Chico’s FAS, Inc. (NYSE: CHS) (the “Company”) announced its financial results for the Financial 2k19 1st quarter ended May 4, 2k19. For the thirteen weeks ended May 4, 2k19 (the “1st quarter”), the Company reported net income of $2.0(M), or $0.02per diluted share, compared to net income of $29.0(M), or $0.23 per diluted share, for the thirteen weeks ended May 5, 2k18 (“last year’s 1st quarter”).
The Company reported 1st quarter adjusted net income of $5.6(M), or $0.05per diluted share, as presented in the related accompanying GAAP to non-GAAP reconciliation.
“In the 1st quarter, we made significant changes to the Company’s leadership and reset priorities for its development and value creation,” commented Bonnie Brooks, interim CEO and President of the Company. “Actions are now underway across all brands with a focus on three distinct areas that will positively impact our results.
These include driving stronger sales through improved product and marketing; optimizing the customer journey by simplifying, digitizing and extending our unique and personalized service; and transforming our sourcing and supply chain operations to incline product speed to market and improve quality.
Having led successful turnarounds at other major apparel retailers, I am confident that our action steps on the path forward are the ones needed to deliver our plans.”
- Chico’s 1st quarter results stabilized in line with the 4th quarter 2k18. The brand is making progress in elevating the product aesthetic and delivering a more balanced merchandise architecture to its customers.
- Soma reported positive 3.4 percent (%) comparable sales in the 1st quarter, driven by bras and sleepwear. The Company’s latest EnblissTM collection is performing particularly well and is on track to be the #1 franchise in Soma’s portfolio.
- White House Black Market reported a greater than expected comparable sales decline, driven by misses in color and print. Steps to course correct have been implemented, including adjustments for fall and holiday product offerings.
- The Company completed the rollout of StyleConnect™, an enhanced platform that provides digitized clienteling tools to all stores and remains on track to launch Buy Online Pick-up in Store (BOPIS) across its fleet this summer.
- The Company is making progress on its previously announced search for a permanent CEO. The Board’s search committee has met with a number of exceptionally qualified candidates and is pleased with the quality of the apparel executives with merchandising experience that it is seeing.
For the 1st quarter, net sales were $517.7(M) compared to $561.8(M) in last year’s 1st quarter. This decline of 7.8 percent (%) reflects a comparable sales decline of 7.0 percent (%) as well as the impact of 41 net store closures since last year’s 1st quarter. The comparable sales decline was driven by lower average dollar sale and a decline in transaction count.
For the 1st quarter, gross margin was $190.8(M), or 36.9 percent (%) of net sales, compared to $226.9(M), or 40.4 percent (%) of net sales, in last year’s 1st quarter.
This 350-basis point decline primarily reflects the impact of product liquidations, continued charges related to our omnichannel programs and accelerated depreciation as a result of our retail fleet optimization plan announced in the 4th quarter of 2k18.
Excluding the 100 basis-point impacts of accelerated depreciation, gross margin declined approximately 250 basis points.
Retail Fleet Optimization Plan
In the 1st quarter, the Company recorded pre-tax accelerated depreciation charges of property and equipment within the cost of goods sold of $4.9(M) related to our retail fleet optimization plan.
On an after-tax basis, the 1st quarter impact of these charges was $3.6(M), or $0.03 per diluted share.
Selling, General and Administrative Costs
For the 1st quarter, selling, general and administrative (“SG&A”) costs were $185.4(M), or 35.9 percent (%) of net sales, compared to $186.4(M), or 33.2 percent (%) of net sales, for last year’s 1st quarter.
Income Tax Provision
For the 1st quarter, the effective tax rate was 62.7 percent (%) compared to 27.9 percent (%) for last year’s 1st quarter. In the 1st quarter of Financial 2k17, we adopted the employee share-based payment accounting standard which requires all income tax effects of employee share-based awards to be recognized in the income statement when the awards vest or are settled.
Previously, these charges were recorded in additional paid-in capital. Excluding the impact of employee share-based awards, the effective tax rate for the 1st quarter would be approximately flat to last year’s 1st quarter. The following table details the impact of share-based awards on the Company’s effective tax rate (dollars in(M)s):
|Thirteen Weeks Ended|
|May 4, 2k19||May 5, 2k18|
|Components of income tax provision||Amount||Tax Rate||Amount||Tax Rate|
|Income from operations||$||1.4||25.0||percent (%)||$||10.1||25.1||percent (%)|
|Employee share-based awards||2.0||37.7||1.1||2.8|
|Income Tax Provision||$||3.4||62.7||percent (%)||$||11.2||27.9||percent (%)|
Cash, Marketable Securities and Debt
At the end of the 1st quarter, cash and marketable securities totaled $168.0(M), a decline of $86.8(M)compared to last year’s 1st quarter, while debt totaled $53.8(M), a decline of $11.1(M) from last year’s 1st quarter.
This $86.8(M) decline in cash and marketable securities primarily reflects a $124(M) return of cash to shareholders in Financial 2k18 through share repurchases and dividend payments.
At the end of the 1st quarter, inventories totaled $242.4(M) compared to $253.8(M) at the end of last year’s 1st quarter.
This $11.4(M), or 4.5 percent (%), decline primarily reflects the impact of product liquidations through a 3rd party, store closures, and management of inventory levels relative to net sales.
Financial 2k19 2nd Quarter and Full-Year Outlook
The Company is initiating outlook for the 2nd quarter of Financial 2k19 and is updating its full-year Financial 2k19 outlook from its previous outlook. The outlook for both the 2nd quarter and Financial year excludes expected net charges related to the Company’s retail fleet optimization plan.
For the Financial 2k19 2nd quarter, compared to the Financial 2k18 2nd quarter:
- The Company anticipates a mid-single digit decline in total net sales and consolidated comparable sales, reflecting expected softer sales in its White House Black Market brand, which will continue through the 2nd quarter. However, the Company expects that sales at the Chico’s and Soma brands will improve in the 2nd quarter compared to the 1st.
- The Company expects gross margin as a percent of net sales to decline approximately 200 to 250 basis points, due primarily to incremental costs associated with its omnichannel programs and deleverage of fixed costs from lower sales.
- SG&A costs are expected to be approximately flat, reflecting ongoing cost management, offset by investments in Soma marketing.
For full year Financial 2k19, compared to full year Financial 2k18:
- The Company anticipates a low-to-mid-single-digit decline in total net sales and consolidated comparable sales, versus its previous guidance of a low-single-digit decline in total net sales and consolidated comparable sales. The Company expects stronger sales trends across all brands in the 2nd half of the year, as key initiatives gain traction.
- The Company expects gross margin as a percent of net sales to be down 50 to 100 basis points versus its previous guidance of approximately flat to down 50 basis points, due primarily to incremental costs associated with its omnichannel programs and deleverage of fixed costs from lower sales.
- The Company anticipates SG&A costs to be down approximately $10(M), versus its previous guidance of approximately flat with Financial 2k18, reflecting ongoing cost management.
- The Company expects capital expenditures to be approximately $55(M), primarily driven by store reinvestments and technology enhancements.
- The Company estimates a Financial 2k19 tax rate in the range of 35 percent (%) to 40 percent (%) primarily as a result of an incline in tax expense related to the accounting for employee share-based awards.
Conference Call Information
The Company is hosting a live conference call on Tuesday, June 11, 2k19 beginning at 8:00 a.m. ET to review the operating results for the 1st quarter.