Charlotte Russe Holding, Inc. F1Q08 (Qtr End 12/29/07) Earnings Call Transcript

Jan.25.08 | About: Charlotte Russe (CHIC)

Charlotte Russe Holding, Inc. (CHIC) F1Q08 Earnings Call January 23, 2008 5:00 PM ET

Executives

Mark Hoffman - President and Chief Executive Officer

Patricia Johnson - Chief Financial Officer

Analysts

Janet Kloppenburg - JJK Research

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Jeffrey Klinefelter - Piper Jaffray

Jeff Van Sinderen - B Riley & Company

Liz Pierce – Roth Capital Partners

Tony [Van Sammy] - Alderon Capital

Samantha Panella - Raymond James

Betty Chen - Wedbush Morgan Securities, Inc.

Lyn Walther - Wachovia Capital Markets, LLC

Quintin Maynard - Moorehead Capital

Anna Andreeva - JP Morgan

Operator

Good afternoon and welcome to the Charlotte Russe first quarter results conference call. With us on today’s call are Mark Hoffman, President and Chief Executive Officer and Patricia Johnson, Chief Financial Officer. Certain statements made on this quarterly conference call herein, including without limitations, statement addressing the beliefs, plans, objective, estimates or expectations of Charlotte Russe Holding, Incorporated or future results or events constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements involve known or unknown risks, including but not limited to, general economic and business conditions and conditions in the specialty retail industry. There can be no assurance that the actual future results, performance, or achievements expressed or implied by such forward-looking statements will occur. Users of forward-looking statements are encouraged to review the company’s latest annual report on Form 10-K and its filings on Form 10-Q. Management discussion and analysis and the company’s latest annual report to stockholders, the company’s filings on Form 8-K and other federal securities law filings for a description of other important factors that may affect the company’s business results of operations and financial condition.

Once again, thank you for joining us on today’s call and now Mark Hoffman.

Mark Hoffman

Welcome to our conference call today to discuss our first quarter 2008 results and our guidance for the second quarter of fiscal 2008. My prepared comments are focused on the following topics; our first quarter results and performance assessments, progress made regarding our business strategies, our insight for the second quarter of 2008, and our guidance. Please note we are in the fourth and final week of fiscal January in our second quarter 2008. This second quarter 2008 ends on March 29; therefore, the most important Easter holiday period and related spring school breaks will impact our March month this year. When compared to last year, we project that sales will shift out of third quarter and into our current second quarter.

Now to the results we reported this afternoon, for our first quarter 2008. We are understandably pleased with our reported positive, comparable store sales of 1.5% and earnings per share of $0.56. Especially when compared to the industry-wide doubts that were continually broadcast for the holiday selling season and other retailers’ recently reported results. This team remained confident in our trend right holiday assortments, and then carefully planned the inventory quantity and timing of flow to our stores throughout the first quarter. I am also pleased that we were patient and we remained confident in our weekly forecast thereby avoiding excessive promotional markdowns during pre-Christmas, December.

Our December selling was by and large consistent with the last week, the Christmas week, the strongest sales week. Our first quarter ended on December 29. The NRF calendar ended a week later on January 5; therefore, other retailers would have reported that first clearance week of January in their December reported comp sales.

Now on to product successes in the first quarter, which included footwear. It has been a strong boot season, great going out categories also. Our dresses, daytime knit, and sweater-weight tunic dresses, refuge, long denim, the skinny, the straight, and our wall program. To our overall top categories, we received new receipts in the back end of the quarter in solid and striped tunics. Lastly, good performances in our holiday sleep wear coordinates and our handbags.

The first quarter ended with inventory aging improvements again this year and comp store inventories were up 2.7%. I think that, that should be read as no inventory hangover. In the second quarter, no inventory concerns. For those who focus on this important metric, our projection from last conference call was to end the quarter at a plus 3% to 4% comp. Patricia Shields, our Executive Vice President GMM drove again this year, a strong spring-product content in the back half of December providing early reads for spring product.

Our spring conversion for the beginning of the month of January was even higher than last year at approximately 35% penetration. Now looking forward and into the second quarter. The month of January has always been an aggressive clearance and transition month at Charlotte Russe. This January is no exception. Sales and units turned at sharp value, promotional pricing.

We would share today that our business has been comp positive all month, which is a combination of the success of the transition selling and the early spring receipts. All stores will be set for full spring conversion by February 10.

Here is what we are seeing for spring. In our tops categories: color of course, and brights, bare looks, continuation of tunic lengths, the bubble hem, and drape looks. In bottoms, denim and woven crops, shorts in multiple inseams and some early reads on skirts. Dresses, continued focus and continued penetration. Of course footwear, assorted flats and our spring sandals.

We would project to end the second quarter with merchandise inventory up, low single-digit, and comp store positive.

In summary, any outlook in this economic environment requires optimism balanced with caution. We derive our optimism from our confidence in our trend right merchandise, from our consistent and strong cash flows that fund our new store unit growth. A real estate deal-flow demand, seen for several years to come, with our stores fleet continuing to grow to 700 plus locations. Profit is also coming from our systems investments, many that we have made, particularly in our POS systems chain-wide and our mark-down authorization system, in our workforce management software application coming online at the end of our third quarter 2008, from the growing customer response to our e-commerce site now just six-months old, but ahead of plan and performance and with new enhancements, and from productivity in our distribution process benefiting throughout 2008, and from our commitment to build a best-in-class customer shopping experience.

Adding to this important list, I want to share with all of you that we have just begun work with consultants. Together we are focused on opportunities in three primary areas allowing us to add an external pair of experienced eyes to our own internal assessments. Those three areas are: first, driving the productivity of our existing concept. I think this is the most impactful way to accelerate earnings growth. Second, assuring that the next leg of our new store growth is as productive and profitable as possible. The focus here, of course, on real estate. Third is to review with us our plans for a second concept with that focus being on timing and execution. We believe that all of these efforts, all in process now, could not be better timed, particularly given these dynamic economic times, all focused on building more optimism at Charlotte Russe as we move our business forward in fiscal 2008.

Now to our Patty Johnson and her detailed review of the business. Patty.

Patricia Johnson

Great. Thank you, Mark. I would like to take a few minutes to walk you through our performance for the first quarter and to re-iterate our guidance for the second quarter of fiscal 2008.

For the quarter, net sales increased to $238.2 million, a 13.9% increase over the first quarter last year. Comparable store sales increased 1.5% for the quarter. In terms of comp store transaction metrics, average unit retail was over $11 for the quarter and down around 1% to last year. Comp store transactions were up approximately 2.5% and units per transaction were about flat to last year. Operating income as a percent of sales was 9.3% as compared to 10.4% for the first quarter of last year. The reduction of 112 basis points in operating margin is primarily due to the deleverage of fixed costs during the quarter, primarily rent and occupancy costs, depreciation and fixed central office expense.

Let’s take a look at the components of operating margin. Gross margin for the first quarter was 28.2%, down from 28.5% for the same period last year or a decline of 32 basis points. Product gross margin was up 24 basis points for the quarter, primarily driven by reduced freight expense related to the new freight carrier implemented in the third quarter of fiscal 2007. The remaining factors impacting total gross margin were down 56 basis points, primarily attributable to the deleverage of rent and occupancy costs, but partially offset by improved distribution center productivity. Selling, general, and administrative expenses rose by 80 basis points for the first quarter, driven by the deleverage of central office expense on the 1.5% comparable store sales increase for the quarter and the increasing costs year over year related to system and infrastructure investments initiated in fiscal 2007 including the new POS system rollout, e-commerce launch, and the amortization of markdown optimization software.

Diluted shares used to calculate earnings per share were 25 million shares for the first quarter. Diluted earnings per share were $0.56 for the quarter compared to $0.55 a year ago. As discussed in our last conference call, the Board of Directors previously approved a 25 million share repurchase program of which approximately 17 million remained open as of the end of fiscal 2007. While no further purchases were made in the first quarter, management and the Board, in partnership with the external consultant, are actively investigating alternatives that we believe may be more favorable to the company and shareholders.

Our balance sheet perspective, we continued to enjoy a strong balance sheet and we ended the first quarter with a cash balance of $115 million, no long-term debt, and $262 million of stockholders’ equity. Comparable store inventory was up 2.7% at the end of the first quarter. From a store opening standpoint, during the first quarter we opened 8 new stores bringing our total to 440 stores at the end of the quarter. Total gross for our footage was $3,125,000 up from $2,775,000 at the end of the first quarter last year. Capital expenditures for the first quarter were $5.2 million. We continued to project full-year fiscal 2008 capital expenditures in the range of $70 million to $75 million. Depreciation expense was $10.8 million for the first quarter. As we announced previously, we are targeting to open approximately 60 new stores in fiscal year 2008.

Turning to earnings guidance, looking out to the second quarter, based on what we know today, we would reiterate and guide investors to expect a low single-digit comparable store sales increase for the second quarter with diluted earnings per share in the range of $0.12 to $0.15. We are pleased with our sales trend quarter-to-date, but continue to be cautious given the uncertain macro economic environment.

A few additional notes for investors and analysts to assist you with your models. Please keep in mind that the shift of the timing of Easter this year will shift sales out of our third quarter and into the second quarter. We estimate that impact to be approximately 1.5 percentage points of comp sales benefit the second quarter and transfer out of the third quarter. Second, you may recall, that last year we reported a one-time expense of $1.1 million in the third quarter related to the write-off of POS assets as we rolled out the new system. This expense will not repeat in Q3 of this year. However, due to the timing of lease renewals and landlord negotiations, we currently estimate an increase in the number of remodels in the third quarter this year. The incremental expense for remodel asset write-off is expected to partially offset the benefit of last years’ benefit of POS write-off in the third quarter.

Finally, assuming a similar sales trend for the remainder of the year, I would expect SG&A expense to grow each quarter at a rate similar to what we saw in the first quarter of fiscal 2008. That concludes our prepared comments for this conference call and now we would like to open it up for any questions.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator instructions) Our first question is coming from Janet Kloppenburg with JJK Research. Please go ahead.

Janet Kloppenburg - JJK Research

Good Afternoon.

Mark Hoffman

Afternoon, Janet.

Janet Kloppenburg - JJK Research

Just a couple of questions. Patti first. Given the investments you are making and your infrastructure and POS, e-commerce, etc., do you have a higher comp point now or hurdle weight before you can leverage your SG&A levels and your occupancy levels? I am not sure, but I am wondering about that. Then Mark, I wanted to get an outlook from you on product gross margins going forward, with a tough economic backdrop. I don’t know what is going on with some of your competitors in terms of pricing and I would like some direction, perhaps, with respect to product gross margin going forward. Thank you.

Patricia Johnson

Janet, this is Patti. So, in terms of leverage point, you know, we continue to project to that 3% to 4% comp is the point where we leverage this business model. That remains the same.

Janet Kloppenburg - JJK Research

Are you looking at the level of comp in this quarter or are you saying positive low-singles, so we could touch on that leverage point? Yes?

Patricia Johnson

Depending on where we were in the range, but keep in mind, the Easter shift into Q2. Yes, depending on where we are in the range, if we hit a 3% comp, for example, we would have an opportunity to leverage.

Janet Kloppenburg - JJK Research

And when you say keep in mind the Easter shift, that should help the sales in the second quarter and therefore help your leverage, yes?

Patricia Johnson

Correct.

Janet Kloppenburg - JJK Research

It could have some adverse affect on Q3, yes?

Patricia Johnson

Correct.

Janet Kloppenburg - JJK Research

Okay.

Mark Hoffman

Janet, to your question on product gross margin looking out, we believe we have continued opportunity to improve our performance in our product gross margin, specifically in initial mark on, and in continued effective management of our promotional and permanent price changes.

With our import penetration growing from a goal in 2008 from 15% that we ended last year to 20% over the course of a year, I think if we adjust that, that could be worth maybe 10 to 15 basis points.

Janet Kloppenburg - JJK Research

Okay.

Mark Hoffman

In light of the current economic environment, all those macro-elements that effect retail, the confidence in the consumer etc., we all have to allow for the possibility of an increasing promotional environment as other retailers work to deal with their inventory levels. That certainly raises a question as to what magnitude of improvement can we expect to deliver in our quarters.

In summary, we are focused on building it, but we are also mindful to react to the business on a daily, weekly, and monthly basis.

Janet Kloppenburg - JJK Research

Mark, just another question with respect to the third quarter. Can you quantify what level of earnings you think will flow into Q2 and out of Q3 and how we should be thinking about Q3 on this performance?

Mark Hoffman

We have put together for publication, guidance for Q3. We have identified what we believe is the Easter shift out of Q3 into Q2, as Patty articulated, worth about 1.5 basis points.

Janet Kloppenburg - JJK Research

Right, in comp.

Mark Hoffman

Right, comp points. So, if you stay low single-digit and you think that range is somewhere between 0% and 3%, I suppose you could assume about half of it is what management is telegraphing it as the Easter shift valuation.

Janet Kloppenburg - JJK Research

Isn’t June this month of the third quarter? Couldn’t you make up for some of it is what I am suggesting?

Mark Hoffman

Again, I think, as we get further into --

Janet Kloppenburg - JJK Research

Closer.

Mark Hoffman

Yes, further into the second quarter, we get an assessment of our performance versus guidance. We will be talking on our conference call in April about how we view the third quarter, how it was impacted by the Easter shift, how it compares to the prior year, where I think your recalling that business fell off for us, and I think many retailers, in the second half of June last year.

Janet Kloppenburg - JJK Research

Right, so I thought there was an opportunity there.

Mark Hoffman

I know you would like to take me there, but I think we will stay focused on Q2.

Janet Kloppenburg - JJK Research

Okay. Lastly, it sounds like business is pretty good. Is it clearance driven or what is the read on spring?

Mark Hoffman

I think that January by fundamental definition is transition goods from prior season, holiday fall, and it is at Charlotte Russe and I think it is at most other retailers an opportunity to really get as fresh as possible, clean-up the floor in order to accentuate for the customer your spring offering. With that said if I highlighted, we opened January with a 35% penetration spring product and we are enjoying a very strong reaction by the customer to our spring product, giving us encouragement.

However, in summary, I think that we should all look at the month of January and say that the primary driver of sales would be the clearance product and transitioning for the complete spring floor set by the 10th of February.

Janet Kloppenburg - JJK Research

Penetration into spring right now is higher than last year?

Mark Hoffman

That is correct. It is approximately 3% to 5% higher at the beginning of the month of January.

Janet Kloppenburg - JJK Research

Right, okay. Therefore, margins should be better this month if you are selling more spring than last year and you have a higher concentration of it?

Mark Hoffman

All throughout this, Janet, given the bulk of the driver of sales margin would be promotional prices on prior season goods. I just don’t think it would be correct for one to assume that there is some large measurable pick-up in the month of January. It is a transition month for all of us.

I do want to be forthcoming in the consumer read and acceptance of our spring product. We will be talking and measuring more of that in all-important February/March month.

Janet Kloppenburg - JJK Research

Okay, great. Thank you, good luck.

Mark Hoffman

Thank you, Janet.

Operator

Thank you. Our next question is coming from Adrienne Tennant with Friedman, Billings, Ramsey & Co. Please go ahead.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Good afternoon and let me congratulate you on a great holiday season. I know it was very, very difficult. Just a couple of questions here. First, I know you made quick mention of starting to think about incubating a secondary concept here and when you look at the store count and where you are now and where you want to be, it seems like you would need to make that decision sooner rather than later. Can you give us any color as to the timing, I know you don’t want to disclose what it might be, but as to the timing as to when we could expect that?

Mark Hoffman

Adrienne, thank you for the kind comments. To the subject of a second concept, we have for some time been working on a second concept here at Charlotte Russe. As we have commented on in the past, the identification of when we would launch and thereby execute that concept has been a function of what is going on in our core business, and what is going on in the retail environment. I think as we stand today, there would not be any decision to put a stake in the ground as to a launch date. What I refer to with regards to working with consultants is to join us in an assessment of our thoughts on that concept, add value to it, as well as to bring some focus as to when would be the appropriate timing for that launch. As we sit today, again with all of the questions out there about the economy and consumer trend, we are also mindful that, that can change quickly. You know if a lot of good things start to happen for retail sales, particularly at Charlotte Russe, we would be prepared to move quickly and we would certainly be talking about that.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay. This strategic review by this consultant, when do you think they will be completed with their findings?

Mark Hoffman

I think we will be working with them for the next several months on the specific subjects that I mentioned so that we can continue to enhance our overall productivity and profitability and drive and accelerate our bottom line performance.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay. Patty, did you mention the initial mark-up for the quarter?

Patricia Johnson

I did not. I mentioned product gross margin, but I can speak to that if you would like me to.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Yes, please.

Patricia Johnson

Product gross margin was up about 24 basis points for the quarter. It was actually a combination of things. Our initial markdown was down for the quarter. From a trend perspective part of that is mixed and part of that is a new hanger process that we put in place. This is a little bit of operational minutia, but something we put in, in the back half of last year that we now charge hangers to IMU, so IMU is down, but at the same time we sought offset in distribution and expense leverage as well as freight benefit. So net-net there was a benefit, but IMU was down for the quarter.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay. How much of the IMU, was there an offset with a list giving the direct sourcing initiative?

Patricia Johnson

Okay, so that is kind of tangled up in the mix piece. IMU was down for the quarter in spite of or despite some benefits from import penetration improvement.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay, got it. Can you remind us, last year, how the comp flowed throughout the quarter? I think January and March were the most difficult with February being the easiest?

Patricia Johnson

We don’t share the by month comps, but I can share with you how the quarter had played out last year.

Mark Hoffman

In regards to your question, I think that we did last year, as we just did now, give color to January having been a strong, positive comp month and we are repeating that on top of last year’s number. We are repeating that in our comments today. As to the point that Patty just made, we don’t go through and then give the color for February/March, or at least we wouldn’t until we got to our conference call.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

No, I am sorry; I was talking about just so we can do a comparison this year how the comps were last year. Does that make sense?

Patricia Johnson

By quarter?

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

No, by month. Are we up against the most difficult comp of the quarter in January? Do the comps get easier as we go through the quarter? I am actually looking at last year’s comp performance by month. Not in numbers, but relatively speaking.

Patricia Johnson

Yes, because we don’t share --

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay.

Patricia Johnson

-- by month, I am just really uncomfortable by that. I am happy to talk to the quarters last year if you are interested.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay, I think that February is probably going to be your easiest comp that you come up against. Inventory plans at the end of the second quarter, are you also expecting that to be kind of positive low, single digit per store?

Mark Hoffman

That is correct.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay. Mark, my last question. The tone of this call sounds quite a bit different than the tone of the last call heading into holiday. I am just wondering, are you seeing something in the environment that makes you feel a little bit more comfortable or are you just executing according to you plan and you feel good about that?

Mark Hoffman

I think it is clearly that this team is executing according to its plan, and we all feel good about that. I also would go back to the last conference call and say that we came off of the fourth quarter negative comp sales impact, which was very disappointing and frustrating for us. I think that impacted perhaps my tone. I’ll work on that. In working at the holiday selling season, there was such gloom projected across the spectrum that I thought it would be most inappropriate for us to try and project some sort of optimism in the face of all of the pessimism that was out there. Now, today, I still think we have a lot of pessimism out there with regard to looking into the second quarter; however, I am encouraged and given further optimism based upon the performance that this team executed through that very difficult environment in Q1.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Okay, very good. Well, good luck.

Mark Hoffman

Thanks, Adrienne.

Operator

Thank you. Our next question is coming from Jeff Klinefelter with Piper Jaffray. Please go ahead.

Jeffrey Klinefelter - Piper Jaffray

Yes, thank you. Two quick questions for you, probably both Mark and Patty. Clearly this is a comp focus in terms of how you are going to get your leverage and how you are going to drive your operating margin expansion going forward. You seem to be stabilized very nicely with a comp at a low single-digit positive range through the holiday quarter and guiding that way now into the next quarter. Looking back a couple of years when you were driving more positive comps, back into the mid-single, upper and high-single digits; historically higher than that. Is it going to take, Mark, a combination of both traffic and transaction value? Is there something that you are seeing in the categories that may drive a higher UPT trend that could help you lift that comp? What do you think it is really going to take in this current competitive environment?

Mark Hoffman

I think, Jeff, that there has been a consistent focus on driving comp sales for all the leveraging benefits that, that provides and also for demonstrating our ability to recover lost market share. We had eight consecutive quarters of positive comps and we came into the fourth quarter of last year and we fell off the horse. We are getting back on with the positive comps albeit 1.5 low single-digits with the quarter just ended. The management team here continues to be focused on the controllables, and that is how we drive additional average retails, how we can convert and do this with an improvement with our UPT goals while creating a best-in-class shopping experience for our customer.

The focus is across the board in this broadly assorted merchandise presentation called Charlotte Russe and I believe that we can continue to build our average store volumes, drive our comp sales through trend right, fashion right product before the competition. This all sounds nice, but it really comes down to demonstrating that effectively by delivering the numbers.

Jeffrey Klinefelter - Piper Jaffray

Okay, more specifically, when you look at your low, single-digit positive guidance for this next quarter, how much of that is traffic and how much of that is transaction value?

Mark Hoffman

I think it is driven in our mind by the impact of the shift of Easter and by the continued execution as demonstrated in Q1. We don’t have, obviously, the ability to foresee material changes in customer traffic and customer trend patterns. We are mindful of that risk factor but all of that has been taken into consideration in the guidance we have provided.

Jeffrey Klinefelter - Piper Jaffray

Okay. Can you just break down the current quarter you just reported, where the 1.5. How much of that was driven by traffic versus value?

Patricia Johnson

We don’t track traffic.

Jeffrey Klinefelter - Piper Jaffray

Transactions versus transaction value.

Patricia Johnson

Comp transactions were up 2.5%. Fees per unit of transaction were about flat and average unit retail was down 1%.

Jeffrey Klinefelter - Piper Jaffray

Okay.

Mark Hoffman

Did that help you out?

Jeffrey Klinefelter - Piper Jaffray

Yes, that is perfect. One other question, the promotional environment, Mark, we have talked about this in the past over several quarters and how you just really needed to establish a trend with your customer, or equity with your customer so that you could start to migrate them up and out of a promotional cycle. We are probably not in the best environment to try to affect that fully, but as you look into the next quarter, how are you thinking about the promotional environment? Similar to the holiday season, any relief at all, and how will you navigate through that?

Mark Hoffman

I think it is going to be similar to holiday season. I think we are looking at, again relapping last year; we do not project any reductions at this point. I don’t think it would be wise, but we continue a broad-scope focus on the management and the effect of this on our promotional and perm markdowns.

Jeffrey Klinefelter - Piper Jaffray

So, similar promotional environment to last year at this time is how you would characterize it?

Mark Hoffman

I would say so, yes.

Jeffrey Klinefelter - Piper Jaffray

Okay, great. Thank you very much.

Mark Hoffman

Thank you, Jeff.

Operator

Thank you. Our next question is coming from Jeff Van Sinderen with B Riley & Company. Please go ahead.

Jeff Van Sinderen - B Riley & Company

Let me add my congratulations as well to a job well done during a very tough quarter. In terms of the guidance you are providing for the quarter, just wondering if you can give us any general thoughts in terms of what the belt is in terms of what you are expecting or what you would look at if it was $0.12 and what you would expect it to be if it was $0.15. Is it the comp, is it promotions, is it gross margins, maybe if you can give us any color there it would be helpful.

Patricia Johnson

Yes, all of the above. The range obviously encompasses the range of sales performance as well as the range of the competitive promotional environment out there. That is what creates the range. If we are at the top of the range, obviously then we would be at the top of our guidance and if we were more at the bottom of the range in terms of sales or promotional environment then we would hit the bottom one. It is all of the above.

Jeff Van Sinderen - B Riley & Company

Okay, fair enough. Let me ask you, as you look across various general merchandise classifications where are you seeing improvement in merchandise margin? Where do you think the opportunities are that you are targeting going forward to improve your merchandise margins in various categories and classifications, just from a general perspective?

Mark Hoffman

Well, because we stay very close, Jeff, to our direct competition from a pricing perspective, I really would not want to get into the color of what our gross margin opportunities are. We are mindful of the need to be competitive at the same great value or better than our competition and in that, Patricia Shields, our [ABGMM] spends long hours working with our import team and with our entire merchandise organization to maximize the initial mark-on and then work with our planning team to continue to balance that inventory sell through and maintain tight controls on the inventory to drive gross margin. Beyond that, I don’t think I would want to get more specific color.

Jeff Van Sinderen - B Riley & Company

Well, it seems like you are doing a pretty good job of that. I think at ICR you mentioned that improving the customer experience is one of the things you were focused on and I know that you are working on a no line, no wait strategy. I am wondering what other changes you might be considering to enhance the customer experience.

Mark Hoffman

As we have said when we presented at ICR, Jeff, the entire process in the store, from the front of the store coverage and greeting to the emphasis on our values of the day to the continued enhancement of the fleet to the bright store package which utilizes lights to focus consumer on product, to increase our outfitting presentation in our stores, to ensure that we are maximizing our service level in our fitting rooms and in our cash wrap, and as you mentioned the focus on the zero-line strategy. I think we have a lot of upside there. Our field organization is incentivized to achieve that at a higher level in 2008. They will all be here in San Diego next week and we are looking forward to the furthering of those programs to drive that best-in-class customer service.

Jeff Van Sinderen - B Riley & Company

Okay and just a housekeeping question. I know that, I think as you store remodel the stores actually fall out of the comp phase? Just wondering at this point, how many stores are actually not in the comp phase. Also, I think you said you were projecting or you had been hitting a plan of getting to about a 15% comp improvement with new stores, is that right? Just to clarify.

Patricia Johnson

With remodeled stores?

Jeff Van Sinderen - B Riley & Company

Right, remodeled.

Patricia Johnson

Right, I am searching for the exact number of stores that is in the comp base at the moment. I don’t have it in front of me, but remodeled stores only exit the comp base for the time during which they are being remodeled, unless we are expanding the store. During the time they are remodeled they exit and then they come back into the comp base.

Jeff Van Sinderen - B Riley & Company

Okay. So then what would be the average period they are out of the comp base?

Mark Hoffman

We are looking at 10 to 12 weeks, Jeff, and as Patty said they come out during the period of reconstruction until they re-open and then they are in the comp base until the following year when during that same period they are extracted.

Patricia Johnson

378 stores were in the comp base as we entered January 2008.

Jeff Van Sinderen - B Riley & Company

Okay. Thanks very much and good luck this quarter.

Mark Hoffman

Thanks, Jeff.

Operator

Thank you. Our next question is coming from Liz Pierce with Roth Capital Partners. Please go ahead.

Liz Pierce – Roth Capital Partners

Okay. I also will add my congratulations. Just a couple quick questions, have you guys even talked, or I am sure you are talking about, your ‘09 outlook on square footage growth?

Patricia Johnson

No, we have not.

Mark Hoffman

Liz, we typically will, during the third quarter conference call in July, speak to what our new store opening plan is for the upcoming fiscal year. As Patty said we have not shared that yet.

Liz Pierce – Roth Capital Partners

Are you getting any kind of concessions from landlords that you might think about accelerating anything, but maybe not enough time has passed? They haven’t felt the pain yet?

Mark Hoffman

I think it is your latter part of your comment in our opinion. We have the belief that that could come if there are continued difficulties in the retail environment and our landlords, therefore, then begins to feel some of the pain. Perhaps, through a slowdown in new store openings scheduled by other retailers or troubled retailers that are forced to do closures. But I don’t think until we start to see that landlords will be likely to revisit their cost structures as charged to their, especially retail, tenants.

Liz Pierce – Roth Capital Partners

Thanks Mark. Patty, could you remind me how many leases are up for renewal in this current year?

Patricia Johnson

Typically, we don’t share that detail, at least I haven’t. It is probably less than 20.

Liz Pierce – Roth Capital Partners

Okay. You said something offset in the third quarter? The remodel asset write offs were going to offset? You don’t have a lot of them in the third quarter, based on the lease renewals?

Patricia Johnson

Right, yes. They don’t remodel exactly on the date that their lease renews. Sometimes its a few months before. Yes, it will partially offset the benefit that we would have gotten from anniversary that POS write off from last year. I just wanted to give you all a heads up for your modeling.

Mark Hoffman

Yes, the timing of when we commence the remodel is not only a function of having completed negotiation with the landlord and getting that in drive, but it is also having been able to arrange for a temp space so that we can move into that during the remodel and sometimes that can force a lag as is what Patty is referring to and I think you said it would partially offset.

Patricia Johnson

Yes, partially, that’s right.

Liz Pierce – Roth Capital Partners

How many remodels for this year?

Mark Hoffman

We had announced last July; we would be targeting to do as many as 20 remodels in fiscal 2008.

Liz Pierce – Roth Capital Partners

Okay. On the consultant side, that is obviously in your guidance see the pressure that you are going to have on the D&A?

Patricia Johnson

Yes, that is included in the guidance.

Liz Pierce – Roth Capital Partners

Okay. Did this just start; I think that is what you said, recently?

Mark Hoffman

That is correct.

Liz Pierce – Roth Capital Partners

Do you sign a contract with them? Is it based on the study, because it looks like you have a bunch of different things that they are looking at?

Mark Hoffman

What we, in conjunction with our board, have asked them to focus on is what I shared in the prepared comments. Yes, we have an engagement letter.

Liz Pierce – Roth Capital Partners

Mark, in Monday morning quarterbacking, would you have done anything different for the holiday season as you think about next year?

Mark Hoffman

That is a great question. I don’t think that in our review of the first quarter that we were missing any business by being too conservative. I think on the contrary, we were true to our forecast and we were also true to our commitment for inventory timing and flow. We benefited from that by a pull ahead. We benefited from it in October. I was very pleased with the team’s execution for Green Friday and like many other retailers reported a good Green Friday. We had a good Green Friday also. No, as I look at the business, October, November, and December, I think the team did an outstanding job.

Liz Pierce – Roth Capital Partners

One final question, do you feel that what you are seeing from your learning, seeing from e-commerce, is giving you any kind of additional heads-up or clarity as you plan things for the future?

Mark Hoffman

We expect it will continue to do so, but it is fledgling at this point, mindful that we just launched it in July, Liz. We are all very much in the strong belief that it will be a tremendous information flow as well as contact point with our customer. I see us being in a position to talk about that as we move further into 2008, anniversary its first year of operation. The headroom or upside in this business for us late to the game but based upon what we understand, our direct competitors are doing today, and it’s significant. We are very encouraged by that.

Liz Pierce – Roth Capital Partners

Right, okay great. Thanks and good luck.

Mark Hoffman

Thank you Liz.

Operator

Thank you. Our next question is coming from Tony [Van Sammy] with Alderon Capital.

Tony [Van Sammy] - Alderon Capital

Fantastic job everybody. Just a quick couple of questions here. Regarding the remaining 52 stores that you plan on opening this year, can you break that out by quarter? Is that sort of weighted toward the fourth quarter or is it evenly split between the three?

Mark Hoffman

While Patty is looking for that schedule, it is historically weighted in Q3 and Q4, much to the frustration of operators because they would like to get the stores open earlier in the year. Unfortunately, the availability of the space is what drives when you can take possession, do the construction, and get the doors open.

Patricia Johnson

I would, for planning purposes or modeling purposes, use last year’s cadence, percent by quarter. I can’t give you exact, because even a few of these will shift one quarter or the next, but as I look forward I think it is going to behave pretty close to last year’s cadence.

Tony [Van Sammy] - Alderon Capital

Terrific. How solid is that number? If sales slowed dramatically as we go through the year, is there a possibility that some of those openings could be pushed out till next year or are you fairly confident in the number 60 for this year?

Mark Hoffman

I would assign a high degree of confidence in the target identified; one should never say never. I would say however, that given the lead time of this process, for us and everyone else, your commitment and again location acceptance is well in process, our leases are largely complete, and we will update as we proceed through the year if there are any reasons for change to that.

Tony [Van Sammy] - Alderon Capital

Fantastic. Just a quick last question, you mentioned in your prepared comments that comps have been positive all month, for the month of January. Can you break that out at all by region? Is that pretty consistent across the country or are there certain regions where comps are positive and others are significantly negative?

Mark Hoffman

Yes, I give you the general comment that frames as much for Q1 that for us there has been improvement in the southeast, which for quite some time had suffered in retail in general. Also improvements in the northeast end, and we are seeing more and more in the Midwest.

Tony [Van Sammy] - Alderon Capital

Fantastic. That is what we need.

Mark Hoffman

Thanks Tony.

Operator

Thank you. Our next question is coming from Samantha Panella - Raymond James. Please go ahead.

Samantha Panella - Raymond James

Good afternoon and congratulations. I just want to talk about what you are seeing with your consumer, as it appears one of your close competitors Wet Seal had better than expected sales at the Christmas season. Maybe just talk about what you are seeing from your consumer? Secondly, I know shrink has been an issue for you in the past, just wondering if you can update us on that in the quarter? Thank you.

Mark Hoffman

Sam, on the subject of the consumer and what are our reads, it’s purely speculative in that the overshadow of the economic conditions, I would speculate probably trickle down last to our customer or more toward the end of that line than other consumer categories. Of course, we are pleased that she continued to receive our product, fashion and trend right per the measure of our comp sales throughout the holiday selling season.

Patricia Johnson

As it relates to shrink Sam, you are right, last year we took a physical inventory about this time last year and our shrink results came in unfavorable to our original forecast and you saw that throughout last year. I would say end of the year was about a 20 basis point impact in our gross margin. We are actually in the process right now of taking our physical inventory in the month of January for our stores, so we will get an opportunity to get another read. As I sit today, I don’t expect that to be a significant driver on our forecast this year.

Samantha Panella - Raymond James.

Okay, great. Thank you.

Operator

Thank you. Our next question is coming from Betty Chen with Wedbush Morgan. Please go ahead.

Betty Chen - Wedbush Morgan Securities, Inc.

Congratulations on a great quarter. I was wondering, Mark and Patty, if you can maybe update us on the new store opening. Whether it is a combination of fill-ins and new markets and perhaps where I think in the past you had mentioned some under penetration in I think the northwest. Secondly, can you remind us again, given your nicely growing capital cash balance, I was a little bit surprised not to see you actively repurchasing your stock? Perhaps you can remind us on how you prioritize your cash decision, how you and the board are thinking about using that.

Mark Hoffman

Betty, on the subject of the new store openings geographically, in 2008 we will begin to enter into what has been for us an absent mark at the northwest, the state of Washington, and we see opportunities probably 8 or 9 stores eventually so that we can continue to expand there as well as in the northeast. However, if you would look at the distribution of our stores across the nation, it really is a continuation of fill-in opportunities as spaces become available in those malls that are on our target list, numbering somewhere around 350 wish locations across the country.

Patricia Johnson

In terms of the shared we purchased, yes just to bring that up, as you know we have approved a 25 million program. We repurchased about 8 million; have 17 million remaining on that program. It is a 12-month authorization, so we have a period of 12-months to complete that program and there is no science behind it at this point. Really what we are doing is evaluating, in conjunction with the consultant that Mark talked about, evaluating all of the best alternatives for generating shareholder value for Charlotte Russe. We will communicate as those decisions are made and the share we purchase program obviously are still authorized and outstanding.

Betty Chen - Wedbush Morgan Securities, Inc.

A couple last housekeeping questions. Have you or did you quantify earlier what the consultant fees are for the next quarter or two? Secondly, what was your depreciation guidance for the year?

Patricia Johnson

We didn’t quantify, but I can tell you that the consulting fees are including in our earnings guidance for Q2. More on that as we get through that process. We do not provide depreciation guidance on the year. I would guide you to take a look at what you are seeing in the first quarter, extrapolate based on your estimate of how many stores we will open each quarter.

Betty Chen - Wedbush Morgan Securities, Inc.

Thank you and good luck.

Operator

Our next question is coming from Lyn Walther with Wachovia. Please go ahead.

Lyn Walther - Wachovia Capital Markets, LLC

Hi, thanks. A couple of questions, can you remind us of the performance of the remodels and what percentage of your stores are going to be in that new format today and by the end of the year? Regarding the shift, in the past when we have had these shifts, you have given us the earnings impact, two quarters out, usually. Anything else you can give us to help us with our models? Thanks.

Mark Hoffman

On the subject of remodels, Lyn, we continue to project a minimum of 15% uplift following the remodeling of the store. We monitor those by a weekly basis, by class. We have high confidence in the importance of our selective remodeling program. I believe that what we have shared is that our remodel or bright format, a combination of the stores that we have remodeled and all of the stores that we have opened in the current prototype, the bright format, approximates 55% of the chain at the end of fiscal 2007. Do the math, we would add 60 new bright stores, according to plan in fiscal 2008 and 20 remodels or 80 locations and that would add to the base. We are continuing to improve the overall penetration. It is one of the things we will look at with our consultants as we value whether or not that program should be further expanded.

Patricia Johnson

What was your second question about earning guidance? I think you can piece it together from the 1.5 percentage point shift in sales out of Q3 into Q2, Mark talked about it earlier. As a rough rule of thumb, you could take about half of that in terms of margin impact. You wouldn’t see a significant shift in your fixed costs, obviously. I think that is a good ballpark for you.

Lyn Walther - Wachovia Capital Markets, LLC

Okay, thanks and good luck.

Operator

Our next question is coming from Quintin Maynard with Moorehead Capital. Please go ahead.

Quintin Maynard - Moorehead Capital

Hi there and congratulations, just two quick questions. One, could you clarify the free cash spend that is not associated with new store openings? In 2008, I think you said $70 million is what we should expect. I just need to know so that we can get some idea where that is going. On another, if you could give us any color on the consultant? Is this one consultant or a group? If you could just tell us a little bit about where they are coming from, that would be great.

Patricia Johnson

Taking the free cash flow question first, if I am understanding your question you are saying what type of free cash flow would we expect after the $70 million to $75 million of capital spending. We don’t give that guidance for the year, but I think a great way to estimate that, and I will give you a couple of caveats.

Quintin Maynard - Moorehead Capital

I am sorry; I misspoke. It is the CapEx I am interested in, the difference in CapEx. The amounts you are going to use on opening the stores.

Patricia Johnson

Got it. Okay, so our typical new store is about $770,000 roughly.

Quintin Maynard - Moorehead Capital

I thought your typical new store was $350,000 net of landlord contributions?

Patricia Johnson

Of landlord contribution, but that landlord contribution is not netted out of my CapEx number.

Quintin Maynard - Moorehead Capital

Okay, got it. That was the clarification I needed, perfect.

Patricia Johnson

Okay.

Quintin Maynard - Moorehead Capital

Okay, the next question about your consultant.

Mark Hoffman

We have engaged as we said, a consultant, which happens to be a team of people. It is one firm that we have selected and we will focus upon the work that I addressed earlier.

Quintin Maynard - Moorehead Capital

Okay, great. Thank you very much.

Mark Hoffman

Thank you Quinn.

Quintin Maynard - Moorehead Capital

Congratulations.

Mark Hoffman

Thank you.

Operator

Thank you. Our next question is coming from the line of Anna Andreeva with JP Morgan. Please go ahead.

Anna Andreeva - JP Morgan

Hi, good afternoon, thanks so much. Patty, I was just hoping to clarify on the SG&A. You mentioned that we should expect a similar growth for the rest of the year in that 19% range. I was just wondering on the inability to leverage 1.5% on comp, I guess the consultant expenses. What else is driving that? I would have thought there were some opportunities for flatter SG&A growth especially in the back half if your comparisons start easing after the second quarter.

Patricia Johnson

It is really about the base, so it’s really about the investments that we made in 2007 that carry into 2008. For example, the amortization of software, the implementation of POS, the e-commerce investment, infrastructure that we have added at the corporate office to support new store openings, etc. Those investments, roughly, is a range. It could range anywhere from 17% to 18%. Roughly, a similar rate of growth will exist throughout the year. Obviously that is based on assuming a similar sales trend. If we see a different sales trend, either higher or lower, there would be some change in that estimate.

Anna Andreeva - JP Morgan

Okay. What is the payroll management opportunity, as you will be adding some of that software? Does that become more of a back half opportunity or are you looking at 2009 too to maximize that?

Mark Hoffman

We see that impacting the fourth quarter, that system should be fully rolled-out from test into application by the end of June.

Anna Andreeva - JP Morgan

Okay, great. Thanks.

Mark Hoffman

Thank you.

Operator

Thank you. There appears to be no further questions. I will turn the floor back over to you for any further or final remarks.

Mark Hoffman

Thank you for joining us today. We look forward to updating you in April with our second quarter conference call. Have a good day.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day.

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