomas E. Reinckens

Right. Right. That’s really what the hope is.

Harry A. Ikenson – Ikenson Research & Consulting

So that’s what I was asking is the process.

Thomas E. Reinckens

That’s really what our goal is.

Harry A. Ikenson – Ikenson Research & Consulting

Then on other expenses –

Thomas E. Reinckens

Expense savings. Expense savings. Clearly the biggest expense that we have planned right now is in the advertising, in the marketing side of the plan, we’re going to keep it at that 4% and maybe slightly higher. It was higher than that slightly in 07 but our sales volume was off. But we will maintain that. We’ve been prudent in reducing some professional fees, we’re at some of the best to the bad in the fourth quarter as Maggie talked about. That will help us in the first quarter, in the first half as well and we’re looking at expenses and we’re bringing in some of our field people, we’re going to take a look at store expenses in more detail and see if we have some saving there. But the main goal again for 2008, drive in the sales per square foot, getting us to be closer to our peers.

Operator

The next question comes from the line of Evan Jones. Please go ahead with your question.

Brandon

I just wondered if you could just talk a little bit about your expectations going forward for both tickets and transactions?

Thomas E. Reinckens

Obviously we’re expecting transaction to go up significantly and tickets might go down slightly.

Brandon

And then on your commentary on inventory, you broke it out on a per store basis, but on a per unit basis, how does that look right now?

Thomas E. Reinckens

When you mean per unit, what do you – I’m not sure I understand.

Brandon

You’ve got some savings obviously built in from sourcing through AV but on a –

Thomas E. Reinckens

Oh yeah. Yeah, absolutely. What I said in the call is – You’re right. The cost savings are obviously greater than inventories, our costs are down or are lower. But as I said in the comments the unit inventory levels and the retail value of those inventories are down and pretty close to the same numbers, not as much, but in that strong high double digits.

Brandon

And then your outlook for the balance of February? I know you got some easier compares because last year you had a snow storm and a change in the marketing cadence and you were up actually the first couple days of February last year too, as I recall. You’ve already comped over that.

Thomas E. Reinckens

You’re 100% right. Our comps for our – It gets easier for us as we go on. We were weaker in the back half of February and weaker in the month of March and then right really through May was weak in the company. We certainly have an opportunity there but who knows in this environment. That’s why we’re a little cautious.

Operator

At this time there are no further questions. I’d like to turn it back to management for closing comments. Please go ahead.

Thomas E. Reinckens

Thanks again for joining us today. We look forward to speaking with you on our first quarter conference call in May, if not sooner. Thanks again.

Operator

Ladies and gentlemen this does conclude the Cache, Inc. fourth quarter fiscal 2007 results conference call. You may now disconnect.

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Source: Cache Q4 2007 Earnings Call Transcript
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