Chico’s FAS, Inc. (NYSE: CHS) today announced its financial results for the fiscal 2020 second quarter ended August 1, 2020.
Molly Langenstein, Chief Executive Officer and President, Chico’s FAS said: “Our core strengths – three distinctive brands with new product being well received, a strong digital platform, a differentiated real estate portfolio, our loyal customer base and solid balance sheet position us for success. We are taking advantage of this unprecedented period by capitalizing on these strengths and staying laser focused on continuing our successful turnaround strategy, including accelerating digital growth.”
“As I enter my second year with the business, the things we learned and improved last fall have been accelerated into the back half of this year. In the second quarter, we substantially enhanced our financial performance despite pandemic headwinds,” Langenstein continued. “Compared to the first quarter, our second quarter digital and store sales trends improved 9.2% and gross margin rate rose more than 1,800 basis points. We lowered year-over-year SG&A expenses by 37% and we strengthened the balance sheet. Store and digital conversion rates improved in the second quarter, providing an indicator that our product changes to comfort, casual and easy care fabrics are resonating with customers, giving us confidence our financial and product initiatives combined with relentless customer focus have positioned us to emerge a stronger company. I remain excited and optimistic about the future of Chico’s FAS.”
Business Highlights
The Company began the second quarter primarily as a digital-only business, with year-over-year total digital sales increasing double digits in the quarter. In May 2020, the Company commenced its phased store reopening plan under enhanced safety protocols and had opened approximately 96% of its store base by the end of the second quarter. Overall, government mandates delayed store reopening plans which resulted in stores effectively being closed the same number of weeks in the second quarter as in the first quarter.
Ms. Langenstein added, “The Company continues to focus on sales and financial initiatives to improve its operational position. Specifically:
- Our investments in and focus on our digital business are delivering positive results. Year-over-year, digital sales in the apparel group and intimates each grew double digits. Soma led the way with digital sales improving 70% in the second quarter over last year.
- COVID-19 presented a major challenge and we took the opportunity to reassort inventory to customer demand.
- We achieved a 37% year-over-year SG&A improvement by streamlining our organizational structure and aligning expenses with sales.
- We are performing a strategic real estate review and reevaluating each store’s strategic value and profitability. We are evaluating options for stores not meeting elevated standards and taking action where warranted as evident by our recent exit of frontline stores in Canada.
- We are partnering with landlords and achieving rent relief in the form of rent reductions, abatements and other concessions to partially mitigate the impact of COVID-19 on our business.
- Our financial position and liquidity have been strengthened through accelerating online sales, store reopenings, an expense structure aligned with sales and reductions in capital spending.
- We continue to invest in and focus on innovation in technology, product and marketing.”
Overview of Financial Results
During the thirteen and twenty-six weeks ended August 1, 2020, the Company experienced varying degrees of business disruptions and periods of store closures or reduced operating hours as a result of the COVID-19 pandemic (the “pandemic”). Throughout the first half of the fiscal year, the Company was able to navigate a rapidly changing retail landscape by leveraging its omni-channel capabilities and reopening most of its stores. Sales exceeded Company expectations across all brands during the back half of the second quarter. At quarter-end, approximately 96% of the store base were open to the public.
The Company recognized significant inventory write-offs and impairment charges as a result of the pandemic during the thirteen and twenty-six weeks ended August 1, 2020, however, the impact was partially mitigated by strong digital commerce performance and the Company’s ongoing cost-saving measures.
The Company’s cash flow for the twenty-six weeks ended August 1, 2020 also reflects the impact of the pandemic. We continued to take aggressive and prudent actions to drive sales, monetize inventory, reduce expenses and manage cash flows, including suspending or reducing rent payments, and partnering with suppliers and vendors to decrease operating costs and extend payment terms to enhance the Company’s financial position. The Company believes it is well positioned to effectively navigate the pandemic business environment and remains confident that it currently has sufficient liquidity to repay its obligations as they become due for the foreseeable future.
For the thirteen weeks ended August 1, 2020 (the “second quarter”), the Company reported:
- A net loss of $46.8 million, or $0.40 loss per diluted share, a material improvement over the thirteen weeks ended May 2, 2020 (the “first quarter”). The second quarter net loss includes the after-tax impact of inventory write-offs of $8.0 million, or $0.07 per share. For the thirteen weeks ended August 3, 2019 (“last year’s second quarter”), the net loss was $2.3 million, or $0.02 loss per diluted share. Last year’s second quarter net loss includes after-tax accelerated depreciation charges of $2.2 million, or $0.02 per share.
- Net sales were $306.2 million, an improvement of 9.2% from the first quarter, reflecting the benefit of strong digital sales and store reopenings. Sales decreased approximately 39.8% from last year’s second quarter, reflecting disruptions related to the pandemic, including the continuation of temporary store closures and limited hours during the second quarter, as well as the impact of 74 net permanent store closures since last year’s second quarter, partially offset by double-digit growth in digital performance.
- Gross margin was $44.8 million, or 14.6% of net sales, up more than 1,800 basis points from the first quarter. Gross margin in last year’s second quarter was $168.6 million, or 33.2% of net sales. The second quarter year-over-year decrease in gross margin primarily reflects the impact of temporary store closures which resulted in deleverage of occupancy costs as a percent of net sales as well as a pre-tax inventory write-off of $12.3 million, or 4.0% of net sales. The inventory write-off was driven by the slower than planned cadence of store reopenings during the first half of the second quarter and less relevant work wear and special occasion product.
- Selling, general and administrative (“SG&A”) expenses were $107.3 million, or 35.0% of net sales, compared to $171.0 million, or 33.7% of net sales, for last year’s second quarter. The $63.7 million decrease in SG&A expenses reflects the Company’s ongoing expense reduction initiatives to align its cost structure with sales.
For the twenty-six weeks ended August 1, 2020, the Company reported:
- A net loss of $225.1 million, or $1.95 loss per diluted share, compared to net loss of $0.3 million, or $0.00 per diluted share, for the twenty-six weeks ended August 3, 2019. The net loss for the twenty-six weeks ended August 1, 2020 includes the after-tax impact of goodwill impairment charges of $73.8 million, or $0.63 per share; impairments on other indefinite-lived intangible assets of $24.7 million, or $0.21 per share; inventory write-offs of $34.1 million, or $0.29 per share; long-lived store asset impairments of $13.9 million, or $0.12 per share; and impairment on right of use assets of $1.8 million, or $0.02 per share. These charges represent $189.5 million of the pre-tax net loss and $148.4 million of the after-tax loss, or $1.27 per share, for the twenty-six weeks ended August 1, 2020. The net loss for the twenty-six weeks ended August 3, 2019 includes after-tax accelerated depreciation charges of $5.7 million, or $0.05 per share.
Financial Results
Results for the thirteen and twenty-six weeks ended August 1, 2020 were significantly impacted by the pandemic and included after-tax charges totaling $8.0 million, or $0.07 per share, and $148.4 million, or $1.27 per share.
Net Sales
For the second quarter, net sales were $306.2 million, an improvement of 9.2% from the first quarter, reflecting the benefit of strong digital sales and store reopenings. Sales decreased approximately 39.8% from last year’s second quarter, reflecting disruptions related to the pandemic, including the continuation of temporary store closures and limited hours during the second quarter, as well as the impact of 74 net permanent store closures since last year’s second quarter, partially offset by double-digit growth in digital performance.
The Company is not providing comparable sales figures for the thirteen and twenty-six weeks ended August 1, 2020 as it is not a meaningful measure due to the significant impact of store closures as a result of the pandemic.
Gross Margin
For the second quarter, gross margin was $44.8 million, or 14.6% of net sales, up more than 1,800 basis points from the first quarter. Gross margin in last year’s second quarter was $168.6 million, or 33.2% of net sales. The second quarter year-over-year decrease in gross margin primarily reflects the impact of temporary store closures which resulted in deleverage of occupancy costs as a percent of net sales as well as a pre-tax inventory write-off of $12.3 million, or 4.0% of net sales. The inventory write-off was driven by the slower than planned cadence of store reopenings during the first half of the second quarter and less relevant work wear and special occasion product.
Selling, General and Administrative Expenses
For the second quarter, SG&A expenses were $107.3 million, or 35.0% of net sales, compared to $171.0 million, or 33.7% of net sales, for last year’s second quarter. The $63.7 million decrease in SG&A expenses reflects the Company’s ongoing expense reduction initiatives to align its cost structure with sales.
Income Taxes
For the second quarter, the effective tax rate was 25.7% compared to 0.0% for last year’s second quarter. The 25.7% effective tax rate includes the annual benefit of the fiscal 2020 pre-tax loss due the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which is slightly offset by the impact of nondeductible book goodwill impairment charges. In addition, during the second quarter, the Company recognized a small valuation allowance against certain state tax credit carryforwards that are expected to expire unutilized in the future. The 0.0% effective tax rate for last year’s second quarter was primarily the result of an income tax benefit on the quarter’s operating loss, offset by a true-up from the first quarter provision due to an increase in the forecasted annual effective tax rate.
Cash, Marketable Securities and Debt
At the end of the second quarter, cash and marketable securities totaled $124.5 million. Debt at the end of the second quarter totaled $149.0 million, remaining unchanged from the end of the first quarter of fiscal 2020.
Inventories
At the end of the second quarter, inventories totaled $235.8 million compared to $227.7 million at the end of last year’s second quarter. Second quarter inventories were elevated year-over-year due to merchandise in-transit and inventory held for liquidation.
Fiscal 2020 Third Quarter and Full-Year Outlook
Given the ongoing market disruption caused by the pandemic and related uncertainty on timing and extent of the market recovery, the Company is not providing fiscal 2020 third-quarter or full-year guidance at this time.
