Chico’s FAS, Inc. (NYSE: CHS) today announced its financial results for the fiscal 2021 thirteen weeks ended May 1, 2021 (the “first quarter”).
“Our first quarter results underscore the tremendous progress we are making in our turnaround strategy and the power of our three unique brands and being a digital-first, customer-led company,” said Molly Langenstein, Chico’s FAS Chief Executive Officer and President.
“The strong first quarter performance across all three brands was fueled by our significant improvements in product and marketing, which drove full price selling. Our momentum started in the fourth quarter of fiscal 2019, stalled by the pandemic, is now back on track to deliver meaningful growth in the years to come. Soma®, which posted a 65% sales increase over last year’s first quarter, remains on track to be one of the largest intimate apparel brands in the country. At Chico’s® and White House Black Market®, elevated styling and quality are leading to faster sell through rates and customer enthusiasm. Operating discipline, strategically planned inventories and the ongoing benefit of cost actions, are further expanding margins and contributing to our return to profitable growth.
“Our progress is measurable and the opportunities planned throughout the coming year will continue driving sales growth, even deeper customer loyalty and market share gains,” Langenstein added.
Business Highlights
The Company’s first quarter highlights include:
- Continued extraordinary sales growth at Soma: Soma posted sales growth of 65% over the thirteen weeks ended May 2, 2020 (“last year’s first quarter”) and a 39% comparable sales growth over the thirteen weeks ended May 4, 2019 (the “first quarter of fiscal 2019”). According to market research firm NPD, Group Inc., for the 12 months ended April 2021, Soma’s growth exceeded that of the U.S. apparel market, was in the top ten brands for non-sport bras and panties, and was in the top five brands in the sleepwear market. We believe this is compelling evidence Soma is well positioned and on track to accelerate market share gains.
- Improving sales performance at Chico’s and White House Black Market (“WHBM”): Chico’s and WHBM are continuing to benefit from improvements in styling and quality. We’ve embraced the comfort culture and developed innovative fabrics and technology to provide comfort features. The bottoms business in both apparel brands was strong. Inventories are lean and demand outpaced supply. Inventory productivity is high, strategically fueling more full price sales.
- Enhanced marketing continued to drive traffic as well as new customers: Chico’s FAS continues to elevate its marketing efforts with digital storytelling, social influencers and organic social efforts. Enhanced marketing initiatives are driving new customer acquisition across all three brands, with new and reactivated customers growing on a monthly basis in the first quarter. The average age of new customers continues to drop, reinforcing the runway for all three brands.
- Strong balance sheet: The Company ended the first quarter with more than $102 million in cash and marketable securities. Borrowings on the $300 million credit facility remain unchanged at $149 million.
- Improved gross margin: Gross margin rate improved to 32.7% in the first quarter, exceeding each quarter’s performance in fiscal 2020.
- Continued cost discipline: Selling, general and administrative (“SG&A”) expenses were essentially flat year-over-year and declined to a 34.6% rate for the first quarter, an improvement over the fourth quarter fiscal 2020 rate of 35.3%, reflecting continued cost discipline and the ongoing benefit of cost savings realized last year.
- Obtained additional meaningful rent reductions: In the first quarter of fiscal 2021, Chico’s FAS obtained additional rent reduction commitments from landlords of $10 million; this is in addition to the $65 million of reductions and abatements negotiated during fiscal 2020.
- Shop-in-shops: Soma shop-in-shops successfully opened inside Chico’s stores and are exceeding expectations. 47 shop-in-shops will be open by mid-June 2021.
Overview of Financial Results
For the first quarter, the Company reported a net loss of $8.9 million, or $0.08 loss per diluted share, compared to a net loss of $178.3 million, or $1.55 loss per diluted share, for last year’s first quarter. Last year’s first quarter net loss included $134.8 million, or $1.17 per share, in significant after-tax non-cash charges.
Sales
For the first quarter, net sales were $388.0 million compared to $280.3 million in last year’s first quarter. This 38.4% increase primarily reflects the impact of temporary store closures during last year’s first quarter, partially offset by 39 net permanent store closures since last year’s first quarter. Total Company comparable sales for the first quarter compared to the first quarter of fiscal 2019 were down 21.7%, Soma was up 39.3%, and the apparel brands were down 32.9%. Total Company on-hand inventories at the end of the first quarter were down 21.0%, Soma was up 12.9%, and the apparel brands were down 35.3%; correlating sales and on-hand inventory.
Gross Margin
For the first quarter, gross margin was $126.8 million, or 32.7% of net sales, compared to $(11.1) million, or (4.0)% of net sales, in last year’s first quarter. The year-over-year improvement in gross margin rate primarily reflects the impact of significant non-cash charges in last year’s first quarter, as reflected in the accompanying Summary of Significant Non-Cash Charges table, improved leverage of occupancy costs with rising sales and margin expansion as a result of less promotional activity.
Selling, General and Administrative Expenses
For the first quarter, SG&A expenses were $134.3 million, or 34.6% of net sales, compared to $130.2 million, or 46.4% of net sales, for last year’s first quarter, primarily reflecting continued cost savings initiatives and sales leverage. The first quarter SG&A expense rate of 34.6% improved over the 35.9% rate in the first quarter of fiscal 2019, reflecting the impact of cost savings initiatives which more than offset sales deleverage.
Income Taxes
For the first quarter, the effective tax rate was 3.3% compared to 30.0% for last year’s first quarter. The 3.3% effective tax rate for the first quarter primarily reflects a change in the valuation allowance and favorable state audit settlements, offset by share-based compensation expense and a provision for state income and foreign withholding taxes. The 30.0% effective tax rate for last year’s first quarter primarily reflects benefits provided by the enactment of the Coronavirus Aid, Relief, and Economic Security Act, partially offset by the unfavorable impact of the Company’s book goodwill impairment and share-based compensation expense incurred during last year’s first quarter.
Cash, Marketable Securities and Debt
At the end of the first quarter, cash and marketable securities totaled $102.4 million compared to $117.6 million at the end of last year’s first quarter. Debt at the end of the first quarter totaled $149.0 million, remaining unchanged from the end of last year’s first quarter.
At the end of the fourth quarter of fiscal 2020, cash and marketable securities totaled $109.4 million. The $7.0 million decrease in cash and marketable securities primarily reflects rent and other liability settlements as well as acceleration of vendor payments, partially offset by an improvement in other cash flow components.
Inventories
At the end of the first quarter, inventories totaled $209.7 million compared to $273.1 million at the end of last year’s first quarter. This $63.5 million, or 23.2%, decrease primarily reflects conservative inventory management to better align inventory and assortments with consumer demand.
Fiscal 2021 Outlook
Given the ongoing market volatility and related uncertainty caused by the COVID-19 pandemic, the Company is not providing specific fiscal 2021 guidance at this time.
The Company is, however, providing information on its planning expectations for the fiscal 2021 full year. At this time, the Company expects:
- Consolidated year-over-year net sales improvement between 28% to 34%;
- Gross margin rate improvement of 18 to 20 percentage points over last fiscal year;
- SG&A as a percent of net sales to improve 500 to 600 basis points year-over-year; and
- Income tax expense of approximately $0.5 million.
