TMCnet News
CHICOS FAS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto and our 2013 Annual Report to Stockholders. Executive Overview We are a leading omni-channel specialty retailer of women's private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing items operating under the Chico's, White House | Black Market ("WH|BM"), Soma Intimates and Boston Proper brand names. We earn revenues and generate cash through the sale of merchandise in our domestic and international retail stores, on our various websites, through our call center which takes orders for all of our brands, and through our international franchise arrangements. We utilize an integrated omni-channel approach to managing our business. We want our customers to experience our brands, not a channel within our brands, and view our various sales channels as a single, integrated process rather than as separate sales channels operating independently. This approach allows our customers to browse, purchase, return, or exchange our merchandise through whatever sales channel and at whatever time is most convenient for her. As a result, we track total sales and comparable sales on a combined basis. Net sales for the second quarter of fiscal 2014 were $671.1 million, an increase of 3.3% compared to $649.5 million in last year's second quarter. The increase reflected 98 net new stores for a 6.4% square footage increase since last year's second quarter and comparable sales growth of 0.3%, partially offset by a $4.4 million decrease in Boston Proper net sales. The 0.3% increase in comparable sales for the second quarter was following a 2.6% decrease in last year's second quarter, reflecting an increase in transaction count partially offset by a decrease in average dollar sale. Net income for the second quarter of fiscal 2014 was $30.1 million, or $0.20 per diluted share, compared to net income of $43.6 million, or $0.27 per diluted share, in last year's second quarter. The change in earnings per share reflects lower net income, partially offset by the impact of approximately 9.5 million shares repurchased since the end of the second quarter last year. Net sales for the year-to-date period of fiscal 2014 were $1.353 billion, an increase of 2.5% compared to $1.320 billion in last year's year-to-date period. Net income for the year-to-date period of fiscal 2014 was $70.0 million, or $0.46 per diluted share, compared to net income of $94.7 million, or $0.58 per diluted share, in last year's year-to-date period. The change in earnings per share reflects lower net income, partially offset by the impact of approximately 9.5 million shares repurchased since the end of the second quarter last year. Long-term Financial Objectives The Company's goals remain to increase sales by a low double-digit percentage and diluted earnings per share by a mid-teen percentage; financial targets that we believe are both sustainable and reflect strong growth metrics. The Company believes that by delivering on these financial objectives over the long-term, the Company will provide its shareholders with substantial value despite occasional periods where we do not meet these objectives. Consistent with these objectives, the Company is pursuing previously announced strategic initiatives to fuel future growth, including enhanced omni-channel capabilities, international expansion, testing of Boston Proper stores, and updating our various loyalty programs. 13 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Thirteen Weeks Ended August 2, 2014 Compared to the Thirteen Weeks Ended August 3, 2013 The following table depicts net sales by Chico's/Soma Intimates, WH|BM and Boston Proper in dollars and as a percentage of total net sales for the thirteen weeks ended August 2, 2014 and August 3, 2013: Thirteen Weeks Ended August 2, 2014 August 3, 2013 (dollars in thousands) Chico's/Soma Intimates $ 431,888 64.3 % $ 414,734 63.8 % WH|BM 213,914 31.9 % 205,090 31.6 % Boston Proper 25,328 3.8 % 29,679 4.6 % Total net sales $ 671,130 100.0 % $ 649,503 100.0 % Net sales for the second quarter increased 3.3% to $671.1 million from $649.5 million in last year's second quarter, primarily reflecting 98 net new stores for a 6.4% square footage increase since last year's second quarter and a 0.3% increase in comparable sales, partially offset by a $4.4 million decrease in Boston Proper net sales. The 0.3% increase in comparable sales for the second quarter was following a 2.6% decrease in last year's second quarter, reflecting an increase in transaction count partially offset by a decrease in average dollar sale. The Chico's/Soma Intimates brands' comparable sales increased 1.4% following a 3.1% decrease in last year's second quarter. The Chico's brand experienced an increase of slightly less than 1% in comparable sales in the second quarter compared to a mid-single digit decrease in last year's second quarter, and the Soma Intimates brand experienced a mid-single digit comparable sales increase in the second quarter compared to a high-single digit increase in last year's second quarter. The WH|BM brand's comparable sales decreased 1.9% following a 1.5% decrease in last year's second quarter. Cost of Goods Sold/Gross Margin The following table depicts cost of goods sold and gross margin in dollars and gross margin as a percentage of total net sales for the thirteen weeks ended August 2, 2014 and August 3, 2013: Thirteen Weeks Ended August 2, 2014 August 3, 2013 (dollars in thousands) Cost of goods sold $ 319,658 $ 293,361 Gross margin $ 351,472 $ 356,142 Gross margin percentage 52.4 % 54.8 % For the second quarter of fiscal 2014, gross margin was $351.5 million compared to $356.1 million in last year's second quarter. Gross margin was 52.4% of net sales, a 240 basis point decrease from last year's second quarter, primarily reflecting increased promotional activity in fiscal 2014 to sell through seasonal merchandise. Selling, General and Administrative Expenses The following table depicts SG&A, which includes store and direct operating expenses, marketing expenses and National Store Support Center ("NSSC") expenses, in dollars and as a percentage of total net sales for the thirteen weeks ended August 2, 2014 and August 3, 2013: Thirteen Weeks Ended August 2, 2014 August 3, 2013 (dollars in thousands) Selling, general and administrative expenses $ 304,737 $ 286,262 Percentage of total net sales 45.4 % 44.0 % For the second quarter of fiscal 2014, SG&A was $304.7 million compared to $286.3 million in last year's second quarter. SG&A was 45.4% of net sales, a 140 basis point increase from last year's second quarter, primarily reflecting sales 14 -------------------------------------------------------------------------------- Table of Contents deleverage of store expenses, costs to support new store growth and the impact of approximately $5 million in incremental investment spending on strategic initiatives. Provision for Income Taxes Our effective tax rate for the second quarter of fiscal 2014 was 35.5%, compared to an effective tax rate of 37.7% in last year's second quarter. The effective tax rate for the current quarter reflects favorable state tax settlements. Net Income and Earnings Per Diluted Share Net income for the second quarter of fiscal 2014 was $30.1 million, or $0.20 per diluted share, compared to net income of $43.6 million, or $0.27 per diluted share in last year's second quarter. The change in earnings per share reflects lower net income, partially offset by the impact of approximately 9.5 million shares repurchased since the end of the second quarter last year. Twenty-Six Weeks Ended August 2, 2014 Compared to the Twenty-Six Weeks Ended August 3, 2013 The following table depicts net sales by Chico's/Soma Intimates, WH|BM and Boston Proper in dollars and as a percentage of total net sales for the twenty-six weeks ended August 2, 2014 and August 3, 2013: Twenty-Six Weeks Ended August 2, 2014 August 3, 2013 (dollars in thousands) Chico's/Soma Intimates $ 872,009 64.4 % $ 839,395 63.6 % WH|BM 431,087 31.9 % 425,488 32.2 % Boston Proper 49,639 3.7 % 55,342 4.2 % Total net sales $ 1,352,735 100.0 % $ 1,320,225 100.0 % Net sales for the year-to-date period increased 2.5% to $1.353 billion from $1.320 billion in last year's year-to-date period, primarily reflecting 98 net new stores for a 6.4% square footage increase since last year's second quarter, partially offset by a $5.7 million decrease in Boston Proper net sales. Comparable sales for the year-to-date period decreased 1.2% following a 1.3% decrease in last year's year-to-date period, reflecting lower average dollar sale as a result of the impact of a highly promotional environment due in part to inclement weather in the first quarter, partially offset by an increase in transaction count. The Chico's/Soma Intimates brands' comparable sales increased 0.9% following a 3.0% decrease in last year's year-to-date period. The Chico's brand experienced flat comparable sales compared to a mid-single digit decrease in last year's year-to-date period, and the Soma Intimates brand experienced a high-single digit comparable sales increase compared to a mid-single digit increase in last year's year-to-date period. The WH|BM brand's comparable sales decreased 5.4% following a 2.4% increase in last year's year-to-date period. Cost of Goods Sold/Gross Margin The following table depicts cost of goods sold and gross margin in dollars and gross margin as a percentage of total net sales for the twenty-six weeks ended August 2, 2014 and August 3, 2013: Twenty-Six Weeks Ended August 2, 2014 August 3, 2013 (dollars in thousands) Cost of goods sold $ 618,372 $ 577,239 Gross margin $ 734,363 $ 742,986 Gross margin percentage 54.3 % 56.3 % Gross margin for the year-to-date period was $734.4 million compared to $743.0 million in last year's year-to-date period. Gross margin was 54.3% of net sales, a 200 basis point decrease from fiscal 2013, primarily reflecting increased promotional activity in fiscal 2014 to sell through seasonal merchandise. 15 -------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expenses The following table depicts SG&A, which includes store and direct operating expenses, marketing expenses and NSSC expenses, in dollars and as a percentage of total net sales for the twenty-six weeks ended August 2, 2014 and August 3, 2013: Twenty-Six Weeks Ended August 2, 2014 August 3, 2013 (dollars in thousands) Selling, general and administrative expenses $ 623,786 $ 591,161 Percentage of total net sales 46.1 % 44.7 % SG&A for the year-to-date period was $623.8 million compared to $591.2 million in last year's year-to-date period. SG&A was 46.1% of net sales, a 140 basis point increase from last year's year-to-date period, primarily reflecting sales deleverage of store expenses, costs to support new store growth and the impact of approximately $9 million in incremental investment spending on strategic initiatives. Net Income and Earnings Per Diluted Share Net income for the year-to-date period was $70.0 million compared to $94.7 million in last year's year-to-date period, and earnings per diluted share for the year-to-date period were $0.46 compared to $0.58 per diluted share in last year's year-to-date period. The change in earnings per share reflects lower net income, partially offset by the impact of approximately 9.5 million shares repurchased since the end of the second quarter last year. Liquidity and Capital Resources We believe that our existing cash and marketable securities balances and cash generated from operations will be sufficient to fund capital expenditures, working capital needs, dividend payments, potential share repurchases, commitments, and other liquidity requirements associated with our operations for the foreseeable future. Furthermore, while it is our intention to repurchase our stock and pay a quarterly cash dividend in the future, any determination to repurchase additional shares of our stock or pay future dividends will be made by the Board of Directors and will depend on our stock price, future earnings, financial condition, and other factors considered by the Board. Our ongoing capital requirements will continue to be primarily for enhancing and expanding our omni-channel capabilities, including: new, expanded, relocated and remodeled stores; and information technology. Operating Activities Net cash provided by operating activities for the year-to-date period of fiscal 2014 was $153.1 million, an increase of approximately $10.1 million from the same period last year. This increase primarily reflected the benefit of changes in working capital, partially offset by lower net income and changes in deferred taxes related to lower incentive compensation. The changes in working capital primarily reflected the impact of lower incentive compensation on accrued and other liabilities and an increase in accounts payable leverage. At the end of the second quarter of 2014, total inventories per selling square foot increased 2.5%, excluding in-transit inventories. The increase primarily reflected a slightly higher average unit cost for inventories on hand and forward fabric commitments. In-transit inventories increased by $11.2 million, primarily reflecting an increase in the amount and timing of shipping via ocean compared to 2013. Investing Activities Net cash used in investing activities for the year-to-date period of fiscal 2014 was $41.3 million compared to $7.8 million in the same period last year, reflecting a $21.7 million decrease in marketable securities in fiscal 2014 to fund general business operating needs compared to a $63.9 million decrease in the same period last year related to $85.0 million in share repurchases. Investing activities in the year-to-date period of fiscal 2014 included net purchases of property and equipment totaling $63.0 million compared to $71.7 million in the same period last year. 16 -------------------------------------------------------------------------------- Table of Contents Financing Activities Net cash used in financing activities for the year-to-date period of fiscal 2014 was $33.9 million compared to $98.6 million in the same period last year. The decrease in net cash used in financing activities primarily reflects $10.0 million in fiscal 2014 share repurchases under our publicly announced repurchase program, compared to $85.0 million in the same period last year, partially offset by an increase in dividends paid as a result of the per share dividend increase announced in the fourth quarter of fiscal 2013. Credit Facility In fiscal 2011, we entered into a $70 million senior five-year unsecured revolving credit facility (the "Credit Facility") with a syndicate led by JPMorgan Chase Bank, N.A., as administrative agent and HSBC Bank USA, National Association, as syndication agent. The Credit Facility provides a $70 million revolving credit facility that matures on July 27, 2016. The Credit Facility provides for swing advances of up to $5 million and issuance of letters of credit up to $40 million. The Credit Facility also contains a feature that provides us the ability, subject to satisfaction of certain conditions, to expand the commitments available under the Credit Facility from $70 million up to $125 million. As of August 2, 2014, no borrowings are outstanding under the Credit Facility. New Store Openings During the fiscal 2014 year-to-date period, we had 53 net openings, consisting of 14 Chico's, 10 WH|BM, 22 Soma and 7 Boston Proper stores. Currently, we expect our net new stores in fiscal 2014 to increase approximately 6%, reflecting net openings of approximately 17 Chico's, 19 WH|BM, 33 Soma stores and 15 Boston Proper stores. We continuously evaluate the appropriate new store growth rate in light of economic conditions and may adjust the growth rate as conditions require or as opportunities arise. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors and believes the assumptions and estimates, as set forth in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014, are significant to reporting our results of operations and financial position. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014. Forward-Looking Statements This Form 10-Q may contain certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to certain events that could have an effect on our future financial performance, including but without limitation, statements regarding our plans, objectives, and future growth rates of our store concepts. These statements may address items such as future sales, gross margin expectations, SG&A expectations, operating margin expectations, earnings per share expectations, planned store openings, closings and expansions, future comparable sales, future product sourcing plans, inventory levels, planned marketing expenditures, planned capital expenditures and future cash needs. In addition, from time to time, we may issue press releases and other written communications, and our representatives may make oral statements, which contain forward-looking information. These statements, including those in this Form 10-Q and those in press releases or made orally, relate to expectations concerning matters that are not historical fact and may include the words or phrases such as "expects," "believes," "anticipates," "plans," "estimates," "approximately," "our planning assumptions," "future outlook," and similar expressions. Except for historical information, matters discussed in such oral and written statements, including this Form 10-Q, are forward-looking statements. These forward-looking statements are based largely on information currently available to our management and on our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, 17 -------------------------------------------------------------------------------- Table of Contents and are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those currently anticipated. Although we believe our expectations are based on reasonable estimates and assumptions, they are not guarantees of performance and there are a number of known and unknown risks, uncertainties, contingencies, and other factors (many of which are outside our control) that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Accordingly, there is no assurance that our expectations will, in fact, occur or that our estimates or assumptions will be correct, and we caution investors and all others not to place undue reliance on such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A, "Risk Factors" in our Annual Report on Form 10-K filed with the SEC on March 14, 2014 and the following: These potential risks and uncertainties include the financial strength of retailing in particular and the economy in general, the extent of financial difficulties that may be experienced by customers, our ability to secure and maintain customer acceptance of styles and store concepts, the ability to maintain an appropriate level of inventory, the quality of merchandise received from suppliers, the extent and nature of competition in the markets in which we operate, the extent of the market demand and overall level of spending for women's private branded clothing and related accessories, the effectiveness of our brand awareness and marketing programs, the adequacy and perception of customer service, the ability to coordinate product development with buying and planning, the ability to efficiently, timely and successfully execute significant shifts in the countries from which merchandise is supplied, the ability of our suppliers to timely produce and deliver clothing and accessories, the changes in the costs of manufacturing, labor and advertising, the rate of new store openings, our ability to grow through new store openings and the buying public's acceptance of any of our new store concepts, the continuing performance, implementation and integration of management information systems, the impact of any systems failures, cyber security or security breaches, including any security breaches that result in theft, transfer, or unauthorized disclosure of customer, employee, or company information or our compliance with information security and privacy laws and regulations in the event of such an incident, the ability to hire, train, energize and retain qualified sales associates and other employees, the availability of quality store sites, the ability to expand our distribution center and other support facilities in an efficient and effective manner, the ability to hire and train qualified managerial employees, the ability to effectively and efficiently establish our websites, the ability to secure and protect trademarks and other intellectual property rights and to protect our reputation and brand images, the ability to effectively and efficiently operate our brands, risks associated with terrorist activities, risks associated with natural disasters such as hurricanes and other risks. In addition, there are potential risks and uncertainties that are related to our reliance on sourcing from foreign suppliers, including the impact of work stoppages, transportation delays and other interruptions, political or civil instability, imposition of and changes in tariffs and import and export controls such as import quotas, changes in governmental policies in or towards foreign countries, currency exchange rates and other similar factors. All written or oral forward-looking statements that are made or attributable to us are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Litigation In the normal course of business, we are subject to proceedings, lawsuits and other claims including proceedings under laws and government regulations relating to labor, product, intellectual property and other matters including the matters described in Item 1 of Part II of this quarterly report on Form 10-Q. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at August 2, 2014, cannot be ascertained. Although these matters could affect the consolidated operating results of any one quarter when resolved in future periods, and although there can be no assurance with respect thereto, management believes that, after final disposition, any monetary liability or financial impact to us would not be material to the annual consolidated financial statements. 18 -------------------------------------------------------------------------------- Table of Contents |