Charlotte Russe Holding, Inc. F3Q08 (Qtr End 06/28/08) Earnings Call Transcript

Jul.23.08 | About: Charlotte Russe (CHIC)

Charlotte Russe Holding, Inc. (CHIC) F3Q08 Earnings Call July 23, 2008 5:00 PM ET

Executives

Jennifer C. Salopek – Non-Executive Chairman of the Board

Leonard H. Mogil - Interim Chief Executive Officer

Patricia K. Johnson - Chief Financial Officer, Exec. VP and Treasurer

Analysts

Millie Chen - Wedbush Morgan Securities Inc.

Seth Withnic - Piper Jaffray

Samantha Panella - Raymond James

Janet Kloppenburg - JJK Research

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Brian R – BLR Capital

Robin Murchison - Suntrust Robinson Humphrey

Quenton Maynard – Morehead Capital

Samuel B. – J.P. Morgan

Eric Keith – Sunrise Capital

Betty Chen - Wedbush Morgan Securities Inc.

Jeff Sinderen - B. Riley & Company, Inc.

Operator

Welcome to the Charlotte Russe third quarter results conference call. (Operator Instructions) With us on today’s call are Jennifer C. Salopek, Non-Executive Chairman of the Board; Len Mogil, Interim Chief Executive Officer; and Patty Johnson, Chief Financial Officer.

Certain statements made on this quarterly conference call herein, including without limitation, statements addressing the beliefs, plans, objectives, 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 10K, its filings on Form 10Q, management discussion and analysis and the company’s latest annual report to stockholders, the company’s filings on Form 8K, 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.

And now I’ll turn the call over to Ms. Jennifer Salopek.

Jennifer Salopek

I’ll begin with a brief discussion of the management announced earlier this week followed by an update on our search for a permanent CEO. Len Mogil will then provide you with a high level overview of our third quarter results and discuss the strategic initiatives that management and the board are working on.

Len’s remarks will be followed by a financial review from Patty Johnson and then Len will conclude with the discussion of fourth quarter guidance and our outlook and positioning for the long-term.

I would like to start by saying that we are incredibly fortunate to have such a qualified and respected executive as our interim CEO. Len has long been the board’s choice under our contingency plan to step in and lead the company should the need arise. Given his tenure on the board, his leadership of the audit committee, and his ongoing involvement in the company’s strategic development process, and his retail industry experience, Len is eminently qualified to lead us through this transition.

Len’s commitment is full-time. He will be based in San Diego at the company’s headquarters. For those of you who do not know Len, he has been on the board, on the audit committee, for seven years and for the past 12 quarters, he has served as Chair of the audit committee. He has been integral in the strategy development process at the board level, serving on our strategic development committee, and participating in monthly meetings as well as staying in regular contact with the management team for the last several quarters. He is a retail industry veteran, having served as group Executive Vice President at Phillips VanHeusen and President of several divisions of allied stores.

His breadth of experience spans all functional levels of the business, including store operations, strategic planning, real estate, merchandise operations, finance, warehousing and distribution, and human resources.

While we are delighted that Len has assumed this leadership role, the board is working diligently to identify a permanent replacement. We will be working with a best in class research firm specializing in retail and I look forward to reporting to you on our selection very soon.

We are focusing on candidates with extensive merchandising and operational experience, proven leadership skills, and a strong track record of driving growth and creating value. In the meantime, our priority continues to be improving the overall profitability of the company and delivering greater value to our shareholders. As you’ll hear from Len, we have a clearly defined strategy development process in progress and a lot of hard work to achieve our goals is well under way.

On behalf of the board, I would like to thank Mark Hoffman for his significant contributions to Charlotte Russe over the past seven years. We wish him all the best in his retirement.

With that, I’d like to introduce Len Mogil.

Len Mogil

I’d like to start by expressing my excitement to be here and my commitment to working with our Board and management to enhance the company’s bottom line and increase shareholder value.

I want you to know that I’m here with the intention of moving things forward, not as a caretaker, until a permanent CEO is elected. In my capacity as a Charlotte Russe board member, I’ve had the opportunity to work with many members of our experienced and talented management team and therefore know firsthand what is already in progress and what needs to be done from both a tactical and strategic perspective to take the company to the next level.

I recognize there are significant opportunities at the company that could create increased value and the board and management team have begun to study and address them. For those of you, I haven’t had the chance to meet, I look forward to talking with you and hearing your thoughts in the days and weeks ahead.

With that general overview, I’ll now turn to the results of the quarter. Our third quarter proved difficult from a comp sales perspective, but we were able to deliver earnings of $0.31 per diluted share and end the quarter with comp store inventory down 10.4%. Although third quarter sales were up 7%, comp sales declined 6.5%, which is below our guidance of flat to negative low single digits.

Broadly speaking, accessories, footwear, and certain apparel classifications performed well, but it was a difficult for some of our summer businesses and our pre-fall transitional products. Early in the quarter, management made the decision to reduce inventory in summer goods to allow for the flow of new transitional products. Unfortunately, that June transitional flow was not well received by our customers, which combined with the difficult macro environment, led to the 6.5% comp sales decline.

On a positive note, the inventory issue has been addressed by providing for appropriate markdowns to clear through that transitional product as we move into the important back-to-school selling season. In fact, the initial back-to-school floor set just arrived in our stores July 20th. Our merchants are excited about what the team has put together and we’re looking forward to getting a read on customer response in the coming weeks.

Looking further ahead, I would like to share with you some of our thoughts on strategic direction and how we’re thinking about the business in terms of reviewing and analyzing all aspects of the current operating model. Today, we’re approaching 500 stores and one billion in sales. We have a business and an infrastructure that is highly scalable. Our primary goals are to leverage and build upon the underlying strength of the business and create an elevated platform for growth. Specifically, we are focusing on and evaluating opportunities in five key areas. First, brand position. Second, merchandise assortment. Third, inventory productivity. Fourth, our existing fleet, and fifth, the optimal utilization of capital.

Turning to new store openings and remodels, we’re carefully evaluating the environment as we craft our plans for fiscal 2009 and beyond. Equally important, we’re looking at ways to most effectively deploy our capital. As we noted in today’s press release, our current plans call for 20 to 30 new stores next year, which we believe is prudent in light of the environment and our ongoing strategy development process.

As I spend more time with our team and delve further into day-to-day operations, I expect to have some great insights to share with you about our direction and focus and the new opportunities for growth.

With that, I’d like to turn the call over to Patty Johnson to review the financials and then I’ll wrap up with some comments on our outlook and on guidance. Patty?

Patty Johnson

Total revenues in the third quarter increased 7.2% to $193 million, while comp store sales decline 6.5%. Looking at comp store transaction metrics, averaging at retail was down about 5% to last year, comp store transactions were down 2.5%, and units per transaction were up approximately 1%.

Third quarter gross profit was down 3% to $52 million, while gross margin declined 290 basis points to 26.7%. The decline was driven by a few major factors. First, product gross margin was down 112 basis points. Of that amount, 80 basis points is attributable to increased markdown expense. The balance can primarily be traced to a decline in IMU driving by sales mix and a higher shrink rate versus last year.

I know that you are hearing a lot about increased cost coming out of China and while we were not significantly affected in Q3, we would expect to see some pressure on IMU beginning in the fourth quarter.

I want to remind everyone that in Q3 we anniversaried the new freight carrier implementation and as a result did not see the positive year-over-year benefit we’ve seen in the last few quarters. In addition, we are starting to feel the impact of rising gas prices on our freight expense. The impact on Q3 was modest, but we anticipate this will have a more significant effect on Q4.

Third quarter gross margin also reflects 221 basis points of rent and occupancy deleverage. This is partially offset by leverage in distribution center costs due to productivity improvements and the decision to reduce receipts and response to business trends. Please keep in mind that in Q4 we will begin to anniversary the DC processing productivity improvements that were implemented in Q4 of last year. As a result, we would not expect year-over-year improvements in Q4 and perhaps a modest increase due to receipt flow timing.

SG&A expenses in the third quarter were $41 million or 21.4% of sales. That’s up 35 basis points to last year. Due to the negative 6.5% comp, some areas of SG&A deleveraged, including store payroll up 60 basis points and central office expense of 70 basis points. This was partially offset by two factors. 30 basis points of lower store operating expense and 60 basis points of lower asset write-off expense versus last year.

As you may recall, last year we rolled out the new POF system and as a result we incurred asset write-off expense of $1.1 million in the third quarter of fiscal 2007.

Looking forward to fourth quarter, we expect the biggest areas of expense pressure to come from the following factors. In order of magnitude they are continued deleverage of rent and occupancy, continued deleverage of store payroll and central office expense, freight cost increases due to fuel surcharges and the timing of receipt flow, higher distribution center costs, which I noted earlier, and finally pressure on IMU due to cost increases out of China.

In terms of written occupancy deleverage, let me give you a reference point. At the low end of our fourth quarter comp guidance, which is negative mid-single digits, the deleverage would likely be similar to what we experience in Q3.

Turning back to the results, third quarter operating income came in at $10.4 million or 5.4% of sales. That compares to an operating margin of 8.6% last year.

Interest income declined substantially, coming in at about $300,000 versus $1.2 million a year ago, partly due to lower interest rates but in a large part due to the cash that was used to complete the Dutch tender offer.

Net income was $6.6 million or $0.31 cents per diluted share compared to $10.1 million or $0.40 cents per diluted share in Q3 of 2007. As a reminder, the share repurchase reduced the number of shares outstanding effective April 3rd. Diluted share used to calculate earnings per share were $21.2 million for the third quarter and $23.8 million for the nine month period.

Looking at the balance sheet, we ended the quarter with $46 million of cash and no long-term debt. Total inventory was down 7% and comp store inventories were down 10.4% at the close of the quarter, reflecting our efforts to actively reduce receipts during the period.

In addition to effectively managing inventories, we have provided for the clearance of June transitional goods in our markdown expense for the quarter, which allowed us to enter July in a clean inventory position.

Turning to new store openings, during Q3 we opened 21 new stores bringing our total to 39 new locations in the first nine months of fiscal 08. We remodeled six locations in the quarter for a total of nine year to date. As of June 28, 2008, gross square footage was $3.3 million up from $2.9 million at the end of Q307.

Capital expenditures were $20 million in the quarter and $39 million year-to-date, leaving us on track for full year expenditures of approximately $70 million. Of that amount, about $46 million is for new stores, $15 for remodels and refurbishments, and about $9 million for corporate IT and distribution.

Third quarter depreciation expense was $10.8 million.

Thanks for your time today. I’ll now turn the call back to Len.

Len Mogil

I would like to point out that the fourth quarter outlook we’re providing today reflects the difficult selling environment as well as sales trends below expectations. That said, our merchants feel positive about our back-to-school assortments that arrived in stores earlier this week.

Our guidance calls for comp store sales to be in the negative low to mid-single digit range and diluted earnings per share between $0.15 and $0.23 cents. The EPS guidance range is wider than we have provided in the past and is reflective of the challenges I have described. At this time, we feel it is important to be appropriately cautious. Please be assured that this management team and board are absolutely committed to maintaining an open dialogue with analysts and investors ensuring that you’re informed about our strategies and opportunities and how we’re working diligently to deliver improved profitability and shareholder value.

Thanks for your attention today. I’ll now ask the operator to please open the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Milly Chen with Wedbush Morgan.

Milly Chen - Wedbush Morgan

I’m calling for Betty Chen and my question is in regard to the refurbishment program, if you could talk a little bit more about that and how we’re protected for the year and if you might still be seeing a sales lift from those that have been refurbished.

Patty Johnson

As we commented, we did complete six remodels during the quarter, a total of nine this year. As you may recall, our target for this year was to do about 15 to 20. We’ll be closer to 15 remodels for the year. We continue to be pleased with the performance of our bright store format. It does continue to drive a lift when we remodel stores and we will continue our remodel program going forward albeit somewhat more modestly until we’re finished with our strategic work.

Operator

Your next question is coming from Seth Withnic with Piper Jaffray.

Seth Withnic - Piper Jaffray

Could you just prioritize the things that you see as controllable factors as it relates to your fourth quarter guidance and then maybe into the first part of next year.

Patty Johnson

In other words, what are some of the flex points. So some of the flex points are store payroll. Obviously at different sales levels, you’ll see different store payroll levels. As always, we are very tight in terms of managing our cost structure so any discretionary spending or discretionary projects are put on hold during times like this. We have some flexibility in things like distribution costs and freight as they relate to receipts. So those will flex up and down with receipts. When you under-perform at certain levels, you don’t see as high as expense on the bonus line, either store expenses or corporate expenses. So I’d say those are some of the moving parts.

Seth Withnic - Piper Jaffray

Could you just give us a look into CapEx for next year with the store reductions and how many of those 20 to 30 stores are already committed and at what points in the year are the openings planned. Thanks.

\

Patty Johnson

I don’t have a CapEx target yet for next year, but you can get a rough idea that 20 to 30 stores are typical store build has been approximately 750. So you can come up with a range there. Our remodel target is probably going to be a minimum of about ten locations and we may do more. So you can come up with a rough estimate based on that and we’ll provide more guidance later on. How many committed on the 20, we have a significant portion of those committed at this time. So I’d say about 15 to 20 of those are in the works; the others are still to be determined.

Operator

Our next question is coming from Samantha Panella with Raymond James

.

Samantha Panella - Raymond James

Just a follow-up if you can give us any more color on the June product, like what was it that you think was not working. Any additional color there and also if you could comment on e-commerce.

Len Mogil

In the third quarter, we saw strength in accessories, footwear, and certain apparel classification. Based on a decision made by the team to change the flow, there was a problem in supporting some of the core summer businesses. The full transitional product, which we did deliver was not well received by the customer. Much of it has to do with the color palettes and the lack of basis.

Samantha Panella - Raymond James

Also, if you could comment on e-commerce sales.

Patty Johnson

We don’t break out our e-commerce sales specifically, but let me give you some color on that. We’re pleased with e-commerce. We think there’s some tremendous growth opportunity there. It is going to be profitable albeit a small profit in its first year, which I think is a success story. We have previously commented that we expected it to be around $6 million in its first full year and it’s going to probably slightly over achieve that.

Operator

Our next question is coming from Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

Patty, you said something about markdown expense for third quarter. Did it reflect the markdowns on the fall transitional products as well?

Patty Johnson

Sure, that was the point. The point is that some of that inventory was still on our books at the end of the quarter and we reserved for it to cover the ultimate markdowns that we would have to take on that slow moving inventory. We don’t share the reserves specifically, but I can tell you that markdown expense was 80 basis points higher than a year ago.

Janet Kloppenburg - JJK Research

Oh total markdowns.

Patty Johnson

Total for the quarter.

Janet Kloppenburg - JJK Research

Len, my question for you on the fourth quarter, given the guidance, it’s sounds like you’re worried that maybe the response to the fall merchandise line that’s now in the stores may continue to be weak as it was with the transitional line?

Len Mogil

Well, first of all, Janet, we just delivered our back-to-school assortment on July 20th. Our merchant team feels very good about it, but we’ll see over the next coming weeks. I appreciate your question, but at this time I think this is something that we’ll know more shortly.

Janet Kloppenburg - JJK Research

It’s just with the inventories down so much and if the merchants feel better it just feels like the guidance is pretty extreme, so I was wondering if you could talk a little about that.

Len Mogil

I think in the current sales environment, the macro environment, would suggest that it is a good time to be lean and we feel that we’re appropriately positioned based on that, Janet.

Janet Kloppenburg - JJK Research

What measure are you taking, or the merchant team taking, to offset the rising product cost that’s going to be a detriment to the IMUs.

Patty Johnson

Well there’s some work on the sourcing strategy. I’m not an expert on this, but there’s some work on the sourcing strategy in terms of alternative venues, but some of the costs have to do with the cost of fuel and the transportation costs to get it to the country. So it’s partly due to cost increases coming out of China and frankly no matter what we do we’re never going to be completely out of China. There are other countries we can divert production to, but we still have some sourcing in China, but also the cost of freight and transportation to get to the country is really a factor.

Janet Kloppenburg - JJK Research

So you’re not able to pass that on.

Patty Johnson

In this environment, I do not think it’s our strategy to pass that on in terms of higher prices.

Janet Kloppenburg - JJK Research

Right, so the IMUs going to have to come in a bit. That was taken into consideration in the fourth quarter guidance?

Len Mogil

Yes, it was, Janet.

Janet Kloppenburg - JJK Research

Lastly, Len, I think you guys have laid out your strategic direction. I think you had some consultants working with you to help determine the strategic direction there. I was wondering if you could help us understand what you gleaned from that consultants’ suggestions and sort of strategic direction and maybe if you could help us in learning how the business or brand positioning may change going forward.

Len Mogil

Well, Janet, this is an area a great deal of work has been performed to date. At this point, we’re not ready to come to any conclusions as we’re still evaluating. This was a very wide ranging study. It touched every part of our business. At this point, it’s a little premature to come to any conclusions or report any results. This is something we expect in future calls to give you more information on.

Janet Kloppenburg - JJK Research

Are you still working with the consultants?

Len Mogil

Yes we are.

Janet Kloppenburg - JJK Research

So that’s an ongoing relationship?

Len Mogil

Yes it is, Janet.

Janet Kloppenburg - JJK Research

And you’ll bring us up-to-date.

Len Mogil

As the information is processed and we do some more studying and come to some conclusions, we will be happy to report to you.

Operator

Our next question is coming from Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

My first question, Patty, is for you. On the impact, it says that the guidance is excluding the impact of the transition and the CEO charges. Can you help us out into other EPS or in dollars what that actually is?

Patty Johnson

Not quite yet. We’re still actually estimating that. You can get a little glimpse into that in the 8K we disclosed, Mark’s financial package. You can take a look at that, but there are some other costs that we need to quantify and we just haven’t gotten it done yet, but we will shortly. Our goal is to disclose that potentially in our 10Q which we’ll be filing in the next week, week and a half.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

We did look in the 8K and we’re coming up with about $0.04 cents at impact. Is that too much?

Patty Johnson

Don’t know yet.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Can you also help us out on direct initiatives, if there’s any way that you can help us with how in quantitative terms we should think about the percent cost increases and do you have any way of pushing back on these vendors. I mean a lot of things we’re hearing are that there’s not excess capacity, but all of the factories there are seeing shrinkage in terms of volume coming out of the US. Do you have any way of pushing back and can you have some offset from the direct initiative.

Len Mogil

Sorry, I truly appreciate your question, but as I’m sure you understand, this is my third day here and specifics like that I’m not in a position to give that level of detail.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Patty, since you had been talking about percentage of direct, could you maybe help us out there?

Patty Johnson

We’re still on track to be in that 15 to 20% import penetration at the end of the year and that has provided some mitigation of cost. It is not enough, of course, to offset some of the cost increases that we expect to see, but it has provided some mitigation by having a slightly higher import penetration than a year ago. We started off last year, we ended up last year at about 12 and then we’re going to get closer to 15, 15 to 18% at the end of this year. It’s a forecast; I don’t have all the numbers in front of me.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Len, you’ve been on the board for some time, so you’ve seen the company in different phases. In terms of the competitive environment, there’s a lot of talk about Forever 21 continuing to grow and the larger footprints. How do you feel about the size of Charlotte Russe’s store, where you should be in terms of positioning, the competition.

Len Mogil

That’s something that’s part of what we’re studying. We’ve reached a stage in our development and our lifecycle with 500 stores and close to a billion dollars in sales, that it’s appropriate at this point for us to do that type of study and that’s the kind of things we’re looking at reviewing and hope to come up with in the near future, the going forward strategy.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Any changes on the merchandising team?

Patty Johnson

Not that we’re anticipating.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Last question is the promotional strategy that you’ve employed has really been largely about kind of in store signage, bogos. Again, I know you’ve only been on the top three days, but is that something that maybe you might change for the fall holiday time period? Would you do anything like opening price points perhaps and do less of that kind of in-your-face promotional advertising?

Len Mogil

Under the current environment, we have to be cautious as to making changes of that type right now. It’s something that we’re looking at our sales optimization and markdown optimization system and we’ll continue to study it but it is a little premature for me to comment on that today.

Operator

Our next question is coming from Liz Pierce of Roth Capital Partners. Please go ahead.

Elizabeth Pierce - Roth Capital Partners LLCVan

I wanted to backtrack to the June early fall flow and get a sense of were there changes made at the last minute that somewhat deviated from what you originally had planned to bring in and was that a response to the environment or the kind of product that had been on order? What I was trying to understand when you talk about the early fall product that came in in June, was that product changed in anticipation of something or was that the product that had always been planned to be delivered?

Len Mogil

I believe it was the merchandise that was planned to be delivered. What we changed was in order to reduce our inventory levels in view of the sales drops and the environment, we did have less of the summer seasonal product. That was a decision that was made early in the quarter.

Elizabeth Pierce - Roth Capital Partners LLCVan

Okay seasonal products like tanks, things like that.

Len Mogil

At this point, I couldn’t identify the product. It was summer goods, but which exact product I’m not in a position to tell you.

Elizabeth Pierce - Roth Capital Partners LLCVan

Based on the fact that didn’t work and you said you don’t anticipate any changes in the merchandise team, as you look for what’s on order for holiday, has this caused you to rethink the product for holiday?

Len Mogil

At this point, no.

Elizabeth Pierce - Roth Capital Partners LLCVan

Thinking about the promotional environment, as you have bought the product, have you bought being prepared to be defensive and to be aggressive to keep and protect market share?

Len Mogil

You were fading out, I’m sorry.

Elizabeth Pierce - Roth Capital Partners LLCVan

Based on the current environment, were you able to buy the holiday goods at a price where you could be aggressive, you could step up in order to protect market share.

Len Mogil

I appreciate your question, but at this point, I couldn’t comment on the specifics.

Patty Johnson

Liz, let me jump in and first comment on the transitional product that was not well received by the customer. It was one delivery. A muted color palette, it did not resonate with the customer. Our brights had performed well, but this muted palette was not successful. We have reserved for that and provided for that for the markdowns needed to clear that inventory. So we’re like putting that one behind us. In terms of fall and holiday go forward, obviously we’re in the marketplace and reacting to the trends that we see in the marketplace today and feel good about that. Not necessarily seeing price decreases out there from a sourcing perspective. It’s a little bit challenging and we certainly don’t want to erode the quality that we have set for the product standards. We’re adjusting to the trends as we see them out there today.

Elizabeth Pierce - Roth Capital Partners LLCVan

Were there any regional variances in the quarter?

Len Mogil

Yes there were. The northeast performed well and some of the areas of the southwest continue to perform poorly. Excuse me, the southeast continues to perform poorly. I know a broad overall, but that’s as clear as I can give you right now.

Elizabeth Pierce - Roth Capital Partners LLCVan

California is still like most retailers a problem.

Patty Johnson

California actually performed a little better in Q3. Just FYI. So we hopefully we’ll start to see some trend change there. Northern California was tougher.

Elizabeth Pierce - Roth Capital Partners LLCVan

Right, and I know you guys don’t like to speak to the months, but just based on kind of where we started the quarter, it appears from what you’re saying that maybe things were steady state until that June delivery and then things just really kind of wimped out.

Patty Johnson

We don’t comment on the months, but I can tell you that the trend worsened in June. It had a lot to do with the poor customer acceptance on the transitional flow.

Elizabeth Pierce - Roth Capital Partners LLCVan

So really worsened in June from where you kind of started out the quarter?

Patty Johnson

Right.

Operator

Our next question is coming from Brian F – BLR Capital.

Brian F – BLR Capital

Pending your prepared remarks, you mentioned some comp metrics. Can you please repeat those?

Patty Johnson

Averaging at retail was down 5%. Comp store transactions down 2.5%. Units per transaction up 1%.

Brian F – BLR Capital

The CapEx for Q3?

Patty Johnson

$20 million in the quarter, $39 million year-to-date.

Brian F – BLR Capital

You mentioned in the breakout of CapEx for the year 46 from new stores, 15 and 9 from what?

Patty Johnson

The 15 for remodels and refurbishment, 9 for corporate IT and distribution, all combined.

Brian F – BLR Capital

You had also mentioned that your comp guidance for the fourth quarter at a down mid-single digit would equate in Q4 to the same type of SG&A deleverage for Q3. Is that correct?

Patty Johnson

I said rent and occupancy. I was just given you a point of reference, that being the most significant impact from a deleverage perspective. That point of reference is that if you see us down a mid-single digit, as we were in the third quarter, you would likely see a similar basis point deleverage in rent and occupancy.

Brian F – BLR Capital

Being that you characterized the quarter as I guess June is the worst month, is that correct?

Patty Johnson

I said the trends have worsened in June.

Brian F – BLR Capital

From April and May, so to speak?

Patty Johnson

Correct.

Brian F – BLR Capital

Could you guys comment on July versus June?

Patty Johnson

No, we can’t, because we only disclose sales on a quarterly basis.

Brian F – BLR Capital

Can you guys comment on Mark’s retirement maybe a little bit from what you can say? It was kind of abrupt, that’s the only reason that I ask.

Jennifer Salopek

I can only say that Mark informed the board of his decision to retire and that he’s worked diligently over the last seven years to help us build the company. It’s one of the fastest growing mall-based specialty retailers. We thank him for those contributions and we’re wishing him all the best in his retirement.

Brian F – BLR Capital

So he has retired?

Jennifer Salopek

Yes.

Operator

Our next question is coming from Robin Murchison of Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

Guess what, everything was asked that I was going to ask. So Len, congratulations, or good luck with engineering and working on the turn and just look forward to hearing more about it in the future. Thanks very much.

Operator

Our next question is coming from Quentin Maynard with Morehead Capital.

Quentin Maynard – Morehead Capital

One quick question, Mark in the past had indicated that as a long-term goal a 10% operating margin was what he thought the business had the potential to generate and just wondering, Len, as you think about the business if that’s something that seems reasonable to you or if that’s one of the components that’s being rethought right now.

Len Mogil

I think your final comment was correct. As part of our complete review and evaluation of the business, we’ll be looking at that, but I’m not in a position to date to comment on it.

Operator

Our next question is coming from Seth Withnic with Piper Jaffray.

Seth Withnic - Piper Jaffray

Just a quick follow-up. I want to just understand better the state of affairs of the stores currently. How much of that transition product is still in the stores if you had to quantify it and how should we think about inventory levels as we exit Q4?

Len Mogil

Well as far as that product being in the stores, as we’ve indicated previously, we provided what we feel is the markdown exposure on it and appropriately to move it out in the proper timeframe. At that present time, we ended the third quarter with our inventories down 10.4% and we expect to end, at this point, we expect to end Q4 down mid-single digit range would be our estimate on a comp store basis.

Operator

Our next question is coming from Samuel B. with J.P. Morgan.

Samuel B. – J.P. Morgan

Thank you. My question has been answered.

Operator

Our next question is coming from Eric Keith with Sunrise Capital.

Eric Keith – Sunrise Capital

Can you comment on the growth strategy over the past few years where you ramped up the number of stores, but it’s not contributing to the bottom line. Are you rethinking that now and just can you talk about that a little bit? Obviously the CapEx, I don’t see the return on the CapEx dollars. Can you talk about that?

Len Mogil

I think in my opening comments I did speak to that. In the lifecycle of our business, we’re at almost 500 stores at the end of this year and the last couple of years have been fairly aggressive. As the new store opening model made good economic sense, but to your point, we recognize that it’s time to really take a good hard look for the going forward. Our board, as well as management, realizes that at this stage we need to reassess that growth strategy and concentrate in the near term on capital utilization, return on our assets, and optimizing the deployment of capital, and also optimizing the fleet we already own.

Eric Keith – Sunrise Capital

Can you talk about your expense control? Is one of your priorities as you knew, going forward, are you going to take a hard look at SG&A and the reason I’m asking is factoring out this quarter, forgetting this quarter for a second, if you look back over the last three previous quarters, SG&A is rising much more rapidly than sales. Is there any room for a hard look at your SG&A and expense control?

Len Mogil

On that, we’re always conscious of expense control, it’s a tenant of our business, but our productivity on all our assets, rather it’s inventory, operations, and real estate are the key here to driving that to the appropriate level. As we study things going forward, we have to support our existing business, but productivity is an important metric that we need to work on so that it’s to leverage SG&A.

Eric Keith – Sunrise Capital

Is the new POF system fully functional? Are you happy with it?

Len Mogil

It is fully functional and yes, the company is pleased with the outcome?

Eric Keith – Sunrise Capital

Can you talk about newer stores versus the performance of some of the older stores?

Profitability-wise. What’s that? Can you give us some sense of that that looks like?

Len Mogil

Patty is going to comment on that.

Patty Johnson

Probably the biggest difference between a new store and an older store would be that in today’s negotiated rent, rents are going to be higher than a store that opened say five, six, seven, eight years ago. So our older stores, more mature stores, assuming that they’re hitting average store volumes, are likely to be more profitable and therein lies the opportunity that Len is talking about. The more we can drive productivity in our existing store base and top line productivity, average sales per store, sales per square foot, the greater opportunity we’ll have to continue to improve that profitability.

Eric Keith – Sunrise Capital

And that’s also the opportunity to open fewer stores that are possibly more profitable than just opening a target 50 or 60 stores per year. How long have the consultants been in there now?

Len Mogil

I think it’s approximately six months.

Eric Keith – Sunrise Capital

Would you say that Charlotte Russe, is it a macro environment issue that’s affecting Charlotte Russe more than a micro, you know, company specific issue in here?

Len Mogil

Well I think our third quarter performance, it was in that case both issues. I think going forward we feel that the issue is more macro than micro.

Eric Keith – Sunrise Capital

And the micro would just be the miss on that one.

Len Mogil

Yes, in that one...

Eric Keith – Sunrise Capital

Right. Thank you very much and good luck

Operator

Our next question is coming from Betty Chen with Wedbush Morgan.

Betty Chen - Wedbush Morgan

As you continue to work with the consultants and I know that they’re helping the company figure out and evaluate their opportunity for a new concept, I was just curious on what’s the status of that?

Len Mogil

At this time, we don’t think it’s the right environment or timing for a new concept. We have a tremendous opportunity in front of us with the Charlotte Russe concept and there’s plenty of runway to grow the existing business and improve our overall profitability.

Betty Chen with Wedbush Morgan

Then just a follow-up on the earlier question of trying to drive more store productivity and more out of the existing store sizes and again I recognize you’ve only been on the job for a few days. Should we think about that through additional product categories or what are different ways to try to drive more volume out of the stores?

Len Mogil

At this point, we’re not in a position to unfortunately to answer that for you. We’re looking at all aspects. No stone will be left unturned.

Betty Chen with Wedbush Morgan

Just a last question. I believe there was a workforce management system that was being implemented this year. I was just wondering on the status of that?

Patty Johnson

We’re set up to begin some testing on that in the fourth quarter and we’ll get back to you as we evaluate that rollout and that opportunity.

Operator

Our next question is coming from Jeff Sinderen with B. Riley.

Jeff Sinderen - B. Riley & Company, Inc.

Len, let me ask you, is it possible that you are selected to be permanent CEO or would you want to be permanent CEO?

Len Mogil

At this point, I am not a candidate for the permanent position. The board, as you heard Jennifer say earlier, will shortly be hiring a top in class firm to do the executive search, but no, I’m the interim CEO and as I said earlier, not as a caretaker, but I am not a candidate for the position.

Jeff Sinderen - B. Riley & Company, Inc.

How long do you think it will take to go through the process of finding a new CEO? What do you guys think about the talent pull that’s out there that you can draw from and then is it going to be, Len and Jennifer, are you also going to be involved in interviewing the candidate and making a decision?

Jennifer Salopek

I’ll absolutely be involved. I’ll be leading it along with a committee of the board. We formed a search committee. We are not certain how long it will take. We’re just beginning a process and at this point we’re not putting a timeline on it. As Len mentioned, we are working with a top tier firm. We expect them to identify some terrific candidates for us. We’re going to be looking for significant experience in merchandising and operations, proven leadership skills, and someone who can really work with us to take Charlotte Russe to its next level of development. Given where we are in our lifecycle and demands of going to the next stage.

Jeff Sinderen - B. Riley & Company, Inc.

Do you think that there’s a lot of talent out there to draw from that has those kinds of qualities?

Jennifer Salopek

Well I couldn’t comment on that at this time, but I assure you we’re working with a great firm. I’m sure that they will identify talent and we, the search committee on the board, will be effectively evaluating it.

Operator

There appears to be no further questions at this time. I’ll turn the floor back over to you for any further closing remarks.

Len Mogil

Well I’d like to thank everybody for their participation and their listening abilities and we look forward to communicating with you in the future. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!