Q3 2020 Chico's FAS Inc Earnings Call
Welcome to Chico's Fas third.
Third quarter 2014 conference call and webcast.
All participants will be at which normally book.
Please note this growth is being recorded.
I would now like to turn the call over to day, but all of the true.
Well from <unk> and senior Vice President of Controller Mr. Robert Please go ahead, and good morning, and welcome to the Chico's and <unk> third quarter 2020, copper total Wally.
Well, we like and spine Archie at present and also joining me today.
From a refresh our third quarter release can be found on our website at.
At Chico's at the U.S. Dot Com under press releases on day real Investor Relations page today's call and that's why include forward looking statements regarding our current expectations assumptions plans estimates judge a bunch of and projections about our business and our industry.
Which speaks only as of todays date, you should not unduly rely on forward looking statements.
Important factors that could cause actual results or events to differ materially from those projected or implied by our forward looking statements are accident and our earnings release issued this morning.
Net interest and she filings and other comments that are made on this call.
We disclaim any obligations to update or revise any information discussed on this call.
Except as maybe required by law.
And with that I'll turn the call over commodity.
Thank you David and good morning, everyone.
We continued to see momentum in the business and the third quarter and we have taken definitive action and created US from financial Foundation at we believe the pairs and positions at a 2021 and beyond.
Specifically, we have accelerated our transformation to a digital first company.
Fast tracking several investment and innovation and digital technology, which are driving sales and higher customer engagement.
We significantly enhanced our liquidity and financial flexibility with our amended and extended 300 million dollar credit facility.
We nearly completed our comprehensive real estate review.
Obtaining landlord commitment of.
$65 million and rent abatement and reduction.
And we continue at the process of streamlining our organization and reducing our cost structure to support our business.
EBIT and I will offer additional detail and these actions during today's call.
Our business plan this year is to deliver improved quarter over quarter of formats.
And the third quarter, we again delivered on the subject of substantially enhancing our financial results over the second quarter.
Total sales improved nearly 15% and the third quarter and the second driven by continued strong digital performance and rebounding store revenue.
Our gross margin rate rose 740 basis points, reflecting greater full price selling on leaner inventory and leverage of fixed occupancy costs.
We strengthened our balance sheet with cash and cash equivalents, increasing nearly 21 million.
And so.
The only generated a 10 and a half per cent comp for the quarter.
First let's focus on our digital transformation.
18 months ago, we prioritize digital at the primary growth engine for all three of our brands.
Making major strategic shifts and investments in talent and technology to pivot to a digital first company and.
In March of this year, and our business became 100% digital overnight, we accelerated that transformation true innovation and state of the art technology enhancements.
Even with our stores now we opened we continue to generate double digit year over year digital sales increases.
At the digital first company. We believe we are competitively positioned to accelerate growth and gain market share and 2021 and beyond.
All three of our brands achieved solid digital sales growth year over year, so from a leading the way with of 67% increase.
Digital channel continued to feel total customer and new customer growth for the third quarter year over year digital customer count grew nearly 27% and conversion was up 170 basis points.
And what is it true success story Soma is now a digital first business supported by boutiques throughout the country.
We believe we can replicate the learning and success of Soma to our apparel brands.
Let me talk about some specific innovation, we have put in place that.
That we consider meaningful competitive advantages.
Style connect our digital style and coolconnect per customer with her style experts to receive personalized advice.
Year over year style, connex sales and once again more than doubled in Q3 and increased more than 40% over the second quarter.
In the third quarter, we added shop and look at the components of that connect which is generated increased engagement and units per transaction.
We will continually enhanced at school with additions such as ACIP recommendation.
We accelerated the formal launch of our personal cloud and feature my closet into the third quarter. After a successful soft launch.
Sales for this tool, which enables customers to augment their closet by coordinating with past purchases doubled from Q2 to Q3.
And we'll continue to expand its functionality to stock index.
Since launch the conversion rate of this new feature has been remarkable exceeding six times the site average conversion rate.
Here's an example of how these digital investments and neutral impact sales.
At Chico's associate reached out to her customer through south and that making a virtual appointment where she showed the customer at new products that coordinate with past purchases.
Resulting in a 2000 dollar sales this happy customer share I can't believe you know what's in my closet, I don't even know with and my closet and.
And she picked up of purchases curbside.
In the third quarter, we also successfully tested and rolled out social from the thing for all three brands social.
Social producing provide insight into real time customer shopping behavior, allowing appears to influence her purchases and they might be and the bidding room.
This feature allows customers to build confidence and creates urgency for customers to buy early read and show excellent conversion at all.
Oh price position to digital also incorporate mobile Pos eight <unk> search engine optimization and enhanced navigation touch points across all brands.
We have also accelerated the launch of new leading edge digital selling and fulfillment tool to drive greater customer demand and our online channel.
We were honored that each of our brands were recently named best online shop for 2020 by Newsweek building on our best online company designation.
We have recently made additional investments that are innovating the customer experience to drive greater digital sales across all of our brands.
In October we invested in new strategic relationships with leading technology companies, including sales force after pay and content stuck to further modernize and personalize the digital experience.
To better leverage our unified view of our millions of customers and their robust data that has been collected from more than three decades. We are partnering with sales force to help US track every omni channel customer journey and interaction.
And at every commerce channel create more engaging personalized and targeted marketing and messaging using predictive intelligence and adjusted marketing and real time based upon trends or customer action. This.
This includes leveraging our loyalty program, which has some of the highest participation rates and retail sales force a leading company driving CRM has a track record of driving double digit sales and productivity growth.
This holiday season customers have a new way to shop, the companys online boutique enjoying their purchases now and paying for them later with interest free installments using after pay.
Early read show, a meaningful increase and average order value as well as conversion and units per transaction improvement.
And finally, our commitment to deliver on the best overall customer experience, we and able to new analytical tools through content stuff and streamline digital processes to be able to read real time customer behavior and take action to continually optimize it from a path to purchase.
We continue to leverage our digital investments converting single channel customers to the omni channel customers.
As the average omni channel customer spends nearly three and a half times more and the single channel customer.
A quick note about our stores.
All of our boutiques were opened during the quarter and traffic and sales continue to rebound from month over month from each brand.
And version.
At the store level grew nearly 20% from last year, demonstrating that customers are responding to our product Kurt.
Curbside picked up and continue to grow and popularity expanding 50% from the second quarter.
Third quarter store productivity was nearly 60% of last year's sales and improvement over the second quarter performance.
The two thirds of our boutique located and outdoor center continues to outperform those and enclosed mall.
And we are continuing to monitor at local and state mandates for would do small hours and closures.
On the marketing front, we continue to build on our organic social efforts and participated and multiple partnership and virtual events throughout the quarter with several well known organization media partners and social Influencers to increase brand awareness driving engagement generate traffic and acquire new customers.
Our new marketing campaigns, and the third quarter, including marketing some of products to both Chico's and White house Black market customers. We saw this effort pay off.
Our marketing efforts are driving site and store traffic as well as new customers to our brand and we are retaining our newly acquired digital and store customers at a meaningful higher rate and last year.
In addition quarter over quarter spend for customers from both existing and reactivated customers is up.
We continue to be laser focused on our customer and elevate our product.
Customers are responding to current product and our best ideas of selling out.
At Soma, we are innovating and creating the most incredibly soft and functional fabric and products that are offering our customers and beautiful solutions style and comfort that are synonymous with the Brent.
Continual product newness and investments in pajamas, and the intimates franchise, and our expanding market share and driving results.
At Chico's White house Black market as our customers' lifestyle needs have evolved by both living and working from home, we have shifted our focus and colorful casual comfortable and versatile apparel at.
As we move into the holiday season inventories are positioned with uplifting gifting messages and whimsical colors and price.
We have the right products personalized service and creative marketing to drive sales during this important period Dave.
David.
Thanks Molly.
We entered fiscal 2020 with a solid financial foundation and.
And it has continued to improve partially driven by aggressive expense reduction as well at last commitments from meeting for rent abatements and reductions.
We ended the third quarter with 145 million of cash and cash equivalents.
Nearly 21 billion from the end of the second quarter, and we navigated through the third quarter without increasing debt levels and our credit facility.
Speaking of of credit facility and.
October we substantially enhanced our financial liquidity and flexibility and for the future like.
My closing on our admitted.
Other billion dollar senior credit facility.
With a five year term maturing and October 25, which.
Which replaced our 200 million dollar agreement, which was scheduled to mature and August 23.
We believe the new facility demonstrates the confidence our lenders have and our company and the sustainable long term success of our branch we do not currently expect to other access the facility this or next fiscal year.
As a result of the pandemic, we suspended rent payments beginning of April 2020 due.
Due to our temporarily closed stores and.
Of engaged at talk to your real estate consultant AG.
Okay, and GE Realty partners.
And assist us and restructuring our store leases.
And the last six months, we have renegotiated over 90% of of leases and our portfolio, resulting and commitments of 65 million at renovate much and reductions to date.
Cost of about 3 million and referrals to future years.
And bar these numbers have met our expectations.
One of cash basis, approximately 44 million of this amount is expected to be realized this fiscal year with the majority of the balance of expected to be realized and fiscal 21.
<unk> income statement purposes, these rent abatements and reductions will be recognized pro rata over the remaining lease terms.
During the third quarter, we permanently closed four additional locations and opened one store, bringing our net year to date closings to 31.
With seven more closings planned for the end of January 21.
At fiscal year end, we have closed approximately 125 locations since the beginning of fiscal 19, we ended the third quarter with 1300 and Tim boutiques.
As a result of our rent restructuring work, we have postponed and cancel certain closures based on favorable rent concessions received.
After the negotiations are complete we expect to maintain strong lease fleets of globally with nearly 60% of at least is coming up for renewal or kick offs, becoming available over the next three years.
We are holding our stores at higher profitability standards and will continue to shrink our store base and the future primarily as leases come due please.
Please kick outs are available or buyouts and make economic sense.
Two other improves from activity, we anticipate closing between 6% to 15% of our existing fleet over the next three fiscal years.
Let's turn now to the third quarter financial performance.
Net sales totaled 351.4 million up 14.8% from the second quarter.
Reflecting robust digital performance and rebounding store revenues.
Compared to the third quarter last year total sales decreased 27.5%, reflecting a decline of store sales as well and the impact of 63 net permanent store closures.
And the last 12 months, partially offset by a double digit growth and digital sales.
For the third quarter, we reported a net loss of 55.9 million or 48 cents per diluted share primarily reflecting the impact of lower store sales.
Our third quarter loss from further a six cents per share charge related to at $8.4 million pretax information technology and write off.
Gross margin and the third quarter was 22% of net sales a 740 basis point improvement from Q2, reflecting a higher degree of full price selling careful inventory management and improved leverage of fixed occupancy cost on higher sales.
[music].
Note that third quarter occupancy costs at component of gross margin does not reflect meaningful savings from rent abatements or reductions.
As these reductions are being recognized pro rata over remaining lease terms.
I am pleased with how swiftly arching pivoted, our assortment and has managed inventory.
We believe our inventory, which is down nearly 8% from the prior per quarter apart.
The per year third quarter is currently and properly balanced.
Entering the fourth quarter.
Compared to the second quarter of this year.
Third quarter, EBITDA and expenses increased 45.8 million.
Primarily reflecting payroll costs related to reopen stores ready.
Restoration of associates salaries from temporary pay reductions from.
Herbal and associates, returning to work and the $8.4 billion pre tax impairment charge related to the technology and write off.
Compared to last year's third quarter expenses were down 27.5 million assets.
Decrease reflects our ongoing expense reduction initiatives to align our cost structure with sales, partially offset by the impact of the 8.4 million dollar technology write off.
And your provisions of the cares and act, we realized a $38 million cash benefit and the third quarter.
Related and recovery of previously page federal income taxes.
Additionally, our balance sheet reflects a $54 billion receivable related to the recovery of federal income taxes paid and prior years.
The company also expects to realize a 12 million dollar cash benefit ratably. This fiscal year related to the deferral of employer. So some pretty tax payments that were repaid and future years.
We are continuing to carefully manage cash flow, our financial position and liquidity are being bolstered by strong digital performance across all brands sales.
Sales at opened at retail stores.
And at a significantly leaner expense structure that better align costs with sales.
Additionally, our cash position at the quarter was approved by lower cash rent paying much from lease up a bunch of and reductions.
Continued uncertainties surrounding the current environment make our future performance extremely difficult to predict.
So we are still unable to provide forward looking guidance.
We believe the actions we have taken combined with our solid financial position increased flexibility under our amended credit facility.
And our competitive believe physician brands have positioned us for 2021, and beyond and will enable us to emerge a stronger company.
Ill now turn the call back over to the operator for Q.
Thank you we will now begin the question answer session.
You asked the question group of stores and one of the Touchtone phone.
The majority of questions. Please first moving too.
And anticipation of a consideration of the others. Please limit yourself to one question.
Today's first question comes from smoother soon and B. Riley. Please go ahead.
Hi, good morning, nice job, managing through and really tough environment and.
I'm curious just on the casual product that you're mixing into chico's and White House I guess I'm curious how much have you been able to increase that mix versus historically and then also.
And how are you reaching out to consumers to I guess, let them know that theres more casual product in stores to get them back and there. Thanks.
Good morning, Susan Thank you so much for the earnings for the question.
Sure. So we started working on the fourth quarter product in March and April. So we were able to make some significant changes to the assortment and so youre seeing that and you're certainly seeing that and the percentage of the amount of gift inventory that we have and both of the apparel brands.
How were telling customers and one is we enjoy a high loyalty penetration and all of our brands. So we leverage and lean and heavy on the high penetration of loyalty customers through our catalog and to our marketing outreach and both social and on as well as our of our catalogs to be able to show and.
At the expression changes have then in addition to utilizing style connect and not one on one customer engagement from our sales associates in stores and also customers that they know and im to be able to share the changes and the assortment.
Great and then for holiday I'm curious, how you're managing the holiday different than last year, given the capacity constraints and the stores and then also are you expecting this holiday to be more promotional than last year and then also just on the gifting front it sounds like you're very focused there.
Should we expect.
Similar penetration of gifts versus last year.
And so in terms of the Assortments for holiday and how we're thinking about the gifting number one.
And gift Assortments are actually bigger than last year, and white house in particular in chico's and a little bit bigger and some of it is X and quite a bit bigger and based upon how we thought through gifting and and what we think the customer and we'll be giving and this time period as it.
As it relates to the amount of traffic in stores I'm pleased to share that so far and with all of the moving parts on the constraints that are happening by state and in managing traffic, we are not experiencing delays in the lines and but we do have a line busting system.
By using style connect to be able to make sure that we are serving our customers and so we are navigating each day and in this changing environment.
Great and then just on the promotional environment for holiday, what you're expecting yes, sorry about that we are at the end.
We are not planning to be from more promotional than last year and so right. Now we are clear plans are flat to last year from Promotionality and all three brands.
Great very helpful. Thanks, So much good luck in fourth quarter. Thank you.
Our next question today comes from rocks and Mark.
True partners. Please go ahead.
Well our book.
Gross profit was one of of course and comes from day, one tolls and told you, but as you review of please go ahead.
Good morning, as you think about the impact of delivery expenses moving to a digital first environment. How does one how are you budgeting delivery expenses this year at growth.
Good day, especially given the shipping surcharges that are out there and also on the savings of $235 million at 23% is impressive what buckets are being adjusted and with the rent expense is at an additional opportunity and what could that add to the expense stream.
Okay. Thank you.
Sure great questions starting with shipping.
The other pandemic as you mentioned has really increased market demand for shipping as more customers are pivoting and shop online and of like.
Like other retailers, we are seeing higher pricing, but we have factored that into our fourth quarter plans and our plans for next year as well.
And we are to the extent possible adjusting and also navigate their cost of mitigated where we can but.
We're moving forward and it's in our plan.
And so low.
The first question.
The second question related to.
And expense reduction so that sort of very high value of the biggest component yes.
Yes still labor.
[music].
Looking at it.
Where we are universally we took out a significant pal of out of labor.
And last spring, we did a restructuring of our corporate organizational structure.
As well and the field today, we're still.
Bracketing below.
Historical levels of payroll.
And to fill as well.
Other cost components include marketing our marketing in the third quarter is Daniel first.
Versus our plan.
You asked about risk specifically you are not seeing any meaningful impact of the rent concessions and our PML at this time.
Data is from is going to be on a go forward basis, because we're taking at ratably over the lease term we treated these other abatements.
And reductions as lease modifications and so thats a go forward benefit versus a sub and you're seeing right now.
Got it and then just lastly, how did you exit the third quarter in terms of sales and any commentary on how November at starting for you.
And no November I would say is as I mentioned in the last call that and tuck in and about the stores specifically that as there are rising cases and co bid at the store traffic.
Has followed all year and we are not seeing a change of a change in that and the good news is that as stores have opened and at the third quarter and were opened the whole quarter. We did not lose traction digitally and we were able to maintain digital growth in all three of our brands on and improvement.
Which is which we are excited about and why we pivoted to so many investments in the third quarter and that would get at that time.
Additional sales and from the customer as we move forward into fourth quarter and beyond. So we are we are robust and bullish about the traction that we are getting and our digital tools to be able to manage whatever comes in the next quarter.
Thank you.
And our next question today comes from reduction of loan true partners. Please go ahead.
Great Good morning.
My question is is really a follow up to your comments on being a digital first company and I'd I'd love to hear about what that means for your longer term outlook and strategy. You know in terms of how you're thinking about the store fleet I know that you mentioned six of 15% range.
Section and stores over the next few years, where where could that end up and you know and how you see margins evolving at the total company you know based on where they are for digital versus where they are for stores.
And then EBIT and then also from a customer account perspective, how you think of that digital first strategy is going to impact your ability to at to drive new customer growth I know you talked to at 27% increase in digital customer count which is terrific.
Many of the what percent of those were existing customers already at stores versus new customers across your brands. Thanks a lot.
Thank you Roxanne and so let's start with the.
Investments that we're making and digital and being a digital force company.
So we thought long and hard about the $8 million write down that we had to take on on our digital tools and we did that specifically to be able to pivot dollars and investments into tools that would be able to more immediately impact our digital business and to think about our business as the.
Customer as the channel versus where the actual purchase and whether that transaction is online or in store. That's important because of the interaction that we are seeing and the example of that I gave of the customer that was so delighted we actually knew was in her closet and she didn't know.
Is that we can meet her needs wherever she wants to shop with us. So the each one of the tools that connect my closet, and social proofing and all of those things are things that we are seeing traction on that should continue to gain traction whether we started at soft launch in Q2, and we saw improvement into cash.
Three and so we feel that those investments are going to continue to serve us well and that not only of the transaction online at the customer themselves can drive, but it also can be and aided transaction at the sales associates in stores can provide for consumers and that's why I mentioned that is so incredibly.
Important that and we have this large customer base that is single channel and a lot of customer that shopped us online and a lot of customers at shopped us and store at that consumer that shops. Both channel is three and a half times more valuable and and part of our strategy on how we're going to continue to get growth.
New customers and Roxanne you mentioned that in terms of on each one of our brands is acquiring new customers across the board actually seeing that and these new customers that are coming into us are returning at a faster rate than they did last year, which we believe.
As an indication of our assortment and the stickiness of the of all three of our brands. In addition to that we are seeing the customers that are there a little bit younger and and overall overall age but they are similar profile that we've had in the past. So we just see a broadening of the new customers that are coming to our brand.
Just to add on that a little bit rocks and that's the reason why the we believed at the new relationship with sales force is so incredibly important that we're sitting on this mountain of data.
From all of the customers that we've had and we've been collecting over the years that to be able to more actively and I use the customer data and and speak to her in the past purchase behavior that she has shown and to be more specific and personalized and our messaging will be a view.
Early on something very positive for us one from a a relative of standpoint, but also in terms of the customer responsiveness.
Great. Thanks for all of the color and best of luck for holiday. Thank.
Thank you at Cowen.
And next question today comes from Marni Shapiro.
Please go ahead.
Hey, guys.
Got it and the case I forget the Chico's stores look absolutely outstanding for the holiday completely amazing to me.
Probably could you talk a little bit there's been obviously, a significant shift to direct to consumer and a very short period of time so.
So can you talk about your return cadence prior to that with your direct to consumer shopper across the brands and then what has it looked like since the shift has happened and how did you plan for that for the fourth quarter.
On you mean, Marty of this shift from the customer that's only shopping in the store channel.
Well I think the shopper.
Yeah, well as as people move more online how have you seen your returns.
Pop up because she is normally shopping and the store and now she's shopping online.
And how we manage that yeah, and heavy mantra and how do you think about it from fourth quarter, which is always a very different animal anyway. Yeah. On you know we felt that it was incredibly important in the second quarter. When stores were closed that it wasn't fair to penalize customers and that weren't able to get.
At back into stores on to not be able to return. So we we wanted to make that customer first decision and accommodate consumer so we extended our return a window and I in the second quarter and we got a lot of positive feedback from customers at that made them feel at ease and made made them have a lot more trust and organization as far as a person.
End of returns and to each one of the brands, we've not seen a change it's really stayed flat and to where it has been in the past and and so we are we have not seen and increase in any three of the brands during Q2 or Q3.
That's fantastic.
And then kind of just follow up I know you said that you've had a pretty significant increase in buy online pickup and store and Curbside, Inc, especially if it is a significant part of the sales now is it into the double digit percentage of your sales at this point.
Oh.
We see it growing month over month, our largest month was October.
In terms of of Curbside and we are.
And we are marketing it and because we believe that you know and for the fourth quarter time period and back to the you know one of the earlier questions about the.
Escalating challenges for shipping that we want to make sure it's convenient for customers to be able to pick up packages also in the last 10 days when done and they want to insurance to be able to pick up their packages and with two thirds of our fleet being and outdoor centers at makes curbside, very easy and and seamless for them to to pick up their packages. So.
We are we're hopefully and the momentum that we we got from Q2 to Q3, where it's doubled and in the quarters and the and momentum that we saw in October is going to continue and just become a part of weighted of business going forward.
That's fantastic best of luck with the holidays stores really looks fantastic. Thanks.
Thanks morning.
And ladies and gentlemen, this concludes the question and answer session.
Moving to turn the call back over of only one of them from closing comments.
Thank you so much Rocco and thank you everyone for coming this morning, I am extremely privileged to lead this company of product and customer obsessed associates and these three very special and distinctive brands that offer when and thoughtful solution and give them confidence enjoy.
We are fortunate that each of our brands have unique growth opportunities that we have at and we have a very robust and growing digital business of strong real estate portfolio of solid balance sheet and financial position and a talented and nimble and experienced team I believe the actions we have taken and continue to take our establishing a solid foundation to thrive.
In the years ahead and create meaningful value for our shareholders and excited about the future of Chico's Fas before I conclude my remarks and want to offer a special thank you to all of our associates, especially those on the front lines and our distribution center and in our stores, who will assure our customers have terrific experiences during this disk.
Corruptive holiday season, I hope, everyone has a wonderful and safe Thanksgiving. Thank you so much for your interest and chico's at the EPS and for joining US today, we look forward to speaking with you again in February of our fiscal year end call.
This conference is now concluded. Thank you for attending today's presentation you may now disconnect.