Q2 2020 Chico's FAS Inc Earnings Call
Good morning.
Welcome to Chicos second quarter 2020 conference call at work.
All participants will be in what's the only about.
Please note this call is being recorded.
I would now as opposed to conference over to David older Interim Chief Financial Officer, and Senior Vice President Controller Mr. Oliver. Please go ahead, good morning, and welcome to the Chico's <unk> second quarter 2020 carpets call a webcast moly legacy <unk> Hershey on President also joining me today.
Second quarter really is can be found on our website at www Chico's nothing else Dot com under press releases.
Well the Investor Relations page.
Todays comments will include forward looking statements regarding our current expectations assumptions plans estimates judgments and projections about our business and are industry, which speaks only as of today's date.
You should not unduly rely on forward looking statements.
Important factors that could cause actual results to differ materially from those projected or implied by our forward. Looking statements are included in our earnings release issued this morning.
Interestingly filings and other comments made on this call.
We disclaim any obligations to update or revise any information discussed on this call, except as maybe otherwise required by law with that I'll turn the call <unk>.
Thank you David and good morning, everyone.
We have had a tough quarter as stores, where effectively close the same amount of time in Q2 as Q1.
However, our results for Q2 are much stronger because of our ability to stay focused on our turnaround plan starting in fiscal 2019.
We're very optimistic about our future and are energized for growth. Despite the current headwind.
In the fourth quarter of last year, we proved that we could drive our best sales performance in six years.
Outstanding 9.2% comparable sales improvement from what we posted in Q1 fiscal 2019.
Based on customer acceptance of our new product, we have confidence in our strategy to return to the trajectory started in the first quarter.
We are taking advantage of this on precedented period can be flexible and to stay laser focused we have streamline the organization reduced expenses reengineered, our supply chain and accelerated technology initiative.
We are fortunate to have three distinctive brand with loyal customers and unique growth opportunities.
A very robust digital business.
Strong store portfolio, a solid financial position and a nimble talented organization.
Our business plan it based on delivering improved quarter over quarter performance.
In the second quarter, we substantially enhanced our financial performance from the first quarter.
Digital and store sales combined improved by 9.2% in Q2 over Q1, despite stores effectively being closed the same number of weeks in second quarter ads in the first.
Our gross margin rate rose more than 1800 basis points.
As DNA expenses decreased by 22.9 million or 18%.
Our cash and cash equivalents increased by 7 million and our inventory levels were reduced by nearly 14%.
We are taking actions to continue to capture market share and emerge and even stronger company.
We are applying the same discipline that drove last years fourth quarter performance and using this opportunity as a catalyst.
We have better aligned our inventory and assortment to demand.
We've streamlined organizational structure, reducing staffing by 30% and year to date ftn expense by 33% compared to last year.
We reengineered our supply chain and we've continued to rationalize our store base and reduced occupancy cost and accelerated investments in innovation and technology.
David My will offer additional color on many of these actions.
Let's start with digital.
Digital sales have grown month over month end quarter over quarter.
We had substantial learnings when our business became 100% digital for 13 weeks. We took these learnings into the second quarter and that digital channel has not moderated since the stores have reopened.
We have a new expertise with proven track record in driving the digital businesses.
For the second quarter year over year digital customer account grew nearly 55% and conversion was up 100 basis points.
And year over year total company second quarter digital sales grew substantially with our apparel brands growing by double digits and Soma, leading the way with digital sales up over 70%.
On the storefronts in early May we initiated our multi phased reopening plan for all of our boutiques.
Our opening painful slower than planned and 96% of boutiques, where reopen by quarter end, albeit with limited hours and customer capacity limitations.
So essentially our boutiques were effectively close for about the same amount of time in Q2 as in Q1 about half of each quarter.
In the aggregate boutiques opened in the quarter generated sales at about 53% of last years level.
July with the one month, where nearly all our boutiques were open.
This was slightly ahead of our expectations and above the initial levels experienced in may.
Our data shows sales trends inversely correlate to cope it tastes and trends.
Sales improved Workover cases decline.
As customer sentiment improves so do traffic and revenue.
Customers are responding to our product as demonstrated by our 30% plus increase in conversion at the store level compared to the second quarter last year.
Regarding our inventory I'm pleased how swiftly our team continues to pivot our assortment and manage inventory.
After inventory write downs in the first and second quarters, we ended the second quarter with inventories down nearly 14% and with current seasonally right product.
Due to our diligence.
We entered the second quarter with a streamlined organizational structure and significantly reduced expense base aligned to the needs of the business.
This fiscal year, we expect to generate approximately 245 million or about 24% an expense savings to plan before rent.
We are committed to retaining at least half this year savings into next year driving leverage.
Communication is key during this challenging time and we continue to have biweekly calls with our leadership team and monthly calls with the entire organization to keep our associates engaged informed and connected.
We have made the decision for our corporate team to continue to work remotely through the end of the calendar year.
Regarding our supply chain coated with a catalyst to quickly we engineer our supply chain shipments from agents and third party suppliers will be caught almost in half this year and we expect additional reduction next year.
In regards to our landlord suppliers and vendors, we're continuing to partner with our suppliers vendors and especially our landlord to reduce operating costs.
We have engaged a top tier real estate consultant eight and GE real estate partners to assist in an arduous process.
And our landlords are stepping up with rent relief, we know that there will be some store shrink in the coming here as we are holding our stores to a higher profitability standards either through increased sales per square foot or lower Brett.
We remain focused on our key initiatives started in our 2019 turned around and we are continuing to make tremendous progress on elevating our products and being customer focused let me give you a few update.
First on our product elevation in being a design driven organization.
At Soma as we continue to focus on innovating and developing the most king credibly soften amazing fabrics and products that offer our customers the beautiful solutions effortless style and comfort that she expects and dessert.
The focus on innovation and franchise dominant produced another terrific quarter for summer.
With strong sales in all proprietary intimate loungewear and sleepwear categories.
Wireless and comfort products were strong for the quarter.
We were especially on or is that good housekeeping named and Bliss their choice for the best overall brought Matt.
Soma posted positive comps for the month of July with stores operating with reduced hours and limited customer capacity.
Our accelerating investments recent result, and current momentum give us confidence that we will continue to catapult the somo brand and take market share.
At Chico's and White house Black market, our merchandising and design teams pivoted to quickly meet the need for casual versus <unk> apparel as many of our customers continue living and working from home and her lifestyle needs have evolved.
Our new fabrications, and Washable net Jersey resonated with customers at White House Black market.
And chico's enhancement to the Zenergy active franchise and newness in the casual assortment performed well for the quarter.
Dan customer focused and led we are continually optimizing all touch points due out the customer journey by simplifying digitizing and elevating our unique and personalized service, allowing her to shop whenever wherever and however, she.
He prefers.
Our innovative proprietary technology is an integral part of and complement our great personalized service and we have accelerated implementation of digital personalization tools to help us reach customers in new and creative ways.
So how can that our online styling service continues to be a differentiator for us, allowing our customers to connect digitally with her personal style expert to best Blink customer and product suited to her.
Year over year style connect sales grew over 50% for the quarter.
We are also so excited about our second quarter soft launch of the personal closet feature.
An online personalized functionality that enables customers to shop digitally to augment their closets coordinating with their past purchases.
Since launch the conversion rate for this new feature has been remarkable exceeding six times conversion rate versus the site average.
This unique program is a truly competitive advantage and based on early results. We accelerated the formal launch which was planned for next year into this year third quarter.
We are continually enhancing our customers shopping experience through digital site improvements. This month, we added shop. The look which is also available on file connect these tools are generating increased engagement and units per transaction.
The customer shopping behavior has changed and we have quickly pivoted our business to ensure that she can always be connected with our style experts in new personalized simplified and innovative ways.
These times have been a catalyst to think swiftly and differently as we put the customer in the center of our shopping journey.
Before I turn the call over to David to discuss financial performance, Let me take a minute to talk about inclusion and diversity.
We are committed to an inclusive environment that celebrates our individuality influences our culture and innovate the way we work.
Earlier this year, we were so honored to be named one of the best employers for diversity in 2020 by Forbes magazine and to be included on the 2020 corporate equality index published by the human rights campaign for corporate policies and practices related to the LGBTQ workplace equality.
And we are always striving to do more.
We are continually building upon our existing diversity infrastructure and initiative.
We have an active inclusion and diversity council, which is developing specific goal initiative and measurements for key pillars of the business.
We want to build on our strength and take serious and thoughtful actions to combat racism.
Budgeted and discrimination from our company and from the communities we serve.
This is important to all of us and we'll keep you updated on our progress.
David.
Thanks, Wally we entered fiscal 2020 on solid financial footing that continue to maintain a healthy liquidity position. We ended the second quarter with 125 million of cash cash equivalents $7 billion, probably into the first quarter and we have navigated the second quarter without making additional draws on our credit facility.
We have taken steps to align our cost structure with revenues preserve cash and increased liquidity, including aggressively reducing issue that expenses partnering with landlords suppliers and vendors or operating cost and extended payment terms, reducing merchandise receipts and lowering planned capital expenditures, we also temper.
Really suspended rep pay much or stores during the cobot 19 store closure period and have made reduced Arctic Goshen upfront payments as stores have reopened we're about 55% through the initiative with energy to restructure or at least portfolio and have already achieved renovate much for fiscal 2020 that aggregate two lane.
Meaningful eight figures in savings and we are in active discussions with her landlords to find a mutually except the path forward for the remaining locations.
Focusing on a real estate during the quarter, we permanently close 19 stores, bringing our year to date closings to 28, we.
We ended the second quarter with 1300 13 boutiques across North America.
For the remainder of the year consistent with our plan, we anticipate permanent closing additional 25 to 50 stores.
We are the process a thorough reviewing our portfolio and reevaluating dislocations forecasted profitability and strategic value, which mainly to accelerating some closures are postponing or canceling certain closures based on favorable rent concessions.
We have additional flexibility because on average our remaining lease terms are relatively short.
Yes, Molly noted, we're holding our stores to higher profitability standards, either through increased sales per square foot or lower reps.
Turning to find its performance recall that overall, our stores were effectively close the same number weeks in the second quarter as the first.
So the quarter started slowly the gain momentum as stores reopened.
Digital traffic and sales achieved meaningful year over year growth and this cost. If this digital performance helped offset part of the loss sales.
The close stores.
Second quarter net sales totaled 306.2 million up 9.2% from the first quarter, reflecting the continued benefit of strong digital formats and store reopening.
Compared to the second quarter last year sales declined 40%. This year over year sales decrease reflects disruptions related to pandemic, including the continuation of temporary store closures limited to hours from stores reopened and 74 net permanent store closures since last year second quarter.
Productivity of the stores opened in the second quarter was approximately 53% or the prior year, well operating with reduced hours staffing and customer capacity.
For the second quarter reported net loss of 46.8 million core 40 cents per diluted share primarily reflecting the impact of lost sales during the cobot store closure period.
Our loss and the second quarter also included an after tax inventory write off of 8 million or seven cents per share.
Gross margin in the second quarter was 14.6% of net sales more than 18, another basis point improvement to Q1.
The year over year decline in gross margin rate, primarily reflects sales deleverage of occupancy cost and the inventory write off just mentioned.
The inventory write off addressed excess workwear and special occasion apparel as well as Curt inventory and stores that became trapped due to slower than plan cadence of store reopening.
We ended the quarter with total inventory of 236 million a 14% decrease for the first quarter and then second quarter was somewhat elevated due the timing of receipts and product killed for liquidation.
We believe with our planned inventory receipts, we are entering into back half of the year with inventories that are current appropriately balanced and in line with future demand.
SGN expenses for the second quarter were down nearly $64 million compared to last year's second quarter, primarily due to the aggressive reductions taken to align our cost structure with current and future expectations.
64 million represents a 37% decline and yesterday when compared to the second quarter last year, and an 18% reduction from the first quarter. This year.
For the second quarter, the effective income tax rate was 25.7%, reflecting benefits provided by the carriers at that up a valuation allowance for certain stake right carry forwards that are expected to expire underutilized.
Under provisions of the carriers Act.
We realized a 16.4 billion dollar cash benefit and the second quarter related to the recovery a previously paid federal income taxes and employee retention credits. Additionally, our balance sheet reflects an $83 million receivable related to the recovery of federal income taxes paid in prior years and other tax.
Paul changes the company also expects to realize an 11 million dollar benefit physical 20 related to the referral of employer, so pretty tax payments that will repeat repaid in future years.
Our cash flows in the first half of the or it was impacted by the plant in Q2, we continue to take aggressive actions to drive sales and monetize inventory reduce expenses and manage cash flows.
Our financial position liquidity or being bolstered by strong digital performance across all brands cells that open retail stores and a leader expense structure to better align costs with cells. We believe the actions we have taken combined with our solid financial position availability under our credit facility and our competitively positioned brands will enable us.
To successfully navigate the pandemic and emerge a stronger company.
Uncertainty surrounding the current environment continues to make our future performance extremely difficult to predict. So we are unable to provide forward looking guidance I'll now turn the call back over to the operator for Q.
Thank you.
At this time, we would be happy to take your questions to ask a question remember stars in one removed himself from queue. Please press Star then too.
And just the timing considerations the others, we're seeing please limit yourself to one question.
The star, we will pause momentarily to assemble our roster.
[noise] add today's first question comes from Susan Anderson with B. Riley. Please go ahead.
Hi, Good morning, Thanks for taking my question and I was wondering if you could just talk about how much of the product you've been able to shift to more casual our comfort verses wear to work our fashion for the back half and then also David maybe if you could talk about what you're expecting for free cash flow.
For the back half into in the year. Thank you.
Good morning, Susan Thank you so much for the good morning question.
Nice to hear from you.
So in regards to the product shift for the back half in March we were finalizing our fall order and we were in the middle of development for Q4. So 100% of Q4 is influenced with the new behavior of customers and we were able to make significant hibbett.
In the go forward looking assortments in Q3, and make the necessary cancellations on occasion, where and work where that was needed based upon what we knew at the time. So we feel confident we've made significant product shifts in the back half that reflects the customer demand. In addition, we already have.
In Q4 laid out significant changes in casual and cozy encumbered across all three brands that have served us well I'm. In addition to these David changes.
David Yes.
With respect to cash flow back half of the here, we're not providing forward looking comments our guidance in that regard, but the good news is we expect our stores to be open absent any costs costs that might at all.
And so we're going to have the benefit of incremental sales improving our cash flow. We also put in place our $245 million and expense savings to plan and we're going to see that.
Cascade across the back half of your deliveries and so we weren't we're definitely looking for improved cash flow versus first half but.
We have to run the numbers.
Yeah, that's great.
That's helpful. Thanks, So much good luck in the back half.
Our next question today comes from James Dentzer with Jefferies. Please go ahead.
Hi, good morning, and want to ask a little bit more about digital I think you said digitally accelerated month over month and provide some more color there on the cadence and then what you're seeing is it to me Q and then also interested and just some of the learnings that you mentioned from on the stores were closed in the first quarter from the changes you made the digital to help accelerate that.
Thank you.
Hi, Good morning, Janine I will start with digital right, yes, when we closed our stores in March.
And we had a 13 week period, where we weren't digital only we learned a lot during that period that we applied to the back half of the year, including accelerating a lot of our digital initiatives that we had in the glide path all the way through 2021.
As stores opened in the second quarter, we experienced across all three of our brands month over month improvement in our digital business, which we believe has been benefited by the investments that we've made in our technology investments that we've made in our challenge and also the changes that we've done any organizational struck.
Sure to put more emphasis on our digital channel and focus.
And can I ask you to repeat the second half of that question Janine.
Yeah, I think you kind of answered it I was just trying to understand some of the changes that you made the digital business. After you have the stores closed them in the first quarter I guess, just as a follow up on the store performance and interested to hear a little bit more about what you're seeing in terms of reopening build I think the productivity. If you papers that is similar to where you where or when you updated us at the.
The first quarter results. So just curious if you're seeing the stores continued to build or are they kind of plateauing at around 50%.
It really depends upon really the cold. The cases, we are finding that the sentiment of the customer shopping behavior is really following co bid. So in the month of June when some of that started to receive we saw customer traffic improve that in the month in July as you know.
Some of the biggest states that we have stores and became five of the hot spots across the country and we saw a retraction in those days. So really we see this rolling behavior sort of follow escalating kobin cases and versus really a plateau wing.
Of stores. The other thing that we also see is a 10 point improvement and open lifestyle centers and strip Center mall versus enclosed mall and that's been pretty consistent for the quarter.
Great. Thank you very much.
You're welcome.
Over the next wasn't great cultural Marni Shapiro with regional director. Please go ahead.
Hey, guys. How are you graduations, some for making it through this no.
Good shape I've a couple of quick questions can you Molly just talked about your ability to have liquidated the older inventory and where the inventories are today as far as currency and where your inventories are planned for the back half way there.
Yeah, Good morning, Marni and Ah So yes in terms of our inventories you know as we stated in Q1 that we.
Liquidated all of the fall and holiday prior inventory. So we had just bring currently would we walked into the first quarter. What we Didnt know at the time is how long stores, we're going to be closed and the impact on people the way they were living and so in particular to category the special occasion drug.
Where categories that are important for the summertime wedding and also the more career, where I'm more goods that were challenging for us in the apparel brands in second quarter, which we have liquidated and that was part of the write down that we had for second quarter. So we feel confident in our level of inventory that.
We have today and the go forward inventory, we have aligned with our sales projections by brand and by channel.
Fantastic and then can you just supposed to give me a quick update.
<unk> cost at the store level you guys have very good cobot precautions I guess in place and so is it is the extra cost or is this being offset by lower payroll the stores I'm curious how that works out.
I did right now because of.
The limitations on capacity that is different lines date, we are managing the cost in stores, one with lower payroll because we do not have our full part time stuff back yet they're still on furlough and so we're managing quite honestly the team's doing an outstanding job really scrutinizing.
<unk> expenses, but putting the customer safety and our associates safety first a two to manage that experience, which as you know as challenging.
Thank you Molly.
Ladies and gentlemen, as a reminder.
Good question. Please press Star then one at the start today's next question comes from Graham Upholstery with Telsey Advisory Group. Please go ahead.
Good morning, everyone. As you think about the upcoming holiday season, Molly how are you planning holiday differently than prior years, how you're thinking about it both in terms of flow of merchandise and marketing and lastly on the digital on the digital channel. How what are you seeing there in terms of.
So supply chain shipping costs delivery expense and logistics how is that changing thank you.
Thank you and good morning, Dana I know in regard to the digital channel for the back half a year, we have surgically dissected last year's customer and traffic data and overlay that with current traffic and customer behavior to make sure that we built this year strata.
In the back half this detailed strategy by day utilizes our new seamless shopping experiences, including curbside pickup shot my appointment and style connect and also our new digital features to be available for her whenever wherever and how she wants to shop and as you know retailers about detail so Doug.
Ducting. These details has been key in building our back half strategy between both channels.
In regard to.
You know an effort to potentially have higher shipping costs and delays you know in terms of timing for our customers and shifting our holiday upward earlier this year trying to capture more sales earlier.
This will help us reduce the amount of orders that we have and offer free shipping upgrade for which is a larger driver of shipping expense. So we are looking at the calendar and meticulously dissecting the calendar by day to make sure that we've offset each one of the channels. So that we have the expenses built into the structure.
And just lastly on the rent concessions and rent renegotiations that are comment that are occurring how much of the lower occupancy expense can you foresee having going forward.
Well the occupancy expense going forward.
Well ultimately the bill on the amount that we realize as we indicated our savings are roughly are we set a vigorous at this time.
All about 55% through that initiative.
What we're going to get in fiscal 2000 is the cash benefit.
The earnings benefit will be over the remaining lease term from accounting perspective, we'll take that.
Amortizes and so you're not going to see that immediately but you're going through the cash inflow.
Look the cash flow statement.
Thank you.
Thanks Dana.
Our next question today, cultural German Colberg or Jersey Research. Please go ahead.
Hi, everybody I've got a little bit lately, but I was wondering how you Oh, if you could talk to your inventory content I plan and if you think that it will be aligned with Cowen counterparty trends.
As we move in the back half and if we should look forward to move higher year over year. Thank you.
Good morning, Janet and thank you for joining.
Of course, we [laughter] we are confident.
In our inventory positions and we feel that we are well positioned for the expected back half. The man we are fueling the high demand categories in casual and we are also fueling selma to capitalize on the trend within the intimate apparel and loungewear say so the good thing is that during this whole.
Closure period, we did not Miss a product milestones that we were able to pivot the back half receipts to reflect the current customer sentiment.
Even that we'll just have one house, where there's more but we had a well poker.
Yes, Dan I welcome you to go onto the site and look at no I'll do I looked at a point I've looked at it off and then I see what you're doing.
I'm not the customer right now so I'm in mind sweatpants everyday so give me an idea of what we're saying.
Yeah, you know, we pivoted part of the changes that we made last Q4, and we're really not thinking about the white house brands, So singularly career and casual that we blend of the two lifestyles and put a lot of new fabrications in place I attributed to the new talent that we brought to the organization and thought leadership team brought.
Brought a lot of new washable net elastic waist really products that have ease that can take you all kinds of Vicki.
And and that's what you're seeing on the site. In addition to really growing the denim category and the t. shirt categories, but you're saying that reflected today in our in our Assortments and that was due to all of the changes. We started in Q4 that have just continue this year.
And how is the customer.
Caution around entering the store right now I know digital leading your business, what's your outlook there as we go forward.
No that customer sentiment has no sense may has really not not change you know she anxious to get in stores and to get back to speaking with her on her trusted associates and and we see that across the board. However, we do see in our data that the customer.
Follows Covance no. So ask cases have escalated in spike in hot Bob the traffic does recede.
And so that is something that we pay close attention to but the sense of anything are you seeing improvement and then in the space with a high some moderating now yeah. Yeah. Okay. Okay. Lastly, could you comment on the promotional environment and what kind of questioning the thinking there.
The promotional environment for the back half of the year, we are planning lots of slightly down to last year. We believe that our inventory positions are in the right place and experiencing no additional shut down for the future. We believe we are in a good.
Right inventory position, but a backup.
Hi, just wanted to say congratulations on the Pablo. Thank you. Thank thank you Jennifer.
Ladies and gentlemen. This concludes your question answer session. Although her Mccollum foods Barker remotely ordinances, let me follow works [noise].
Great I'd like to thank our associates for their flexibility understanding and dedication to our customers our communities and each other.
Especially as we navigate through this challenging time I'm extremely privileged to lead this company of product and customer obsessed associates and these special brands that offer women thoughtful solution that gives them confidence enjoy we are fortunate to have three distinct brands with loyal customers and unique growth opportunities are robust E commerce.
Its business strong real estate portfolio, a solid balance sheet and financial position and talented experienced team as an agile organization. A company is successfully navigating the challenges and becoming stronger and Nimbler. We have taken many actions to propel US forward. The continued enthusiasm of a customer for our brand.
And the financial Foundation, we have in place and our significant cost saving measures have positioned us to emerge a stronger company I'm. So excited about the future she goes up.
Thank you for the interest in our company and for joining US today, we look forward to speaking with you again in November for our third quarter call.
Thank you Maam, let's conclude today's conference call. We thank you all for permanent today's presentation. You remember all this work along rather wonderful day.