Chico’s FAS, Inc. (NYSE: CHS) (the “Company”) today announced its financial results for the fiscal 2019 first quarter ended May 4, 2019
For the thirteen weeks ended May 4, 2019 (the “first quarter”), the Company reported net income of USD 2.0 million, or USD 0.02 per diluted share, compared to net income of USD 29.0 million, or USD 0.23 per diluted share, for the thirteen weeks ended May 5, 2018 (“last year’s first quarter”). The Company reported first quarter adjusted net income of USD 5.6 million, or USD 0.05 per diluted share, as presented in the related accompanying GAAP to non-GAAP reconciliation.
“In the first quarter, we made significant changes to the Company’s leadership and reset priorities for its growth 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 increase 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 first quarter results stabilized in line with the fourth quarter 2018. 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% comparable sales in the first 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 first quarter, net sales were USD 517.7 million compared to USD 561.8 million in last year’s first quarter. This decrease of 7.8 % reflects a comparable sales decline of 7.0 % as well as the impact of 41 net store closures since last year’s first quarter. The comparable sales decline was driven by lower average dollar sale and a decrease in transaction count.
For the first quarter, gross margin was USD 190.8 million, or 36.9 % of net sales, compared to USD 226.9 million, or 40.4 % of net sales, in last year’s first quarter. This 350-basis point decrease 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 fourth quarter of 2018. Excluding the 100 basis-point impact of accelerated depreciation, gross margin decreased approximately 250 basis points.
Retail Fleet Optimization Plan
In the first quarter, the Company recorded pre-tax accelerated depreciation charges of property and equipment within cost of goods sold of $4.9 million related to our retail fleet optimization plan. On an after-tax basis, the first quarter impact of these charges was $3.6 million, or $0.03 per diluted share.
Selling, General and Administrative Expenses
For the first quarter, selling, general and administrative (“SG&A”) expenses were $185.4 million, or 35.9% of net sales, compared to $186.4 million, or 33.2% of net sales, for last year’s first quarter.
Income Tax Provision
For the first quarter, the effective tax rate was 62.7% compared to 27.9% for last year’s first quarter. In the first quarter of fiscal 2017, 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 first quarter would be approximately flat to last year’s first quarter. The following table details the impact of share-based awards on the Company’s effective tax rate (dollars in millions):
Cash, Marketable Securities and Debt
At the end of the first quarter, cash and marketable securities totalled USD 168.0 million, a decrease of USD 86.8 million compared to last year’s first quarter, while debt totalled USD 53.8 million, a decrease of USD 11.1 million from last year’s first quarter. This USD 86.8 million decrease in cash and marketable securities primarily reflects a USD 124 million return of cash to shareholders in fiscal 2018 through share repurchases and dividend payments.
At the end of the first quarter, inventories totalled USD 242.4 million compared to USD 253.8 million at the end of last year’s first quarter. This USD 11.4 million, or 4.5 %, decrease primarily reflects the impact of product liquidations through a third party, store closures and management of inventory levels relative to net sales.
Fiscal 2019 Second Quarter and Full-Year Outlook
The Company is initiating outlook for the second quarter of fiscal 2019 and is updating its full year fiscal 2019 outlook from its previous outlook. The outlook for both the second quarter and fiscal year excludes expected net charges related to the Company’s retail fleet optimization plan.
For the fiscal 2019 second quarter, compared to the fiscal 2018 second 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 second quarter. However, the Company expects that sales at the Chico’s and Soma brands will improve in the second quarter compared to the first.
• 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 expenses are expected to be approximately flat, reflecting ongoing cost management, offset by investments in Soma marketing.
For full year fiscal 2019, compared to full year fiscal 2018:
• 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 second 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 expenses to be down approximately $10 million, versus its previous guidance of approximately flat with fiscal 2018, reflecting ongoing cost management.
• The Company expects capital expenditures to be approximately $55 million, primarily driven by store reinvestments and technology enhancements.
• The Company estimates a fiscal 2019 tax rate in the range of 35% to 40% primarily as a result of an increase in tax expense related to the accounting for employee share-based awards.
The Company, through its brands – Chico’s, White House Black Market, Soma and TellTaleTM is a leading omni-channel specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing, intimates and complementary accessories.
As of May 4, 2019, the Company operated 1410 stores in the U.S. and Canada and sold merchandise through 84 international franchise locations in Mexico and 1 domestic franchise airport store. The Company’s merchandise is also available at http://www.chicos.com, http://www.chicosofftherack.com, http://www.whbm.com, http://www.soma.com and http://www.mytelltale.com as well as through third-party channels. For more detailed information on the Company, please go to our corporate website at http://www.chicosfas.com. The information on our corporate website is not, and shall not be deemed to be, a part of this press release or incorporated into our federal securities law filings.