- Third quarter GAAP loss of USD 0.07 per diluted share; Adjusted loss of USD 0.04 per diluted share
- Sequential improvement in comparable sales for all brands
- Executing on strategic priorities, investing in growth areas, maintaining cost discipline
- Updates full-year fiscal 2019 outlook to reflect improvements in the business and tariff impact
Chico’s FAS, Inc. (NYSE: CHS) (the “Company”) announced on November 26, 2019, its financial results for the fiscal 2019 third quarter ended November 2, 2019.
For the thirteen weeks ended November 2, 2019 (the “third quarter”), the Company reported a net loss of USD 8.1 million, or USD 0.07 loss per diluted share, compared to net income of USD 6.5 million, or USD 0.05 earnings per diluted share, for the thirteen weeks ended November 3, 2018 (“last year’s third quarter”). The Company reported third quarter adjusted net loss of USD 4.6 million, or USD 0.04 loss per diluted share, as presented in the related accompanying GAAP to non-GAAP reconciliation.
For the thirty-nine weeks ended November 2, 2019, the Company reported a net loss of USD 8.4 million, or USD 0.07 loss per diluted share, compared to net income of USD 52.3 million, or USD 0.41 earnings per diluted share, for the thirty-nine weeks ended November 3, 2018. For the thirty-nine weeks ended November 2, 2019, the Company reported adjusted net income of USD 0.9 million, or USD 0.01 earnings per diluted share, as presented in the related accompanying GAAP to non-GAAP reconciliation.
“Our third quarter results demonstrate that we are gaining traction on our strategic priorities. Comparable sales improved sequentially by 10.4 percentage points at White House Black Market and by 2 points at Chico’s, our largest brand. In addition, Soma’s comparable sales increased double-digits for the second consecutive quarter. Each of these achievements indicate that the actions being taken are positively impacting results,” said Bonnie Brooks, CEO and President.
“Our customers are also responding to our brands’ better product, stronger marketing and changes to store presentation. I firmly believe the Company’s turnaround is on the right track, and we have updated our full-year financial outlook to reflect the positive momentum of our business,” continued Ms. Brooks.
Fiscal 2019 Third Quarter Business Highlights
The following fiscal 2019 third quarter business highlights reflect the Company’s progress executing on its three strategic priorities: (i) driving stronger sales through improved product and marketing; (ii) optimizing the customer journey by simplifying, digitizing and extending the Company’s unique and personalized service; and (iii) transforming sourcing and supply chain operations to increase product speed to market and improve quality.
- Chico’s® reported sequential improvement in comparable sales, reflecting a focus on key items and a more balanced inventory position between basics and fashion.
- White House Black Market® (“WHBM”) reported sequential improvement in comparable sales enabled by changes made in talent, merchandising and product design.
- Soma® reported double-digit positive comparable sales growth for the second consecutive quarter, driven by product innovation and inventory and marketing investments.
- In the third quarter, the Company strengthened its product teams and made investments in growth areas, such as digital and customer experience. The Company also repositioned some departments, consolidated others, and reduced areas where the Company can operate more efficiently with fewer resources.
- The Company completed the implementation of its Buy On-Line, Pick-up In-Store (BOPIS) capability across all of its brands.
- The Company is actively diversifying its country of origin mix and reducing manufacturing penetration in China, thereby mitigating the majority of tariff increases.
For the third quarter, net sales were USD 484.7 million compared to USD 499.9 million in last year’s third quarter. This decrease of 3.0% reflects a comparable sales decline of 2.2% as well as the impact of 58 net store closures since last year’s third quarter. The comparable sales decline was driven by lower average dollar sale, partially offset by an increase in transaction count. In the third quarter, comparable sales at Soma were up positive double-digits for the second consecutive quarter while Chico’s and WHBM posted sequential quarter-over-quarter improvement by adjusting product assortment and presentation.
For the third quarter, gross margin was USD 171.0 million, or 35.3 % of net sales, compared to USD 181.0 million, or 36.2 % of net sales, in last year’s third quarter. This 90-basis point decrease primarily reflects accelerated depreciation as a result of our previously announced retail fleet optimization plan and the impact of severance and other related net charges (collectively, “Severance Charges”) in connection with actions taken to reposition our organizational structure.
Excluding the 60 basis-point impact of accelerated depreciation and Severance Charges, gross margin decreased 30 basis points as a result of the clearance of seasonal merchandise and the impact of tariffs, partially offset by improvement in occupancy costs as a percent of sales.
Selling, General and Administrative Expenses
For the third quarter, selling, general and administrative (“SG&A”) expenses were USD 180.6 million, or 37.3 % of net sales, compared to USD 178.4 million, or 35.7 % of net sales, for last year’s third quarter. The USD 2.2 million increase primarily includes Severance Charges in connection with our revised organizational structure.
Retail Fleet Optimisation Plan
In the third quarter, the Company recorded pre-tax accelerated depreciation charges of property and equipment within cost of goods sold (“COGS”) of USD 2.1 million, or 40 basis points, related to our retail fleet optimization plan. On an after-tax basis, the third quarter impact of these charges was USD 1.5 million, or USD 0.01 earnings per diluted share.
In the third quarter, the Company recorded pre-tax Severance Charges of USD 2.8 million. These charges are reflected in the financial statements as USD 1.0 million, or 20 basis points, in COGS and USD 1.8 million, or 40 basis points, in SG&A. On an after-tax basis, the third quarter impact of these charges was USD 2.1 million, or USD 0.02 earnings per diluted share.
For the third quarter, the effective tax rate was 14.7 % compared to (141.7 %) for last year’s third quarter. The 14.7 % effective tax rate was primarily the result of an income tax benefit on the third quarter operating loss, offset by an unfavourable fiscal 2018 provision-to-return adjustment, and a valuation allowance on certain deferred tax assets for charitable contributions with limitations. The favourable prior year effective tax rate was primarily due to the Company’s ability to accelerate certain income tax deductions into the 2017 federal tax return as a result of the Tax Cuts and Jobs Act of 2017.
Cash, Marketable Securities and Debt
At the end of the third quarter, cash and marketable securities totalled USD 127.4 million while debt totalled USD 46.3 million.
At the end of the third quarter, inventories totalled USD 277.5 million compared to USD 266.1 million at the end of last year’s third quarter. This USD 11.4 million, or 4.3 %, increase primarily reflects continued investment in Soma inventory to fund growth.
Fiscal 2019 Fourth Quarter and Full-Year Outlook
The Company is initiating outlook for the fourth quarter of fiscal 2019 and is updating its previously provided full-year fiscal 2019 outlook to reflect improvements in the business. The outlook for both the fourth quarter and fiscal year now includes the incremental impact of tariffs, while excluding expected net charges related to the Company’s retail fleet optimization plan and Severance Charges.
The Company continues to manage through its turnaround and anticipates continued improvement in net sales and comparable sales trends as progress executing its strategic priorities continues.
For the fiscal 2019 fourth quarter, compared to the fiscal 2018 fourth quarter:
- The Company anticipates a low 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 150 basis points, due primarily to incremental costs from tariffs.
- SG&A expenses are expected to be down approximately USD 5 to USD 7 million, reflecting ongoing cost management.
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.
- The Company expects gross margin as a percent of net sales to be down 150 to 200 basis points consistent with previous guidance, which now includes our consideration of incremental costs in the second half of fiscal 2019 associated with tariffs.
- 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 40 million to USD 45 million, primarily driven by store reinvestments and technology enhancements.
- The Company estimates a full year income tax provision of approximately USD 2 to USD 3 million, which excludes accelerated depreciation related to our fleet optimisation plan and Severance Charges in connection with our revised organisational structure.
The Company, through its brands – Chico’s, White House Black Market, Soma and TellTale™ is a leading omnichannel specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing, intimates and complementary accessories.
As of November 2, 2019, the Company operated 1373 stores in the U.S. and Canada and sold merchandise through 89 international franchise locations in Mexico and 2 domestic franchise airport locations. The Company’s merchandise is also available at www.chicos.com , www.chicosofftherack.com , www.whbm.com , www.soma.com and www.mytelltale.com , as well as through third-party channels.