|
|
|
ITEM 1.
|
FINANCIAL STATEMENTS
|
CHICO’S FAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
|
October 28, 2017
|
|
October 29, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
% of
Sales
|
|
Amount
|
|
% of
Sales
|
|
Amount
|
|
% of
Sales
|
|
Amount
|
|
% of
Sales
|
Net sales
|
$
|
532,287
|
|
|
100.0
|
|
$
|
596,912
|
|
|
100.0
|
|
|
$
|
1,694,596
|
|
|
100.0
|
|
|
$
|
1,875,621
|
|
|
100.0
|
|
Cost of goods sold
|
335,585
|
|
|
63.0
|
|
366,618
|
|
|
61.4
|
|
|
1,051,380
|
|
|
62.0
|
|
|
1,142,182
|
|
|
60.9
|
|
Gross margin
|
196,702
|
|
|
37.0
|
|
230,294
|
|
|
38.6
|
|
|
643,216
|
|
|
38.0
|
|
|
733,439
|
|
|
39.1
|
|
Selling, general and administrative expenses
|
171,424
|
|
|
32.3
|
|
188,350
|
|
|
31.6
|
|
|
527,605
|
|
|
31.2
|
|
|
583,117
|
|
|
31.1
|
|
Restructuring and strategic charges
|
—
|
|
|
0.0
|
|
10,820
|
|
|
1.8
|
|
|
—
|
|
|
0.0
|
|
|
31,027
|
|
|
1.6
|
|
Income from operations
|
25,278
|
|
|
4.7
|
|
31,124
|
|
|
5.2
|
|
|
115,611
|
|
|
6.8
|
|
|
119,295
|
|
|
6.4
|
|
Interest expense, net
|
(388
|
)
|
|
0.0
|
|
(526
|
)
|
|
(0.1
|
)
|
|
(1,286
|
)
|
|
(0.1
|
)
|
|
(1,474
|
)
|
|
(0.1
|
)
|
Income before income taxes
|
24,890
|
|
|
4.7
|
|
30,598
|
|
|
5.1
|
|
|
114,325
|
|
|
6.7
|
|
|
117,821
|
|
|
6.3
|
|
Income tax provision
|
8,200
|
|
|
1.6
|
|
7,000
|
|
|
1.1
|
|
|
41,300
|
|
|
2.4
|
|
|
40,100
|
|
|
2.2
|
|
Net income
|
$
|
16,690
|
|
|
3.1
|
|
$
|
23,598
|
|
|
4.0
|
|
|
$
|
73,025
|
|
|
4.3
|
|
|
$
|
77,721
|
|
|
4.1
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share-basic
|
$
|
0.13
|
|
|
|
|
$
|
0.18
|
|
|
|
|
$
|
0.57
|
|
|
|
|
$
|
0.59
|
|
|
|
Net income per common and common equivalent share–diluted
|
$
|
0.13
|
|
|
|
|
$
|
0.18
|
|
|
|
|
$
|
0.57
|
|
|
|
|
$
|
0.58
|
|
|
|
Weighted average common shares outstanding–basic
|
124,957
|
|
|
|
|
128,753
|
|
|
|
|
125,550
|
|
|
|
|
129,830
|
|
|
|
Weighted average common and common equivalent shares outstanding–diluted
|
124,989
|
|
|
|
|
128,996
|
|
|
|
|
125,591
|
|
|
|
|
129,999
|
|
|
|
Dividends declared per share
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
0.2475
|
|
|
|
|
$
|
0.2400
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated statements.
3
CHICO’S FAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
|
October 28, 2017
|
|
October 29, 2016
|
Net income
|
$
|
16,690
|
|
|
$
|
23,598
|
|
|
$
|
73,025
|
|
|
$
|
77,721
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
Unrealized (losses) gains on marketable securities, net of taxes
|
(47
|
)
|
|
(35
|
)
|
|
(15
|
)
|
|
4
|
|
Foreign currency translation (losses) gains
|
(60
|
)
|
|
(19
|
)
|
|
49
|
|
|
(46
|
)
|
Comprehensive income
|
$
|
16,583
|
|
|
$
|
23,544
|
|
|
$
|
73,059
|
|
|
$
|
77,679
|
|
The accompanying notes are an integral part of these condensed consolidated statements.
4
CHICO’S FAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
January 28, 2017
|
|
October 29, 2016
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
125,646
|
|
|
$
|
142,135
|
|
|
$
|
80,331
|
|
Marketable securities, at fair value
|
60,411
|
|
|
50,370
|
|
|
50,411
|
|
Inventories
|
265,023
|
|
|
232,363
|
|
|
261,341
|
|
Prepaid expenses and other current assets
|
48,876
|
|
|
52,758
|
|
|
68,557
|
|
Total Current Assets
|
499,956
|
|
|
477,626
|
|
|
460,640
|
|
Property and Equipment, net
|
424,961
|
|
|
477,185
|
|
|
495,587
|
|
Other Assets:
|
|
|
|
|
|
Goodwill
|
96,774
|
|
|
96,774
|
|
|
96,774
|
|
Other intangible assets, net
|
38,930
|
|
|
38,930
|
|
|
38,930
|
|
Other assets, net
|
16,581
|
|
|
18,479
|
|
|
18,382
|
|
Total Other Assets
|
152,285
|
|
|
154,183
|
|
|
154,086
|
|
|
$
|
1,077,202
|
|
|
$
|
1,108,994
|
|
|
$
|
1,110,313
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
135,004
|
|
|
$
|
116,378
|
|
|
$
|
125,532
|
|
Current debt
|
15,000
|
|
|
16,250
|
|
|
10,000
|
|
Other current and deferred liabilities
|
118,495
|
|
|
170,232
|
|
|
148,706
|
|
Total Current Liabilities
|
268,499
|
|
|
302,860
|
|
|
284,238
|
|
Noncurrent Liabilities:
|
|
|
|
|
|
Long-term debt
|
57,335
|
|
|
68,535
|
|
|
74,768
|
|
Deferred liabilities
|
108,000
|
|
|
118,543
|
|
|
122,848
|
|
Deferred taxes
|
7,961
|
|
|
9,883
|
|
|
9,320
|
|
Total Noncurrent Liabilities
|
173,296
|
|
|
196,961
|
|
|
206,936
|
|
Commitments and Contingencies
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
Preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
Common stock
|
1,278
|
|
|
1,288
|
|
|
1,301
|
|
Additional paid-in capital
|
463,502
|
|
|
452,756
|
|
|
445,787
|
|
Treasury stock, at cost
|
(411,766
|
)
|
|
(386,094
|
)
|
|
(366,081
|
)
|
Retained earnings
|
582,387
|
|
|
541,251
|
|
|
538,134
|
|
Accumulated other comprehensive income (loss)
|
6
|
|
|
(28
|
)
|
|
(2
|
)
|
Total Shareholders’ Equity
|
635,407
|
|
|
609,173
|
|
|
619,139
|
|
|
$
|
1,077,202
|
|
|
$
|
1,108,994
|
|
|
$
|
1,110,313
|
|
The accompanying notes are an integral part of these condensed consolidated statements.
5
CHICO’S FAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
Cash Flows From Operating Activities:
|
|
|
|
Net income
|
$
|
73,025
|
|
|
$
|
77,721
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
73,968
|
|
|
82,585
|
|
Loss on disposal and impairment of property and equipment
|
5,204
|
|
|
6,434
|
|
Deferred income taxes
|
(1,483
|
)
|
|
(8,098
|
)
|
Stock-based compensation expense
|
14,739
|
|
|
15,483
|
|
Deferred rent and lease credits
|
(14,684
|
)
|
|
(14,264
|
)
|
Changes in assets and liabilities:
|
|
|
|
Inventories
|
(32,660
|
)
|
|
(27,506
|
)
|
Prepaid expenses and other current assets
|
4,506
|
|
|
(6,237
|
)
|
Income tax receivable
|
1,050
|
|
|
25,755
|
|
Accounts payable
|
18,758
|
|
|
(3,789
|
)
|
Accrued and other liabilities
|
(47,598
|
)
|
|
(3,391
|
)
|
Net cash provided by operating activities
|
94,825
|
|
|
144,693
|
|
Cash Flows From Investing Activities:
|
|
|
|
Purchases of marketable securities
|
(29,097
|
)
|
|
(43,266
|
)
|
Proceeds from sale of marketable securities
|
19,056
|
|
|
43,058
|
|
Purchases of property and equipment, net
|
(27,128
|
)
|
|
(35,663
|
)
|
Net cash used in investing activities
|
(37,169
|
)
|
|
(35,871
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
Payments on borrowings
|
(12,500
|
)
|
|
(7,500
|
)
|
Proceeds from issuance of common stock
|
2,058
|
|
|
2,363
|
|
Dividends paid
|
(32,021
|
)
|
|
(31,936
|
)
|
Repurchase of common stock
|
(25,697
|
)
|
|
(76,334
|
)
|
Payments of tax withholdings related to stock-based awards
|
(6,034
|
)
|
|
(4,990
|
)
|
Net cash used in financing activities
|
(74,194
|
)
|
|
(118,397
|
)
|
Effects of exchange rate changes on cash and cash equivalents
|
49
|
|
|
(45
|
)
|
Net decrease in cash and cash equivalents
|
(16,489
|
)
|
|
(9,620
|
)
|
Cash and Cash Equivalents,
Beginning of period
|
142,135
|
|
|
89,951
|
|
Cash and Cash Equivalents,
End of period
|
$
|
125,646
|
|
|
$
|
80,331
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
Cash paid for interest
|
$
|
1,831
|
|
|
$
|
1,713
|
|
Cash paid for income taxes, net
|
$
|
44,783
|
|
|
$
|
22,752
|
|
The accompanying notes are an integral part of these condensed consolidated statements.
6
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 28, 2017
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Chico’s FAS, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by accounting principles generally accepted in the U.S. (“U.S. GAAP”) for complete financial statements. In the opinion of management, such interim financial statements reflect all normal, recurring adjustments considered necessary to present fairly the condensed consolidated financial position, the results of operations and cash flows for the interim periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. For further information, refer to the consolidated financial statements and notes thereto for the fiscal year ended
January 28, 2017
, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on
March 7, 2017
.
As used in this report, all references to “we,” “us,” “our” and “the Company,” refer to Chico’s FAS, Inc. and all of its wholly-owned subsidiaries.
Our fiscal years end on the Saturday closest to January 31 and are designated by the calendar year in which the fiscal year commences. Operating results for the thirteen and
thirty-nine
weeks ended
October 28, 2017
are not necessarily indicative of the results that may be expected for the entire year.
Adoption of New Accounting Pronouncements
In the first quarter of 2017, we adopted the guidance of Accounting Standard Update (“ASU”) 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The provision of ASU 2016-09 related to the recognition of excess tax benefits and deficiencies in the income statement was adopted on a prospective basis whereas the provision related to the classification in the statement of cash flows was adopted retrospectively, and the prior periods were adjusted accordingly. The Company has elected to continue estimating forfeitures of share-based awards when determining compensation cost to be recognized each period. The adoption of ASU 2016-09 did not have a material impact on the accompanying condensed consolidated financial statements.
Note 2. New Accounting Pronouncements
In October 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-16,
Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.
ASU 2016-16 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU 2016-16 requires companies to recognize the income tax effects of intercompany sales or transfers of other assets in the income statement as income tax expense (benefit) in the period the sale or transfer occurs. Additionally, companies would evaluate whether the tax effects of the intercompany sales of transfers of non-inventory assets should be included in their estimates of annual effective tax rates by using today's interim guidance on income tax accounting. ASU 2016-16 will require modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption, which we expect to implement in fiscal 2018. At
October 28, 2017
, the Company had
$5.8 million
in assets related to the transfer of intra–entity asset transfers.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which replaces the existing guidance in Accounting Standard Codification 840, Leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and should be applied on a modified retrospective basis. ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and for operating leases, the lessee would recognize straight-line total rent expense. Upon adoption of the standard in fiscal 2019, we expect to record material right–of–use assets and lease liabilities on the balance sheet approximating the present value of future lease payments.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, under which entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify as available-for-sale in other comprehensive income but instead recognize the change in fair value in net income. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. We do not anticipate adoption to have a material impact to our consolidated financial statements.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 28, 2017
(Unaudited)
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. The update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB approved a one year deferral of the effective date, to make it effective for annual and interim reporting periods beginning after December 15, 2017. The standard allows for either a full retrospective or a modified retrospective transition method. The FASB has issued subsequent ASUs related to ASU No. 2014-09, which detail amendments to the ASU, implementation considerations, narrow-scope improvements and practical expedients. Through our evaluation of the impact of this ASU, we have identified certain changes that are expected to be made to our accounting policies, practices, systems and controls including: the timing of our recognition of advertising expenses, whereby certain expenses that are currently amortized over their expected period of future benefit will be expensed the first time the advertisement appears, and presentation of estimated merchandise returns as both an asset, equal to the inventory value net of processing costs, and a corresponding return liability, compared to the current practice of recording an estimated net return liability. The Company is also evaluating and identifying appropriate changes to internal control over financial reporting in connection with preparation for adoption of this ASU. We plan to adopt this ASU under the modified retrospective approach beginning in the first quarter of fiscal 2018 with a cumulative adjustment to opening retained earnings as opposed to retrospectively adjusting prior periods. We are continuing to evaluate the impact this ASU, and related amendments and interpretive guidance, will have on our consolidated financial statements.
Note 3. Restructuring and Strategic Charges
During the fourth quarter of fiscal 2014, we initiated a restructuring program, including the acceleration of domestic store closures and an organizational realignment, to ensure that resources align with long-term growth initiatives. In fiscal 2015, in connection with the restructuring program, we completed an evaluation of the Boston Proper brand, completed the sale of the Boston Proper direct-to-consumer business and closed its stores.
During the first quarter of fiscal
2016
, we expanded our restructuring program to include components of our strategic initiatives that further align the organizational structure with long-term growth initiatives and to reduce cost of goods sold ("COGS") and selling, general and administrative expenses ("SG&A") through strategic initiatives. These strategic initiatives include realigning marketing and digital commerce, improving supply chain efficiency, reducing non-merchandise expenses, optimizing marketing spend and transition of executive leadership. In connection with this program, during the
third
quarter of fiscal
2016
, we recorded pre-tax restructuring and strategic charges of $
10.8 million
, primarily related to outside services and continuing employee-related costs, which are included in restructuring and strategic charges in the accompanying condensed statement of income. Effective in the third quarter of fiscal 2016, we substantially completed charges related to our previously announced restructuring program. We have closed
132
stores in connection with this restructuring program through the
third
quarter of fiscal
2017
, including
20
Boston Proper stores.
A summary of the pre-tax restructuring and strategic charges is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
October 29, 2016
|
|
October 29, 2016
|
|
|
|
|
|
|
|
(in thousands)
|
Impairment charges
|
|
$
|
—
|
|
|
$
|
1,453
|
|
Continuing employee-related costs
|
|
781
|
|
|
1,796
|
|
Severance charges
|
|
65
|
|
|
9,485
|
|
Proxy solicitation costs
|
|
108
|
|
|
5,697
|
|
Lease termination charges
|
|
79
|
|
|
427
|
|
Outside Services
|
|
9,779
|
|
|
12,013
|
|
Other charges
|
|
8
|
|
|
156
|
|
Total restructuring and strategic charges, pre-tax
|
|
$
|
10,820
|
|
|
$
|
31,027
|
|
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 28, 2017
(Unaudited)
As of
October 28, 2017
, a reserve of
$0.6 million
related to restructuring and strategic activities was included in other current and deferred liabilities in the accompanying condensed consolidated balance sheets. A roll-forward of the reserve is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Employee-related Costs
|
|
Severance Charges
|
|
Lease Termination Charges
|
|
Outside Services
& Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Beginning Balance, January 28, 2017
|
$
|
671
|
|
|
$
|
2,413
|
|
|
$
|
846
|
|
|
$
|
7,299
|
|
|
$
|
11,229
|
|
Payments
|
(671
|
)
|
|
(2,413
|
)
|
|
(292
|
)
|
|
(7,299
|
)
|
|
(10,675
|
)
|
Ending Balance, October 28, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
554
|
|
|
$
|
—
|
|
|
$
|
554
|
|
Note 4. Stock-Based Compensation
For the
thirty-nine
weeks ended
October 28, 2017
and
October 29, 2016
, stock-based compensation expense was
$14.7 million
and
$15.5 million
, respectively. As of
October 28, 2017
, approximately
9.3 million
shares remain available for future grants of equity awards under our Amended and Restated 2012 Omnibus Stock and Incentive Plan, which was amended and restated effective June 22, 2017.
Restricted Stock Awards
Restricted stock award activity for the
thirty-nine
weeks ended
October 28, 2017
was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested, beginning of period
|
2,463,186
|
|
|
$
|
13.87
|
|
Granted
|
1,396,680
|
|
|
13.39
|
|
Vested
|
(1,029,675
|
)
|
|
14.48
|
|
Forfeited
|
(272,547
|
)
|
|
14.53
|
|
Unvested, end of period
|
2,557,644
|
|
|
13.29
|
|
Performance-based Stock Units
For the
thirty-nine
weeks ended
October 28, 2017
, we granted performance-based restricted stock units (“PSUs”), contingent upon the achievement of a Company-specific performance goal during fiscal
2017
. Any units earned as a result of the achievement of this goal will be settled in unvested shares of our common stock on the first anniversary of the grant date. Such unvested shares will then vest on the second and third anniversary dates.
Performance-based restricted stock unit activity for the
thirty-nine
weeks ended
October 28, 2017
was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested, beginning of period
|
652,248
|
|
|
$
|
13.28
|
|
Granted
|
601,137
|
|
|
13.93
|
|
Vested
|
(279,375
|
)
|
|
13.54
|
|
Forfeited
|
(112,046
|
)
|
|
13.22
|
|
Unvested, end of period
|
861,964
|
|
|
13.66
|
|
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 28, 2017
(Unaudited)
Stock Option Awards
For the
thirty-nine
weeks ended
October 28, 2017
and
October 29, 2016
, we did not grant any stock options.
Stock option activity for the
thirty-nine
weeks ended
October 28, 2017
was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
Outstanding, beginning of period
|
577,246
|
|
|
$
|
13.58
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
(8,000
|
)
|
|
10.15
|
|
Forfeited or expired
|
(144,334
|
)
|
|
17.21
|
|
Outstanding and exercisable at October 28, 2017
|
424,912
|
|
|
12.42
|
|
Note 5. Income Taxes
The provision for income taxes is based on a current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. Our effective income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items and the mix of earnings.
For the thirteen weeks ended
October 28, 2017
and
October 29, 2016
, the effective tax rate was
32.9%
and
22.9%
, respectively. For the thirteen weeks ended
October 28, 2017
, the income tax provision was
$8.2 million
compared to the income tax provision of
$7.0 million
for the thirteen weeks ended
October 29, 2016
. The current quarter effective tax rate of
32.9%
includes a
430 basis point
tax benefit related to income tax credits. The favorability in the effective tax rate for the
third
quarter of
2016
primarily reflects an additional tax benefit related to the disposition of Boston Proper's stock and the recognition of income tax credits in
2016
.
For the
thirty-nine
weeks ended
October 28, 2017
and
October 29, 2016
, the effective tax rate was
36.1%
and
34.0%
, respectively. For the
thirty-nine
weeks ended
October 28, 2017
, the income tax provision was
$41.3 million
compared to the income tax provision of
$40.1 million
for the
thirty-nine
weeks ended
October 29, 2016
. The current year-to-date effective tax rate of
36.1%
includes a
140 basis point
tax benefit related to income tax credits and favorable tax settlements. The favorability in the effective tax rate for the
thirty-nine
weeks ended
October 29, 2016
primarily reflects an additional tax benefit related to the disposition of Boston Proper's stock and the recognition of income tax credits in
2016
.
Note 6. Earnings Per Share
In accordance with relevant accounting guidance, unvested share-based payment awards that include non-forfeitable rights to dividends, whether paid or unpaid, are considered participating securities. As a result, such awards are required to be included in the calculation of earnings per common share pursuant to the “two-class” method. For the Company, participating securities are comprised entirely of unvested restricted stock awards and performance-based restricted stock units (“PSUs”) that have met their relevant performance criteria.
Earnings per share (“EPS”) is determined using the two-class method when it is more dilutive than the treasury stock method. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period, including participating securities. Diluted EPS reflects the dilutive effect of potential common shares from non-participating securities such as stock options, PSUs and restricted stock units.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 28, 2017
(Unaudited)
The following table sets forth the computation of basic and diluted EPS shown on the face of the accompanying condensed consolidated statements of operations (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
|
October 28, 2017
|
|
October 29, 2016
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
Net income
|
$
|
16,690
|
|
|
$
|
23,598
|
|
|
$
|
73,025
|
|
|
$
|
77,721
|
|
Net income and dividends declared allocated to participating securities
|
(394
|
)
|
|
(502
|
)
|
|
(1,683
|
)
|
|
(1,677
|
)
|
Net income available to common shareholders
|
$
|
16,296
|
|
|
$
|
23,096
|
|
|
$
|
71,342
|
|
|
$
|
76,044
|
|
Denominator
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
124,957
|
|
|
128,753
|
|
|
125,550
|
|
|
129,830
|
|
Dilutive effect of non-participating securities
|
32
|
|
|
243
|
|
|
41
|
|
|
169
|
|
Weighted average common and common equivalent shares outstanding – diluted
|
124,989
|
|
|
128,996
|
|
|
125,591
|
|
|
129,999
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.13
|
|
|
$
|
0.18
|
|
|
$
|
0.57
|
|
|
$
|
0.59
|
|
Diluted
|
$
|
0.13
|
|
|
$
|
0.18
|
|
|
$
|
0.57
|
|
|
$
|
0.58
|
|
For the thirteen weeks ended
October 28, 2017
and
October 29, 2016
,
0.7 million
and
0.7 million
potential shares of common stock, respectively, were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.
For the
thirty-nine
weeks ended
October 28, 2017
and
October 29, 2016
,
0.7 million
and
0.9 million
potential shares of common stock, respectively, were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.
Note 7. Fair Value Measurements
Our financial instruments consist of cash, money market accounts, marketable securities, assets held in our non-qualified deferred compensation plan, accounts receivable and payable, and debt. Cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value due to the short-term nature of the instruments.
Marketable securities are classified as available-for-sale and as of
October 28, 2017
generally consist of
corporate bonds, U.S. government agencies, municipal securities, and commercial paper with
$35.7 million
of securities with maturity dates within one year or less and
$24.7 million
with maturity dates over one year and less than two years.
We consider all marketable securities available-for-sale, including those with maturity dates beyond 12 months, and therefore classify these securities within current assets on the condensed consolidated balance sheets as they are available to support current operational liquidity needs. Marketable securities are carried at fair value, with the unrealized holding gains and losses, net of income taxes, reflected in accumulated other comprehensive income until realized. For the purposes of computing realized and unrealized gains and losses, cost is determined on a specific identification basis.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Entities are required to use a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 28, 2017
(Unaudited)
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
|
|
|
|
|
|
Level 1
|
—
|
Unadjusted quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
|
Level 2
|
—
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or; Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or; Inputs other than quoted prices that are observable for the asset or liability
|
|
|
|
|
|
Level 3
|
—
|
Unobservable inputs for the asset or liability
|
We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as available-for-sale securities, certain cash equivalents, specifically our money market accounts and assets held in our non-qualified deferred compensation plan. The money market accounts are valued based on quoted market prices in active markets. Our marketable securities are generally valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third party pricing entities, except for U.S. government securities which are valued based on quoted market prices in active markets. The investments in our non-qualified deferred compensation plan are valued using quoted market prices and are included in other assets on our condensed consolidated balance sheets.
From time to time, we measure certain assets at fair value on a non-recurring basis, including evaluation of long-lived assets, goodwill and other intangible assets for impairment using Company-specific assumptions which would fall within Level 3 of the fair value hierarchy. We estimate the fair value of assets held for sale using market values for similar assets which would fall within Level 2 of the fair value hierarchy.
To assess the fair value of long-term debt, we utilize a discounted future cash flow model using current borrowing rates for similar types of debt of comparable maturities.
Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.
During the quarter ended
October 28, 2017
, we did not make any transfers between Level 1 and Level 2 financial instruments. Furthermore, as of
October 28, 2017
,
January 28, 2017
and
October 29, 2016
, we did not have any Level 3 financial instruments. We conduct reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 28, 2017
(Unaudited)
In accordance with the provisions of the guidance, we categorized our financial instruments, which are valued on a recurring basis, based on the priority of the inputs to the valuation technique for the instruments, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Balance as of October 28, 2017
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
(in thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
861
|
|
|
$
|
861
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Municipal securities
|
6,637
|
|
|
—
|
|
|
6,637
|
|
|
—
|
|
U.S. government agencies
|
16,756
|
|
|
—
|
|
|
16,756
|
|
|
—
|
|
Corporate bonds
|
30,901
|
|
|
—
|
|
|
30,901
|
|
|
—
|
|
Commercial paper
|
6,117
|
|
|
—
|
|
|
6,117
|
|
|
—
|
|
Non Current Assets
|
|
|
|
|
|
|
|
Deferred compensation plan
|
6,925
|
|
|
6,925
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
68,197
|
|
|
$
|
7,786
|
|
|
$
|
60,411
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Long-term debt
1
|
$
|
72,335
|
|
|
$
|
—
|
|
|
$
|
72,786
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 28, 2017
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
471
|
|
|
$
|
471
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Municipal securities
|
5,634
|
|
|
—
|
|
|
5,634
|
|
|
—
|
|
U.S. government agencies
|
23,071
|
|
|
—
|
|
|
23,071
|
|
|
—
|
|
Corporate bonds
|
15,799
|
|
|
—
|
|
|
15,799
|
|
|
—
|
|
Commercial paper
|
5,866
|
|
|
—
|
|
|
5,866
|
|
|
—
|
|
Non Current Assets
|
|
|
|
|
|
|
|
Deferred compensation plan
|
7,523
|
|
|
7,523
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
58,364
|
|
|
$
|
7,994
|
|
|
$
|
50,370
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Long-term debt
1
|
$
|
84,785
|
|
|
$
|
—
|
|
|
$
|
85,139
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 29, 2016
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
365
|
|
|
$
|
365
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Municipal securities
|
3,193
|
|
|
—
|
|
|
3,193
|
|
|
—
|
|
U.S. government agencies
|
23,113
|
|
|
—
|
|
|
23,113
|
|
|
—
|
|
Corporate bonds
|
18,253
|
|
|
—
|
|
|
18,253
|
|
|
—
|
|
Commercial paper
|
5,852
|
|
|
—
|
|
|
5,852
|
|
|
—
|
|
Non Current Assets
|
|
|
|
|
|
|
|
Deferred compensation plan
|
7,291
|
|
|
7,291
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
58,067
|
|
|
$
|
7,656
|
|
|
$
|
50,411
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Long-term debt
1
|
$
|
84,768
|
|
|
$
|
—
|
|
|
$
|
85,207
|
|
|
$
|
—
|
|
1
The carrying value of long-term debt includes the current and long-term portions and the remaining unamortized debt issuance costs.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 28, 2017
(Unaudited)
Note 8. Debt
In fiscal 2015, we entered into a credit agreement (the "Agreement") providing for a term loan of
$100.0 million
and a revolving credit facility of
$100.0 million
. The term loan and revolving credit facility mature on May 4, 2020 and accrue interest by reference, at our election, at either an adjusted eurodollar rate tied to LIBOR or an Alternate Base Rate plus an interest rate margin, as defined in the Agreement. The Agreement contains customary representations, warranties and affirmative covenants, including the requirement to maintain certain financial ratios. The Company was in compliance with the applicable ratio requirements and other covenants at
October 28, 2017
. As of
October 28, 2017
, we had total available borrowing capacity of
$100.0 million
under our revolving credit facility.
The following table provides additional detail on our outstanding debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2017
|
|
January 28, 2017
|
|
October 29, 2016
|
|
(in thousands)
|
Credit Agreement, net
|
$
|
72,335
|
|
|
$
|
84,785
|
|
|
$
|
84,768
|
|
Less: current portion
|
(15,000
|
)
|
|
(16,250
|
)
|
|
(10,000
|
)
|
Total long-term debt
|
$
|
57,335
|
|
|
$
|
68,535
|
|
|
$
|
74,768
|
|
Note 9. Share Repurchases
During the
thirty-nine
weeks ended
October 28, 2017
, under our
$300 million
share repurchase program announced in November 2015, we repurchased
2.5 million
shares at a total cost of approximately
$25.7 million
, at a weighted average of
$10.28
per share. As of
October 28, 2017
, the Company has
$137.9 million
remaining for future repurchases under the program. However, we have no continuing obligation to repurchase shares under this authorization, and the timing, actual number and value of any additional shares to be purchased will depend on the performance of our stock price, market conditions and other considerations.
Note 10. Commitments and Contingencies
In July 2015, White House Black Market, Inc. (WHBM) was named as a defendant in Altman v. White House Black Market, Inc., a putative class action filed in the United States District Court for the Northern District of Georgia. The complaint alleges that WHBM, in violation of federal law, willfully published more than the last five digits of a credit or debit card number on customers' point-of-sale receipts. Plaintiff seeks an award of statutory damages of
$100
to
$1,000
for each alleged willful violation of the law, as well as attorneys’ fees, costs and punitive damages. The Company denies the material allegations of the complaint and believes the case is without merit. The Court denied the Company’s motion to dismiss on July 13, 2016, and the parties have engaged in extensive discovery since then. On October 25, 2017, the magistrate in the matter recommended that the class be certified. On November 8, 2017, WHBM filed objections to such recommendation. The Company will continue to vigorously defend the matter, including a planned motion for summary judgment to dismiss all claims. At this time, the Company is unable to reasonably estimate the potential loss or range of loss, if any, related to the lawsuit because there are a number of unknown facts and unresolved legal issues that may impact the amount of any potential liability, including, without limitation, (a) whether the action will ultimately be permitted to proceed as a class, (b) if a class is certified, the resolution of certain disputed statutory interpretation issues that may impact the size of the putative class and (c) whether or not the plaintiff is entitled to statutory damages. No assurance can be given that these issues will be resolved in the Company’s favor or that the Company will be successful in its defense on the merits or otherwise. If the case were to proceed as a class action and the Company were to be unsuccessful in its defense on the merits, the ultimate resolution of the case could have a material adverse effect on the Company’s consolidated financial condition or results of operations.
In June 2015, the Company was named as a defendant in Ackerman v. Chico’s FAS, Inc., a putative representative Private Attorney General action filed in the Superior Court of California, County of Los Angeles. The complaint alleged numerous violations of California law related to wages, meal periods, rest periods, wage statements and failure to reimburse business expenses, among other things. Plaintiff subsequently amended her complaint to make the same allegations on a class action basis. The parties entered into a settlement agreement, and the Court issued final approval and entry of judgment on June 5, 2017. The settlement did not have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 28, 2017
(Unaudited)
In July 2016, the Company was named as a defendant in Calleros v. Chico’s FAS, Inc., a putative class action filed in the Superior Court of California, County of Santa Barbara. Plaintiff alleged that the Company failed to comply with California law requiring it to provide consumers cash for gift cards with a stored value of less than $10.00. Following voluntary mediation of the matter in November of 2016, the parties entered into a settlement agreement, which was approved by the court on July 25, 2017. The settlement will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Other than as noted above, we are not currently a party to any material legal proceedings other than claims and lawsuits arising in the normal course of business. All such matters are subject to uncertainties and outcomes may not be predictable. Consequently, the ultimate aggregate amounts of monetary liability or financial impact with respect to these matters as of
October 28, 2017
are not estimable. However, while such matters could affect our consolidated operating results when resolved in future periods, management believes that upon final disposition, any monetary liability or financial impact to us would not be material to our annual consolidated financial statements.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 28, 2017
(Unaudited)
Note 11. Subsequent Events
On November 14, 2017, the Board of Directors declared a quarterly dividend of
$0.0825
per share on our common stock. The dividend will be payable on December 18, 2017 to shareholders of record at the close of business on December 4, 2017. Although it is our Company’s intention to continue to pay a quarterly cash dividend in the future, any decision to pay future cash dividends will be made by the Board of Directors and will depend on future earnings, financial condition and other factors.
|
|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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
2016
Annual Report to Shareholders.
Executive Overview
We are a leading omni-channel specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing, intimates and complementary accessories, operating under the Chico’s, White House Black Market (“WHBM”) and Soma brand names. We earn revenues and generate cash through the sale of merchandise in our domestic and international retail stores, our various websites and our call center, which takes orders for all of our brands, and through an unaffiliated franchise partner in Mexico.
We utilize an integrated, omni-channel approach to managing our business. We want our customers to experience our brands holistically and to view our various retail channels as a single, integrated experience 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. As a result, we track total sales and comparable sales on a combined basis.
|
|
Third Quarter of Fiscal 2017 Financial
Highlights
|
Delivered third quarter EPS of $0.13 despite the unfavorable impact of hurricanes
|
Maintained strong cash position and value-focused capital allocation
|
Income from Operations and Select Charges
The following table depicts, on a pre-tax basis, income from operations and restructuring and strategic charges for the
third
quarter of fiscal
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
|
|
|
|
|
(dollars in millions)
|
Income from operations
|
$
|
25
|
|
|
$
|
31
|
|
Restructuring and strategic charges
|
—
|
|
|
11
|
|
Earnings per diluted share for the
third
quarter of fiscal
2017
was
$0.13
compared to
$0.18
in last year's
third
quarter. Results for the third quarter include the unfavorable impact of hurricanes Harvey, Irma and Maria (collectively, the "Hurricanes") of approximately
$5 million
after-tax. Results for the
third
quarter of fiscal
2016
include the impact of restructuring and strategic charges and Boston Proper of
$3 million
after-tax. The Company's earnings per share reflects the benefit of approximately
4 million
shares repurchased since the end of the
third
quarter last year, partially offset by a decrease in net income.
Hurricane Impact
In the third quarter, the Company was impacted by the Hurricanes, resulting in reduced operating hours or the temporary closure of more than 300 stores as well as a decline in direct to consumer sales. The business interruption of the Hurricanes had a significant impact on the Company’s operations. The impact to income from operations due to lower net sales, impairment charges and other incremental Hurricane related expenses was approximately
$10 million
. On an after-tax basis, the Hurricane related impact to net income was
$5 million
.
Our Business Strategy
Our overall business strategy is focused on building a collection of distinct high-performing retail brands serving the fashion needs of women ages 35 and older. We seek to accomplish this strategy through our four focus areas: (1) evolving the customer experience, (2) strengthening our brands' positions, (3) leveraging actionable retail science, and (4) sharpening our financial principles. Over the long term, we may build our brand portfolio by organic development or acquisition of other specialty retail concepts if research indicates that the opportunity complements our current brands and is appropriate and in the best interest of the shareholders.
We pursue improving the performance of our brands by building our omni-channel capabilities, which includes managing our store base and growing our online presence, by executing marketing plans, by effectively leveraging sales and expense initiatives and by optimizing the merchandise offerings of each of our three brands. We continue to invest heavily in our omni-channel capabilities in order to allow customers to fully experience our brands through more than one channel. In essence, we view our various sales channels as a single, integrated process rather than as separate sales channels operating independently. To that end, we often refer to our brands' respective websites as "our largest store" within the brand.
Under this integrated, omni-channel approach, we encourage our customers to take advantage of each of our sales channels in whatever way best fits their needs. Customers may shop our products through one channel and consummate the purchase through a different channel. Our domestic customers have the option of returning merchandise to a store or to our distribution center, regardless of the channel used for purchase. We believe this omni-channel approach meets our customers’ expectations, enhances the customer experience, contributes to the overall success of our brands, reflects that our customers do not differentiate between channels and is consistent with how we plan and manage our business. As a result, we maintain a shared inventory platform for our operations, allowing us to fulfill orders for all channels from our distribution center in Winder, Georgia. We also fulfill in-store orders directly from other stores or our distribution center.
We seek to acquire and retain omni-channel customers by leveraging existing customer-specific data and through targeted marketing, including e-marketing, television, catalogs and mailers. We seek to optimize the potential of our brands with improved product offerings, which includes potential new merchandise opportunities and brand extensions that enhance the current offerings, as well as our continued emphasis on our “Most Amazing Personal Service” standard.
In 2016, we announced and began implementing cost reduction and operating efficiency initiatives, including realigning marketing and digital commerce, improving supply chain efficiency, reducing non-merchandise expenses and optimizing marketing spend. Actions taken as part of these initiatives are expected to continue to reduce expenses and complexity, standardize processes and improve the Company's ability to respond to changes in customer demand for merchandise.
RESULTS OF OPERATIONS
Thirteen Weeks Ended
October 28, 2017
Compared to the Thirteen Weeks Ended
October 29, 2016
Net Sales
The following table depicts net sales by Chico’s, WHBM and Soma in dollars and as a percentage of total net sales for the thirteen weeks ended
October 28, 2017
and
October 29, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
|
|
|
(dollars in millions)
|
Chico's
|
$
|
285
|
|
|
53.5
|
%
|
|
$
|
312
|
|
|
52.3
|
%
|
WHBM
|
175
|
|
|
32.9
|
|
|
210
|
|
|
35.2
|
|
Soma
|
72
|
|
|
13.6
|
|
|
74
|
|
|
12.5
|
|
Total net sales
|
$
|
532
|
|
|
100.0
|
%
|
|
$
|
597
|
|
|
100.0
|
%
|
For the
third
quarter of fiscal
2017
, net sales were
$532 million
compared to
$597 million
in last year’s
third
quarter. This decrease of
10.8%
primarily reflects a comparable sales decline of
8.2%
, driven by lower average dollar sales and a decline in transaction count. The comparable sales calculation excludes the negative impact of stores closed four or more days. Net sales also reflects
36
net store closures, or a
2.4%
net decrease in selling square footage, since last year's
third
quarter.
The following table depicts comparable sales percentages by Chico's, WHBM and Soma for the thirteen weeks ended
October 28, 2017
and
October 29, 2016
:
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
Chico's
|
(5.8
|
)%
|
|
(5.6
|
)%
|
WHBM
|
(14.1
|
)
|
|
(5.5
|
)
|
Soma
|
(1.7
|
)
|
|
0.4
|
|
Total Company
|
(8.2
|
)%
|
|
(4.9
|
)%
|
Cost of Goods Sold/Gross Margin
The following table depicts COGS and gross margin in dollars and gross margin as a percentage of total net sales for the thirteen weeks ended
October 28, 2017
and
October 29, 2016
:
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
|
|
|
|
|
(dollars in millions)
|
Cost of goods sold
|
$
|
336
|
|
|
$
|
367
|
|
Gross margin
|
197
|
|
|
230
|
|
Gross margin percentage
|
37.0
|
%
|
|
38.6
|
%
|
For the
third
quarter of fiscal
2017
, gross margin was
$197 million
, or
37.0%
of net sales, compared to
$230 million
, or
38.6%
of net sales, in last year’s
third
quarter. This
160
basis point
decrease
primarily reflects deleverage of store occupancy costs as a percent of sales and store impairment charges related to the Hurricanes, partially offset by an improvement in merchandise margin.
Selling, General and Administrative Expenses
The following table depicts SG&A, which includes direct operating expenses, marketing expenses and National Store Support Center expenses, in dollars and as a percentage of total net sales for the thirteen weeks ended
October 28, 2017
and
October 29, 2016
:
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
|
|
|
|
|
(dollars in millions)
|
Selling, general and administrative expenses
|
$
|
171
|
|
|
$
|
188
|
|
Percentage of total net sales
|
32.3
|
%
|
|
31.6
|
%
|
For the
third
quarter of fiscal
2017
, SG&A was
$171 million
, or
32.3%
of net sales, compared to
$188 million
, or
31.6%
of net sales, in last year's
third
quarter. This decrease of
$17 million
, or
9.0%
, primarily reflects the impact of a reduction in employee-related costs and marketing spend.
Restructuring and Strategic Charges
In the fourth quarter of fiscal 2014, we initiated a restructuring program, including the acceleration of domestic store closures and an organizational realignment, to ensure that resources align with long-term growth initiatives. During the
third
quarter of fiscal
2016
, we recorded pre-tax restructuring and strategic charges of
$11 million
, primarily consisting of outside services related to cost reduction and operating efficiency initiatives. The fiscal 2016 after-tax impact of the restructuring and strategic charges totaled
$7 million
, or
$0.05
per diluted share. Effective in the third quarter of fiscal 2016, we substantially completed charges related to our previously announced restructuring program. We have closed
132
stores in connection with this restructuring program through the
third
quarter of fiscal
2017
, including
20
Boston Proper stores.
Provision for Income Taxes
For the
third
quarter of fiscal
2017
, the effective tax rate was
32.9%
compared to
22.9%
for last year's
third
quarter. The current quarter effective tax rate of
32.9%
includes a
430 basis point
tax benefit related to income tax credits. The favorability in the effective tax rate for the
third
quarter of
2016
primarily reflects an additional tax benefit related to the disposition of Boston Proper's stock and the recognition of income tax credits.
Net Income and Earnings Per Diluted Share
We reported net
income
for the
third
quarter of fiscal
2017
of
$17 million
, or
$0.13
per diluted share, compared to net
income
of
$24 million
, or
$0.18
per diluted share in last year’s
third
quarter. Results for the
third
quarter of fiscal
2017
include the unfavorable impact of the Hurricanes of approximately
$5 million
after-tax. Results for the
third
quarter of
2016
include the unfavorable impact of restructuring and strategic charges and Boston Proper of
$3 million
after-tax.
Thirty-Nine Weeks Ended
October 28, 2017
Compared to the
Thirty-Nine Weeks Ended
October 29, 2016
Net Sales
The following table depicts net sales by Chico’s, WHBM and Soma in dollars and as a percentage of total net sales for the
thirty-nine
weeks ended
October 28, 2017
and
October 29, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
|
|
|
(dollars in millions)
|
Chico's
|
$
|
897
|
|
|
53.0
|
%
|
|
$
|
995
|
|
|
53.0
|
%
|
WHBM
|
553
|
|
|
32.6
|
|
|
633
|
|
|
33.8
|
|
Soma
|
245
|
|
|
14.4
|
|
|
247
|
|
|
13.2
|
|
Total net sales
|
$
|
1,695
|
|
|
100.0
|
%
|
|
$
|
1,876
|
|
|
100.0
|
%
|
Net sales for the year-to-date period ended
October 28, 2017
decreased
to
$1,695 million
from
$1,876 million
in last year’s year-to-date period. This decrease of
9.7%
primarily reflects a decline in comparable sales of
8.4%
driven by lower average dollar sales and a decline in transaction count. The comparable sales calculation excludes the negative impact of stores closed four or more days. Net sales also reflects
36
net store closures, or a
2.4%
net decrease in selling square footage, since last year's
third
quarter.
The following table depicts comparable sales percentages by Chico's, WHBM and Soma for the
thirty-nine
weeks ended
October 28, 2017
and
October 29, 2016
:
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
Chico's
|
(8.3
|
)%
|
|
(5.4
|
)%
|
WHBM
|
(11.5
|
)
|
|
(3.5
|
)
|
Soma
|
(1.1
|
)
|
|
0.6
|
|
Total Company
|
(8.4
|
)%
|
|
(4.0
|
)%
|
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
thirty-nine
weeks ended
October 28, 2017
and
October 29, 2016
:
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
|
|
|
|
|
(dollars in millions)
|
Cost of goods sold
|
$
|
1,051
|
|
|
$
|
1,142
|
|
Gross margin
|
643
|
|
|
733
|
|
Gross margin percentage
|
38.0
|
%
|
|
39.1
|
%
|
Gross margin for the year-to-date period ended
October 28, 2017
was
$643 million
, or
38.0%
, compared to
$733 million
, or
39.1%
, in last year’s year-to-date period. This
110
basis point
decrease
primarily reflects sales deleverage of store occupancy expenses as a percent of sales and store impairment charges related to the Hurricanes, partially offset by savings related to cost reduction initiatives.
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
thirty-nine
weeks ended
October 28, 2017
and
October 29, 2016
:
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
October 28, 2017
|
|
October 29, 2016
|
|
|
|
|
|
(dollars in millions)
|
Selling, general and administrative expenses
|
$
|
528
|
|
|
$
|
583
|
|
Percentage of total net sales
|
31.2
|
%
|
|
31.1
|
%
|
For the year-to-date period ended
October 28, 2017
, SG&A was
$528 million
compared to
$583 million
in last year’s year-to-date period. This
decrease
of
$56 million
, or
9.5%
, primarily reflects a reduction in employee-related costs and marketing spend.
Restructuring and Strategic Charges
In the fourth quarter of fiscal 2014, we initiated a restructuring program, including the acceleration of domestic store closures and an organizational realignment, to ensure that resources align with long-term growth initiatives. Restructuring and strategic charges for the year-to-date period of fiscal
2016
were
$31 million
pre-tax, primarily consisting of outside services, severance and proxy solicitation costs. The fiscal
2016
after-tax impact of the restructuring and strategic charges totaled
$19 million
, or
$0.15
per diluted share. Effective in the third quarter of fiscal 2016, we substantially completed charges related to our previously announced restructuring program. We have closed
132
stores in connection with this restructuring program through the
third
quarter of fiscal
2017
, including
20
Boston Proper stores.
Provision for Income Taxes
For the
thirty-nine
weeks ended
October 28, 2017
and
October 29, 2016
, the effective tax rate was
36.1%
and
34.0%
, respectively. The income tax provision was
$41 million
for the
thirty-nine
weeks ended
October 28, 2017
compared to
$40 million
in the same period last year. The current year-to-date effective tax rate of
36.1%
includes an
140 basis point
tax benefit related to income tax credits and favorable tax settlements. The favorability in the effective tax rate for the
thirty-nine
weeks ended
October 29, 2016
primarily reflects an additional tax benefit related to the disposition of Boston Proper's stock and the realization of income tax credits.
Net Income and Earnings Per Diluted Share
Net income for the year-to-date period ended
October 28, 2017
was
$73 million
, or
$0.57
per diluted share, compared to net income of
$78 million
, or
$0.58
per diluted share, in last year's year-to-date period. Results for the year-to-date period ended
October 28, 2017
include the unfavorable impact of the Hurricanes of approximately
$5 million
after-tax. Results for the year-to-date period ended
October 29, 2016
include the unfavorable impact of restructuring and strategic charges and Boston Proper of
$15 million
after-tax.
Inventories
At the end of the
third
quarter of
2017
, inventories totaled
$265 million
compared to
$261 million
at the end of the
third
quarter last year. Inventories at the end of the
third
quarter include a $15 million increase compared to the prior year date due to a change in shipping terms with a supplier.
Liquidity and Capital Resources
We believe that our existing cash and marketable securities balances, cash generated from operations, available credit facilities and potential future borrowings 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: information technology and relocated, remodeled and new stores.
Operating Activities
Net cash provided by operating activities for the year-to-date period of fiscal
2017
was
$95 million
,
a decrease
of approximately
$50 million
from last year's year-to-date period. This
decrease
primarily results from the settlement of prior year accruals for outside services and severance, the timing of tax payments and the impact of a decrease in the incentive compensation accrual, partially offset by the timing of vendor payments.
Investing Activities
Net cash used in investing activities for the year-to-date period of fiscal
2017
was
$37 million
compared to
$36 million
in last year's year-to-date period, primarily reflecting a
$10 million
increase
in marketable securities related to the investment of cash from operations. This increase was partially offset by a
$9 million
decline in net purchases of property and equipment consistent with our overall business strategy.
Financing Activities
Net cash used in financing activities for the year-to-date period of fiscal
2017
was
$74 million
compared to
$118 million
in last year's year-to-date period. The decrease in net cash used in financing activities primarily reflects a
$51 million
decline in share repurchases, partially offset by higher payments on borrowings under our Credit Agreement.
Store and Franchise Activity
During the fiscal
2017
year-to-date period, we had
27
net store closures, consisting of net closures of
10
Chico's stores,
13
WHBM stores and
4
Soma stores. Currently, we expect an additional 20 net store closures in fiscal
2017
, reflecting approximately 9 net closures of Chico's stores, 9 net closures of WHBM stores, and 2 net closures of Soma stores. We continuously evaluate the appropriate store positioning in light of economic conditions and may adjust our strategy as conditions require or as opportunities arise. As of
October 28, 2017
, we also sold merchandise through
64
Chico's and
30
Soma international franchise locations.
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
January 28, 2017
, 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
January 28, 2017
.
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, the effectiveness of our 2016 restructuring and organizational redesign for improved business performance and the future success of our store concepts and our business initiatives. These statements may address items such as future sales and sales initiatives, gross margin expectations, SG&A expectations (particularly estimated expected savings), operating margin expectations, earnings per share expectations, planned store openings, closings and expansions, expected impact of ongoing litigation, future stock repurchase plans, future plans to pay dividends, future comparable sales, future product sourcing plans, inventory levels, planned marketing expenditures, planned capital expenditures and future cash needs.
These statements relate to expectations concerning matters that are not historical fact and may include the words or phrases such as “will,” “should,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “approximately,” “our planning assumptions,” “future outlook” and similar expressions. Except for historical information, matters discussed in 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, 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 7, 2017
and the following:
The financial strength of retailing in particular and the economy in general; the extent of financial difficulties or economic uncertainty that may be experienced by customers; our ability to secure and maintain customer acceptance of styles and in-store and online concepts; the ability to effectively manage and maintain an appropriate level of inventory; the extent and nature of competition in the markets in which we operate; the ability to remain competitive with customer shipping terms and costs pertaining to product deliveries and returns; 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 ability to coordinate product development with buying and planning; the quality and timeliness of merchandise received from suppliers; the ability to efficiently, timely and successfully manage our business in the face of significant economic, labor, political or other shifts in the countries from which our merchandise is supplied; the changes in the costs of manufacturing, raw materials, transportation, distribution, labor and advertising; the availability of quality store sites; our ability to manage our store fleet and the risk that our investments in merchandise or marketing initiatives may not deliver the results we anticipate; our ability to successfully navigate the increasing use of on-line retailers for fashion purchases and the pressure that puts on traffic and transactions in our physical stores; the ability to operate our own retail websites in a manner that produces profitable sales; the ability to successfully execute our business strategies, including our previously announced restructuring program and expense and sales initiatives, and to achieve the expected results from them; the continuing performance, implementation and integration of management information systems; the impact of any systems failures, cyber security or other data 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, motivate and retain qualified sales associates, managerial employees and other employees; the successful integration of our new management team; the ability to respond effectively to actions of activist shareholders and others; the ability to utilize our distribution center and other support facilities in an efficient and effective manner; the ability to secure and protect trademarks and other intellectual property rights and to protect our reputation and brand images; and the risk that natural disasters, public health crises, political uprisings, uncertainty or unrest, or other catastrophic events could adversely affect our operations and financial results; potential risks and uncertainties that are related to our reliance on sourcing from foreign suppliers, including the impact of changes in tariffs, taxes (such as the passage of a "border adjustment" or similar tax)
or other import regulations; changes in governmental policies in or towards foreign countries; currency exchange rates and other similar factors; and the impact of our recent shift to a predominantly free on board (FOB) shipping structure.
All 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.