This summary is based on the first quarter fiscal 2008 earnings call conducted by Chico’s FAS, Inc. (CHS) on May 28, 2008.
Management:
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Vice President, Investor Relations: Michael Smith
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Chairman and CEO: Scott Edmonds
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CFO: Kent Kleeberger
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Chico’s Brand President: Michele Cloutier
Key Investors Issues
- Net income was $12.7 million or 7 cents a diluted share, down 73%.
- Net sales decreased 9.6% to $409.6 million from $453.1 million in the prior year.
- The firm opened 23 new stores, closed five and expanded or relocated 17.
First Quarter Highlights
Net sales decreased 9.6% to $409.6 million from $453.1 million in the prior year due to the challenging sales environment as the suppressed economic outlook has erdoded consumer confidence.
- Comparable store sales decreased 17.5% and the Chico’s brand same store sales decreased by 22% in the White House while Black Market brand same store sales decreased by 10%.
- The firm’s focus on inventory management and expense control resulted in a year over year decline in inventory per square foot of approximately 4%.
- The firm recognized charges of $6.8 million which represents a combination of efforts to clean up aged and overstock inventory in Chico’s and estimated costs to close seven Soma stores that were oversized.
- The firm believes the White House, Black Market brand could turn the corner a little quicker than the Chico’s brand which is not totally unexpected based on a narrower assortment for White House, Black Market.
Net income was $12.7 million or 7 cents a diluted share, down 73% from $47.2 million or 27 cents a diluted share in 2007 due to lower sales compounded by higher expenses
- Gross profit came in at 55.9% down 580 basis points over last year, with the biggest drop coming in the Chico’s front line margin; it was down 290 basis points versus last year.
- The decrease in the gross margin rate experienced added pressure as the firm continued to fund investment in product development and merchandising functions.
- SG&A total expense approximated $212.1 million or 51.8% expressed as a percentage of sales and reflects an increase of 660 basis points versus last year.
The increase was primarily driven by store operating expenses which reflected a 520 basis point increase as occupancy costs increase by $10.2 million which also means it had a savings in other areas such as labor and store supplies.
- Marketing also came in a little higher at $22.8 million displaying nearly 100 basis point increase in rate.
- Shared services expenses came in lower at $28.3 million versus $29.5 million for first quarter last year.
- The level of comparable store sales declined masked much of the progress made in the expense structure as de-leveraging caused by lower sales was the primary culprit for the increase in the SG&A rate versus last year.
The firm has eliminated bonus guarantees and are planning and testing new approaches to the store bonus plans.
- It has also begun work on a more efficient payroll management structure through improved sales planning and rate management and started a number of cost savings initiatives including those involving utilities, store maintenance and store supplies.
- While the direct to consumer business saw slight decrease to $16 million net sales are down 3% from the previous year.
- The firm opened 23 new stores, closed five and expanded or relocated 17 and expects to open between 17 to 19 stores and expand or relocate 9 or 11 stores during the second quarter and close one or two more stores.
Operational Highlights:
- The Soma Intimates brand continues to experience significant top line sales growth during the quarter.
- However, the core brand Chico’s saw continuing deceleration in same store sales during the quarter and the firm continues to experience significant year over year declines in the Travelers collection.
- It recently conducted customer focus groups to confirm that the corrective measures in place for the fall season should improve the performance of this very important product category.
- The firm is steadfastly committed to protecting the free cash flow and strong balance sheet that includes $271 million in cash and marketable securities and zero debt.
Overall performance for the core brand Chico’s was disappointing, with transactions down 13% versus 7% in the prior period and average dollar sale down 9%.
- A record early Easter and unseasonably cool temperatures further compounded a difficult business environment.
- Despite opening the quarter with more forward positioned inventory the firm was unable to post stronger sales due to assortment challenges and sluggish demand.
- From a product perspective it continues to see deteriorating results in the Travelers collection.
Accessories were also down continuing the same comp trend in the fourth quarter again being driven by jewelry and belts.
- Although pants, denim and shorts have been posting very strong results for the past 12 months these categories took a hit as there was customer pull back on spend on full price commodity businesses.
- Jackets had a significant improvement over the prior period as it posted a positive comp including the novelty portion of this category.
- Outerwear, novelty sweaters and active ware all had solid performances and the basic t-shirt business also posted a strong comp in the quarter.
- The firm will increase the novelty investment, continue to provide products that are unique, watch investment on commodity categories and celebrate the 25th anniversary with limited edition products.
The White House, Black Market brand showed improvement over the previous fourth quarter trend and steady progress improving quality, fit and brand marketing initiatives.
