Chico’s FAS, Inc. (NYSE: CHS) today announced its financial results for the thirteen weeks ended July 29, 2023 (“second quarter”). The Company also provided its fiscal 2023 third quarter outlook and updated its full-year outlook.
Molly Langenstein, Chico’s FAS Chief Executive Officer and President, commented, “We delivered another quarter of strong operating income and earnings performance, which was consistent with our outlook.
“For all three brands, full-priced sales remained healthy, we attracted new customers, and we gained market share. Total Company average dollar spend and units per transaction increased, and we increased average unit retail at Chico’s and Soma. Our apparel customers continued to buy head-to-toe dressing, and responded to new proportions in sportswear, and our intimates customers responded to new strapless and unlined bra launches.”
Langenstein concluded, “We continue to deliver strong results and generate meaningful cash flow. Our unrelenting focus on our brand strategy and four strategic pillars of customer led, product obsessed, digital first, and operationally excellent gives us confidence in achieving our long-term financial targets and further enhancing our operating performance, strengthening our balance sheet, and increasing shareholder value.”
Business Highlights
The Company’s second quarter highlights include:
- Consistent profitability: For the second quarter, the Company reported net income per diluted share of $0.49 and adjusted net income per diluted share of $0.28, excluding a non-cash tax benefit.
- Compelling two-year stacked comparable sales: For the second quarter, total Chico’s FAS comparable sales decreased 3.0% versus last year’s second quarter and increased 16.5% on a two-year stacked basis. Chico’s® comparable sales decreased 2.5% versus the second quarter last year. White House Black Market® (“WHBM”) comparable sales decreased 5.7% versus last year’s second quarter, marking a sequential improvement from the first quarter. Soma® comparable sales were down 0.5% versus last year’s second quarter, marking a sequential comparable sales improvement over the last four consecutive quarters. For all three brands, full-priced sales remained healthy, and year-over-year total Company average dollar spend and units per transaction increased.
- Continued market share gains: Our brands continued to take market share. According to market research firm Circana, for the second quarter year over year, Chico’s and WHBM gained share with customers over 45 with household incomes over $100,000. During the same period, Soma outpaced the market and gained share with customers over 35 with household incomes over $100,000.
- Strong operating income: Second quarter income from operations was $46.5 million, or 8.5% of net sales, reflecting solid gross margin performance combined with continued, disciplined expense management and investment in the Company’s growth strategies.
- Solid balance sheet: The Company ended the second quarter with $150.7 million in cash and marketable securities and total liquidity of $385.8 million, with $24.0 million in long-term debt.
Overview of Financial Results
For the second quarter, the Company reported net income of $59.3 million, or $0.49 per diluted share, compared to net income of $42.0 million, or $0.34 per diluted share, for last year’s second quarter. The Company reported second quarter adjusted net income of $33.7 million, or $0.28 per diluted share, excluding the reversal of a $25.6 million non-cash tax valuation allowance, as presented in the accompanying GAAP to non-GAAP reconciliation.
Sales
The Company reported second quarter net sales of $545.1 million compared to $558.7 million in last year’s second quarter. This decrease of 2.4% primarily reflects a comparable sales decrease of 3.0% since last year’s second quarter. The 3.0% comparable sales decline was driven by a decrease in transaction count, partially offset by an increase in average dollar sale.
The following table depicts comparable sales percentages for Chico’s FAS, Chico’s, WHBM, and Soma:
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | ||||||
| July 29, 2023 | July 30, 2022 | July 29, 2023 | July 30, 2022 | ||||
| Chico’s | (2.5) % | 29.7 % | 1.1 % | 39.6 % | |||
| White House Black Market | (5.7) | 31.9 | (6.9) | 47.0 | |||
| Soma | (0.5) | (9.2) | (1.5) | (5.7) | |||
| Total Company | (3.0) | 19.5 | (1.8) | 28.9 |
Gross Margin
For the second quarter, gross profit was $216.9 million, or 39.8% of net sales, compared to $231.5 million, or 41.4% of net sales, in last year’s second quarter. The 160-basis-point decrease in gross margin primarily reflects higher occupancy costs; lower average unit retail; increased raw material costs partially offset by lower inbound freight; and the benefit of disciplined expense management.
Selling, General, and Administrative Expenses
For the second quarter, selling, general, and administrative expenses (“SG&A”) were $170.4 million, or 31.3% of net sales, compared to $173.3 million, or 31.0% of net sales, for last year’s second quarter. The 30 basis points of deleverage primarily reflects increased store operating expenses and deleverage on lower net sales, partially offset by disciplined expense management.
Income Taxes
The Company’s second quarter effective tax rate was a 28.6% benefit compared to a 26.6% expense for last year’s second quarter. This year’s effective tax rate primarily reflects a $25.6 million non-cash discrete benefit due to a reversal of the majority of the valuation allowance on deferred tax assets. The Company’s second quarter effective tax rate, excluding the reversal of the valuation allowance, was 26.9%. Last year’s second quarter effective tax rate primarily reflected the impact of losses in foreign jurisdictions on which a full valuation allowance was recorded.
Cash, Marketable Securities, and Capital Allocation
At the end of the second quarter, cash and marketable securities totaled $150.7 million compared to $172.5 million at the end of last year’s second quarter.
Long-term debt at the end of the second quarter totaled $24.0 million compared to $99.0 million at the end of last year’s second quarter, reflecting a principal payment of $25.0 million in the first quarter of fiscal year 2023, in addition to the $50.0 million repaid in fiscal year 2022.
During the second quarter of fiscal 2023, the Company announced that its Board authorized a new share repurchase program of up to $100 million of the Company’s common stock and canceled the remainder of its $300 million share repurchase program.
Inventories
At the end of the second quarter, inventories totaled $300.2 million compared to $338.8 million at the end of last year’s second quarter. The decrease of $38.6 million, or 11.4%, was primarily due to normalized supply chain conditions that resulted in significantly lower in-transit inventories.
Fiscal 2023 Third Quarter and Full-Year Outlook
For fiscal 2023 third quarter, the Company currently expects:
- Consolidated net sales of $505 million to $525 million;
- Gross margin rate as a percent of net sales of 38.5% to 39.0%;
- SG&A as a percent of net sales of 35.1% to 35.6%;
- Effective income tax rate of 29.0%; and
- Earnings per diluted share of $0.08 to $0.12.
For fiscal 2023, a 53-week year, the Company currently expects:
- Consolidated net sales of $2,145 million to $2,175 million;
- Gross margin rate as a percent of net sales of 38.5% to 38.8%;
- SG&A as a percent of net sales of 33.0% to 33.3%;
- Effective income tax rate of 26.0%;
- Earnings per diluted share of $0.87 to $0.95; and
- Capital and cloud-based expenditures of $75 million to $85 million.
