Second quarter GAAP loss of USD 0.02 per diluted share; Adjusted earnings of USD 0.00 per diluted share
• Sequential improvement at Chico’s brand; Soma delivers double-digit comparable sales increase
• Provides outlook for third quarter 2019; Updates full year fiscal 2019 outlook
Chico’s FAS, Inc. (NYSE: CHS) (the “Company”) today announced its financial results for the fiscal 2019 second quarter ended August 3, 2019.
For the thirteen weeks ended August 3, 2019 (the “second quarter”), the Company reported a net loss of USD 2.3 million, or USD 0.02 loss per diluted share, compared to net income of USD 16.8 million, or USD 0.13 earnings per diluted share, for the thirteen weeks ended August 4, 2018 (“last year’s second quarter”). The Company reported second quarter adjusted net loss of USD 0.2 million, or USD 0.00 earnings per diluted share, as presented in the related accompanying GAAP to non-GAAP reconciliation.
For the twenty-six weeks ended August 3, 2019, the Company reported a net loss of USD 0.3 million, or USD 0.00 earnings per diluted share, compared to net income of USD 45.8 million, or USD 0.36 earnings per diluted share, for the twenty-six weeks ended August 4, 2018. For the twenty-six weeks ended August 3, 2019, the Company reported adjusted net income of USD 5.4 million, or USD 0.05 earnings per diluted share, as presented in the related accompanying GAAP to non-GAAP reconciliation.
“We are seeing evidence of progress within our business and reported second quarter results in line with our expectations. This performance was driven by sequential improvement at Chico’s and continued strong comparable sales growth at Soma of 10.9 % in the second quarter. At White House Black Market, the changes we made in product, marketing and in-store presentation are driving improved sales trends in August compared to our second quarter results. We expect these improvements to continue benefiting the brand throughout the fall and holiday seasons,” said Bonnie Brooks, CEO and President.
“We are committed to enhancing value creation at Chico’s FAS and are taking the necessary steps to do so. We have made significant leadership changes and are focused on executing on our three operating priorities to deliver sustainable, profitable growth,” continued Ms. Brooks.
Fiscal 2019 Second Quarter Business Highlights
• The Company announced the appointment of Bonnie Brooks as CEO and President of Chico’s FAS and a new organizational structure for the Company. Molly Langenstein was appointed President, Apparel Group, leading Chico’s and White House Black Market (“WHBM”), and Mary van Praag, President, Intimates Group, continues to lead Soma® and TellTale™. The new structure and leadership appointments are designed to strengthen the organization, create clear lines of responsibility and accelerate sales driving priorities.
• Soma reported positive 10.9% comparable sales growth in the second quarter, the brand’s best comparable sales performance in four years, and remains a leading performer in the industry. The focus on innovation, improved aesthetic and additional marketing at Soma are driving new customer acquisition.
• Chico’s comparable sales improved sequentially compared to the first quarter, driven by momentum in key items and better in-stock positions.
• WHBM comparable sales were lower sequentially compared to the first quarter due to product misses in color and print, which were identified in the first quarter and have been addressed through significant leadership changes and a more rigorous approval process. The sales trends in the Fall 1 assortment, set in stores and online in early August, have improved. The Company anticipates the performance at the brand to gradually improve throughout the fall and holiday seasons.
• The Company continues to make progress on executing its three operating priorities which are driving stronger sales through improved product and marketing; optimizing the customer journey by simplifying, digitizing and extending the Company’s unique and personalized service; and transforming sourcing and supply chain operations to increase product speed to market and improve quality.
For the second quarter, net sales were USD 508.4 million compared to USD 544.7 million in last year’s second quarter. This decrease of 6.7% reflects a comparable sales decline of 6.1% as well as the impact of 53 net store closures since last year’s second quarter. The comparable sales decline was driven by lower average dollar sale and a decrease in transaction count. In the second quarter, comparable sales at Soma continued to show strong growth while Chico’s posted quarter-over-quarter improvement. Product, marketing and in-store presentation adjustments to change the performance at WHBM are underway.
Comparable Sales Table
For the second quarter, gross margin was USD 168.6 million, or 33.2 % of net sales, compared to USD 196.9 million, or 36.1% of net sales, in last year’s second quarter. This 290-basis point decrease primarily reflects an increased effort to clear WHBM inventory, 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 fiscal 2018. Excluding the 60 basis-point impact of accelerated depreciation, gross margin decreased 230 basis points.
Retail Fleet Optimisation Plan
In the second quarter, the Company recorded pre-tax accelerated depreciation charges of property and equipment within cost of goods sold of USD 3.0 million, or 60 basis points, related to our retail fleet optimization plan. On an after-tax basis, the second quarter impact of these charges was USD 2.2 million, or USD 0.02 earnings per diluted share.
Selling, General and Administrative Expenses
For the second quarter, selling, general and administrative (“SG&A”) expenses were USD 171.0 million, or 33.7% of net sales, compared to USD 174.1 million, or 31.9% of net sales, for last year’s second quarter. This USD 3.1 million decrease primarily reflects a reduction in non-payroll employee-related costs, partially offset by investments in marketing in our intimates group.
For the second quarter, the effective tax rate was 0.0 % compared to 25.4 % for last year’s second quarter. The 0.0 % effective tax rate was primarily the result of an income tax benefit on the second quarter operating loss, offset by a true-up from the first quarter provision due to an increase in the forecasted annual effective tax rate. On a non-GAAP basis, the second quarter effective tax rate was 48.0 % when excluding accelerated depreciation related to our retail fleet optimization plan.
Cash, Marketable Securities and Debt
At the end of the second quarter, cash and marketable securities totalled USD 163.1 million, a decrease of USD 76.3 million compared to last year’s second quarter, while debt totalled USD 50.0 million, a decrease of USD 11.3 million from last year’s second quarter. This USD 76.3 million decrease in cash and marketable securities primarily reflects a return of cash to shareholders through share repurchases and dividend payments.
At the end of the second quarter, inventories totalled USD 227.7 million compared to USD 224.2 million at the end of last year’s second quarter. This USD 3.5 million, or 1.6 %, increase primarily reflects investments in our intimates group to fund growth, partially offset by the benefit of inventory management in our apparel group.
Fiscal 2019 Third Quarter and Full-Year Outlook
The Company is initiating outlook for the third quarter of fiscal 2019 and is updating its previously provided full year fiscal 2019 outlook. The outlook for both the third quarter and fiscal year excludes expected net charges related to the Company’s retail fleet optimization plan and any incremental impact from the implementation of new tariffs.
The Company is managing through its turnaround and although guidance has been tempered for the second half of the year, it does anticipate gradual improvement in net sales and comparable sales trends as traction from its operating priorities take hold.
For the fiscal 2019 third quarter, compared to the fiscal 2018 third quarter:
- The Company anticipates a low to mid-single-digit decline in total net sales and consolidated comparable sales.
- The Company expects gross margin as a percent of net sales to be down approximately 100 to 125 basis points as it clears through seasonal inventory.
- SG&A expenses are expected to be approximately flat to down slightly, reflecting ongoing cost management, offset by investment in marketing in our intimates group.
For full year fiscal 2019, compared to full year fiscal 2018:
- The Company anticipates a mid-single digit decline in total net sales and consolidated comparable sales, versus its previous guidance of a low to mid-single-digit decline in total net sales and consolidated comparable sales.
- The Company expects gross margin as a percent of net sales to be down 150 to 200 basis points versus its previous guidance of down 50 to 100 basis points, due primarily to incremental costs in the first half of fiscal 2019 associated with its omnichannel programs and clearing of seasonal inventory.
- The Company anticipates SG&A expenses to be down approximately USD 10 million, reflecting ongoing cost management, consistent with previous guidance.
- The Company expects capital expenditures to be approximately USD 45 million to USD 50 million, versus its previous guidance of approximately USD 55 million, primarily driven by store reinvestments and technology enhancements.
- The Company estimates third and fourth quarter income tax rates to normalize in the range of 20 % to 25 %, which excludes accelerated depreciation related to our fleet optimization plan.
The Company, through its brands – Chico’s, White House Black Market, Soma and TellTale is a leading omni-channel specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing, intimates and complementary accessories.
As of August 3, 2019, the Company operated 1387 stores in the U.S. and Canada and sold merchandise through 83 international franchise locations in Mexico and 2 domestic franchise airport stores. 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.