Q4 2020 Chico's FAS Inc Earnings Call
Welcome to Chico's, Fas fourth quarter and fiscal year on 2020 conference call and webcast.
All participants will be on listen only mode.
Please note this call is being reported.
I would now like to turn the call over to David Oliver Interim Chief Financial Officer, and senior Vice President controller.
Sure Oliver. Please go ahead, good morning, and welcome to the Chico's Fas fourth quarter and fiscal year 2020 conference call and webcast <unk> Lingus line of our CEO and President also joins me today.
For reference our earnings release can be found on our website at www Dot Chico's Fas Dot com and under press releases on the Investor Relations page.
Today's comments will include forward looking statements regarding our current expectations assumptions plans estimates judgments and projections about our business and our industry.
Which speaks only as of today's date.
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 included in our earnings release issued this morning, and our SEC filings and on the comments that are made on this call.
We disclaim any obligation to update or revise any information discussed on this call except as may be otherwise required by law.
And with that I will turn the call over to Molly.
Thank you David and good morning, everyone.
Although 2020 and pandemic uncertainty created a sales environment that was challenging as reflected in our results. We successfully navigated this extraordinary landscape.
Also creating a solid foundation that we believe positions on our return to growth in 2021 and the years ahead.
We rapidly accelerated our transformation to a digital first company fast tracking numerous innovation and technology investments, which drove higher consumer engagement and year over year digital sales increase of nearly 20%.
Led by Soma digital sales increase of 72%.
As a brand Selma generated.
<unk> sales growth for the last seven months in fiscal 2020.
And according to the NPD group for the 12 months ended January 2021 zone.
<unk> gross exceeded that of the U S apparel market.
The market leader for non sport bras and panties and was in the top five brand overall in the sleepwear market.
I am also pleased to report that Soma sales for the back half of fiscal 2020 were the highest in the history of the brand.
We believe this is compelling evidence soma is well positioned to accelerate in recent market share gains.
Our enhanced marketing efforts drove traffic as well as new customers to our brand and newly acquired customers were retained at a meaningfully higher rate in fiscal 2019.
The average age of on new customers dropped 10 years for Chico's and eight years for Soma.
On the average age for the new White House Black market customers complemented the current target customer reinforcing the run rate for all three brands.
Our new apparel collections resonated with customers, we relaunched <unk> energy in Chico's with new fabrication styling and marketing and also increased on gifting assortment in key item debt, which showed positive results.
White House Black market, we pivoted to capitalization and launched Lux weekend, new runway leggings and a focus on denim that customers love.
We significantly enhanced our liquidity and financial flexibility by amending and extending our credit facility to 300 million and ended the year with a solid cash position.
We obtained landlord commitments of $65 million in rent abatements and reductions and further rationalize our real estate position by permanently closing 40 underperforming locations over the last year.
And we substantially streamlined our organization and permanently reduce our cost structure to more efficiently support our business day.
These efforts resulted in approximately $235 million of annual savings in fiscal 2020, or 22% greater than our original plan.
Chico's Fas is a company of three unique brands and we believe we are poised to take market share in each of these businesses.
When the pandemic related consumer Pos lifts.
We are optimistic about store traffic rebounding as vaccines become more widely available and have in fact seen this correlation proved out.
We believe Soma in particular has the opportunity for significant growth.
Today, the intimate apparel and loungewear market is a nearly $7 billion business in the U S and is forecasted to reach over $11 billion by 2025.
Boneless compelling position in intimates.
And it's seven months of comparable sales growth give us confidence that Soma is on track to take a meaningful piece of this market and become one of the largest intimate apparel brands in the country.
At the same time, we believe there is opportunity to optimize and strengthen both chico's and white house black market.
The disruption in the competitive set has left white space that we can strategically take.
At Chico's, we expect to reinvigorate growth through loyalty community and design.
At White House Black market, we expect to drive consumer enthusiasm for the brand by a focus on fabric fit and fashion that meet our customer where she is in her lifestyle today.
In order to maximize the opportunities in each of our brands. We are targeting five key focus areas for 2021.
First.
Continuing our ongoing digital transformation.
Second.
Further refining product through FID.
Quality fabric and innovation.
Third driving increased customer engagement through marketing.
Number four maintaining our operating and cost discipline.
And finally further enhancing the productivity of our real estate portfolio.
Allow me to elaborate on each of these.
Number one continuing our ongoing digital transformation.
Over the last year and a half we prioritize digital as the primary sales channel for all three of our brands, making major strategic investments in talent and technology to pivot us to a digital first company.
We are enabling her to shop, how she chooses in a way that is personalized and simplified across every touch point on her shopping experience.
Innovative launches that we consider meaningful competitive advantage include style connect our digital styling tool my closet, a personal closet feature and social proofing.
Each of these tools have gained traction and driven engagement and conversion.
In the fourth quarter style connect orders nearly doubled from last year.
We have successfully enrolled 42% of our active customer file in style connect representing almost 3 million customers.
Our prioritization to digital also incorporates mobile Pos AI 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 tools to drive greater online customer demand.
We will be rolling out more innovations in 2021, including an optimized mobile first experience.
We continue to leverage our digital investments converting single channel customers to be omnichannel customers.
The average omnichannel customer spend is nearly three five times more than a single channel customer.
Number two further refining product through fit quality fabric and innovation.
At each of our brands, we are laser focused on our customer continually elevating our products. So we can capture the greatest market share.
At Soma innovation is a core.
While beautiful solutions that extend to wellness and comfort are synonymous with our brand.
Our products serve our customers lifestyles, and promote health, including a great night sleep and lounge wear to live in.
We fueled our bra and panty franchises and are positioned to further expand on market share and drive results.
A growing customer base with the most meaningful growth in our under 34 age group.
As a result of more inclusive branding and evolved product assortment.
To continue capturing a broader audience, we will integrate our digitally native and younger telltale brands onto the Soma site.
Which we successfully tested in the fourth quarter.
At our apparel brands as the world shifts toward comfort and work from home, we see increased interest in our core franchises of effortless chic pants and tops at Chico's.
And denim with plenty of stretch legging and feminine tops at White House Black market.
As women emerge from their homes and continue to reinvent their wardrobes, we have developed improved fabrics and integrated new technology and comfort features to adapt to her needs.
Number three driving increased customer engagement through marketing.
Our goal is to increase brand awareness drive engagement generate traffic and acquire new customers through continuous marketing improvement.
We are especially excited about our partnership with sales force, which enables us to better leverage the unified view of our millions of customers.
And act on our robust customer data that has been collected for more than three decades.
We can track every omnichannel customer journey and interaction connect every commerce channel create more engaging personalized and targeted marketing and messaging using predictive intelligence and adjust marketing in real time based on trends or customer actions.
The sales force relationship also create the data foundation to support the rollout of our enhanced loyalty program in the second half of this year.
And our loyalty program already has some of the highest participation rates in retail at over 90%.
We also have some of the most loyal and long tenured customers in retail our chico's customers average well over 12 years with us.
White House Black market customers average nine and Soma customers average over six demonstrating we have the ability to retain new customers for a very long period of time.
We will continue to elevate our marketing efforts with more digital storytelling the use of social influencers on to build upon our organic social efforts and why to buy communication.
Number four maintaining our operating and cost discipline.
We will continue to improve our sourcing logistics and operational processes to drive efficiencies and speed and lower cost.
We have teams focusing on a wider range of areas from further diversifying the supply chain lowering dependence on agents, increasing the use of three D design and streamlining outbound shipping and ship from store processes just to name a few over.
Over the last year, we have reduced our supplier base by 20% and agents currently represents 32% of the business and we expect to lower that to about 18% by 2022.
And finally number five further enhancing the productivity of our real estate portfolio.
Stores continue to be an important part of our Omnichannel strategy and digital sales are higher in markets, where we have a retail presence.
Soma is certainly a great example of that while Soma is now a digital first business. It is supported by 259 boutiques.
In alignment with driving Soma to be one of the largest intimate apparel brands in the country. We are excited about opening soma shop in shops in a number of chico's boutiques.
We have opened 10, so far this year and we will open 40 more by early May.
On marketing data indicate that Soma in Chico's in store cross shop opportunities are abundant.
And we believe the shop in shop format will deliver meaningful brand awareness and generate both store and digital sales in markets, where we are underpenetrated.
In addition, we plan to convert eight white house black market locations into Soma boutiques.
We will also continue rationalizing and tightening our real estate portfolio, reflecting our emphasis on digital and our priority for higher profitability standards.
We are currently driving store sales with less inventory and increased productivity.
We have closed 40 underperforming locations since the beginning of fiscal 2020 and.
And ended the fiscal year with 1300 into boutiques.
We will continue to shrink our store base to align with these standards, primarily as leases come due lease kick outs are available or buyouts make economic sense.
We have strong lease flexibility with nearly 60% of our leases coming up for renewal or kick out available over the next three years.
To further improve store productivity, we anticipate closing, 13% to 16% of our remaining store fleet over the next three years.
With 40 to 45 of those closures occurring in fiscal 2021.
The vast majority are expected to be mall based chico's and white house black market stores.
This mean from the beginning of fiscal 2019 through the end of fiscal 2023, we will close up to a total of 330 stores.
Well ahead of our original multi year closure target of 250 stores.
Now, let me turn the call over to David to update you on our financial performance.
Thanks Molly.
Balance sheet remains solid.
We ended the fiscal year with one other volume total cash on cash equivalents after paying $38 million in the fourth quarter results.
As we navigate in the fourth quarter without increasing debt levels on our newly amended credit facility, which matures in October 2025.
As you recall last year, we renegotiated over 90% of our store leases, resulting in commitments of $65 million and rent abatements and reductions.
On a cash basis approximately $44 million on these savings were realized in fiscal 2020.
With the majority of the balance expected to be realized in fiscal 2021.
This is $65 billion represented about 45% of our annual rent expense, which we felt was a reasonable request at the time.
However, with the effect of the pandemic now extending well beyond our original expectations.
We are watching phase II of our lease renegotiation process.
Going back to rely on <unk> for additional reductions.
Phase two will focus on the continuing COVID-19 impact on our stores.
We will again work with AMG real estate partners to obtain what we expect will be meaningful rent concessions.
We will provide an update on this initiative during our first quarter earnings call.
In the fourth quarter, we permanently closed eight stores, bringing our net year to date closures to 39.
As of fiscal year end, we have closed 123 stores since the beginning of fiscal <unk>.
Turning to fourth quarter performance.
Net sales totaled $386 2 million compared to $527 1 million last year.
This $26 seven decrease reflects a comparable sales decline of 24, 5%.
As well as the impact of <unk> 39, net store closures on a year.
Partially offset by a double digit growth in digital sales.
For the fourth quarter, we reported a net loss of $79 1 million or 68.
<unk> per diluted share, which included $35 9 million or 32 cents per diluted share.
Significant after tax noncash charges.
As outlined in today's release.
The majority of these charges related to a $32 $1 billion on 28 cents per share deferred tax asset valuation allowance.
Gross.
And on the fourth quarter was 19% on net sales compared to 32, 5% last year.
The rate decline, primarily reflected lower maintain margin and our apparel brands.
On the deleverage of fixed occupancy cost.
Or apparel maintained margin rich primarily reflected the impact on declines in average unit retails.
With higher sales driving promotional activity and increased markdowns mix versus last year.
Also keep in mind that fourth quarter occupancy cost as a component of gross margin.
Does not reflect a meaningful savings from rent reductions as these reductions are being recognized pro rata over remaining lease terms.
I am pleased with how swiftly our team pivot.
Our assortment and managed inventory we believe our inventory is current on properly balance with the influx of new seasonally appropriate receipt.
We ended the year with inventory sale over 17% on the prior fiscal year.
And weeks of supply are substantially less than last year.
More importantly, our inventory is appropriately targeted.
Apparel inventories are down over 20% in Soma inventories are up 2% year over year.
As we look ahead to the first half of fiscal 'twenty. One we are planning the year over year apparel inventory is down more than 30%.
And so on inventory over 30%.
As we continue to capitalize on the momentum in this rapidly growing business.
SG&A expenses for the fourth quarter totaled $136 2 million.
On improvement of $48 million from last year.
Reflecting our ongoing expense reduction initiatives to align our cost structure with sales.
The effective fourth quarter tax rate was a provision of 24% compared to a benefit of 21, 6% for last year's fourth quarter.
The current year effective tax rate, primarily reflects the deferred tax asset valuation on oil charge.
Partially offset by the favorable rate differential due to the benefits provided under the cares Act.
The fourth quarter valuation allowance is on non cash charge as a result of ongoing pandemic related uncertainties surrounding future realize ability of the related deferred tax assets.
Our financial position liquidity are being bolstered by strong digital performance across all brands retail store sales and a significantly leaner expense structure.
That better aligns cost for sales.
In addition, our fiscal year end balance sheet reflects a federal income tax receivable of approximately $55 million that we expect to realize on the second quarter on fiscal 'twenty one.
Turning to our outlook.
Given the ongoing market disruption caused by the pandemic.
And related uncertainty on timing and extent of the market recovery, we are not providing specifics fiscal 'twenty one forward looking guidance at this time.
However, we believe it would be helpful to have a view into our planning for the coming year.
And on providing color.
At this time, we expect to benefit from the COVID-19 vaccine rollout, particularly given our customer base and are planning for consolidated sales trends to improve in the back half of the year.
As Mollie noted we are seeing traffic trends improve in areas, where vaccines are becoming more widely available.
We're planning purposes consolidated sales trends for the first half of the year are expected to be largely in line with our reported fiscal 2020 results.
Looking at each brand. We expect continued strong performance on Soma with performance at Chico's and White house consistent with market expectations.
In addition, we expect our ongoing investment in the digital channel to deliver continued sales growth.
We expect cost savings realized in fiscal 2020 to be maintained in fiscal 'twenty. One we are continuing to implement supply chain efficiencies and intend to maintain stringent inventory controls.
With fiscal 2021 first half inventory is planned down roughly 30% to last year.
These actions are expected to deliver significant improvement in current margin levels.
We believe the actions we have taken combined with our solid financial position.
Increased flexibility under our credit facility.
And our competitively positioned brands and <unk>.
US to emerge as a stronger company in 2021 and beyond on.
Now I'll turn the call back over to the operator for Q&A.
Thank you.
This time, we will be happy to take your questions.
To ask a question you May Press Star then one on you touched on from there.
Using a speakerphone please pick up on your handset before pressing the keys.
Drawing a question. Please press Star then two.
The interest of time into some rich to others. Please limit yourself to one question.
And today's first question comes from Susan Anderson with B Riley. Please go ahead.
Hi, good morning, Thanks for taking my question.
I guess quick question on your guidance for sales for the first half to be flat is that I guess consistent across the first quarter and second quarter are there any differences you're expecting there and then also with the stores now.
And in first quarter versus last year I think they were shut half the quarter are you expecting chico's and white house could be down or flat and then it sounds like you expect soma to be positive and I'm. Just curious have you seen yet as maybe some of your customers have started to get vaccinated have you seen them come back to the storage yet.
<unk>.
Good morning, Susan what we are in terms of our outlook. What we're saying is that our trends are in line with what's happening in the market. So in other words, yes, we are definitely seeing that as before where we followed the virus and the traffic followed the virus. We are now seeing the inverse.
<unk> net traffic is following the vaccine so in areas, where there is a for our target customer. The majority of the people that are vaccinated. We are seeing the improvement in traffic. So we believe that traffic and sales will continue to follow that trend line as it did in 'twenty.
And so that's how we're looking at sales for the first half of the half of the year in terms of your question on Soma, We believe that the runway that we've had in Soma and the investments that we're making and the inventory will continue to pay out greater than the market trends that have that we have in front of us.
Great. That's really helpful. Thank you and then just if I can add a follow up on gross margin how much of that deleverage was occupancy in the fourth quarter versus the maintain margin and then can you talk about the puts and takes you see for first quarter. It looks like your inventory is pretty lean and I think.
You mentioned that first quarter. It can be down 30. So are you expecting maintain margin to improve year over year.
Looking at the maintain margin occupancy cost was.
On the material driver of the deleverage.
Total rate, but we also had a few other items that impacted the number.
What I would call out would be the promotional activity moving through inventory as well on shipping costs like other retailers, where we are incurring higher shipping prices.
With the increased market demand for shipping as more consumers pivot shopping online.
On the port delays.
More specifically when you look at the fourth quarter with the port delays have required us to flip some goods from.
Two are from vessels to meet demand.
The combined increase of those escalating costs in the fourth quarter was approximately $7 million, but we are taking action to mitigate the impact of that moving forward, but do expect our shipping cost and fiscal 'twenty one to remain higher.
And are you.
But we do go ahead margin, we do expect margins to be better because our inventories are very lean and so we expect to be less promotional in the apparel brands.
We were flat in promotion in Q4 in Soma, and we expect to be less promotional in the apparel brands and margins to improve.
Great and just on the Port delays are you expecting an impact in first quarter with or are you seeing late deliveries or were you able to manage around that.
We've been closely monitoring the supply chain, we've had no cancellations from our suppliers we've had a.
We've paid a little bit of a premium from vessel space and cargo space in order to ensure our consistency of getting goods to the U S. The delays have been at the port on.
On consistently out of the La Porte, we're now starting to feel a little bit of delays out of the Savannah port as well on.
We've made decisions, where we've needed to drive sales on flipping from vessel to are mostly in particular in the in the Soma brand and we've adjusted floor sets and marketing based upon some of the delays that we've experienced a week, we literally have a weekly meeting to stay close to the issue and we're confident that we have the impact of <unk>.
And our sales.
Great. That's helpful. Thanks, So much good luck this year.
Thank you Susan.
And our next question today comes from Marni Shapiro with retail tracker. Please go ahead.
Hey, guys amazing.
At some of the store something truly amazing.
Just a follow up on that conversation about the freight costs and the flipping of the floor sets and everything on the marketing have you had to incur costs to get all of this done or.
Or what are you doing it on the fly you hadn't planned you hadn't planned too much. So you didn't have to undo and redo.
We have we did have to incur costs in terms of error for the fourth quarter and.
And most of that was to drive some line and to drive the gifting for the for just the apparel brands and when following floor set it's hard I'd say on average about a two week impact.
On versus where we were originally planning sets too to be customer facing and made sure that the assets followed the inventory on.
And are on.
Mining closely to make sure that they need the product and the marketing is aligned.
Okay, so, but there hasn't been on incremental cost to the marketing or to the changes you've made the floor set is more of the freight costs that really incremental correct.
Okay and then just also a follow up you've talked a lot about the store the shop in shops on Soma I've seen two of them being built your associates were shaking with excitement.
It was so exciting but are you going to open any standalone soma stores as well because I don't know if that came through on the call today.
We've identified eight white house black market stores, where it makes sense, because we want them to soma.
So those are the first that we've identified in addition to the 40 other shop in shops that we have rolled out by May.
In Chico's locations and we are excited to report that the 10 initial shop in shops are beating our expectations.
That's very exciting and then one last follow up it sounds like okay, if I could sneak it in I.
I guess, how are you thinking about the balance of product at White house, because in particular with your stores I actually I don't even know cause chico's was so hard hit too because that customer, but the white house customer was going to white house to buy out which go to the office and then outfits to go to bridal showers and events and parties and graduation.
None of which happened as we start to step back into all of that how are you.
How are you planning to re layer in the dresses and all of that so you don't get caught with.
All leggings when she's looking for dresses, but all dresses when she is still looking for leggings like how it what's your thought around that.
We are maniacally listening to our customer we have a every other week conversation with our customers to understand what's happening in her life.
And how she is thinking about the coming months and maybe events since she's starting to think about fantasy participating and again. In addition to that we are staying very close to failed searches online as addition to Google search.
And starting to see some activity where she is starting to look a little bit more aggressively even though it's down significantly. So we have positioned product in the pipeline. So that we can pull triggers when she is ready, but and we're also using the U S data on when people are getting vaccinated.
And we're gonna have to make some day, we're gonna have to make some decisions and just in terms of when she's gonna open back up again, because we feel that the closure on the reopening on probably gonna be a swift. So that timing is Ah is critical for us to stay close to.
Fantastic Best of luck guys. Thank you marni.
And our next question comes from Dana Telsey with Telsey Group. Please go ahead.
Everyone. As you think of the rent abatements, which were considerable in 2000 $20 million to $65 million, what is coming up in 'twenty 'twenty, one could it be as significant in 2021 as compared to what you achieved in 2020 and then when you think about digital how are the digital margins given.
As it is scaling is there any synergies that you can get on how do you expect it to be to be in 2021. Thank you.
Thank you Dana I'll, let David take the rent Abatements, and then I'll take the margin.
With respect to renovate much.
We are now in the planning stage of a phase two.
Launching next week.
But.
Looking at.
Looking at what our plans are at this point.
Oh.
Yes.
Looking at look at our plants on point, we're really working with AMG, we think it will be meaningful savings moving forward.
We have not put a number to it.
Publicly at this time.
We'll update you on the first quarter call.
But we will be launching the next week.
Yeah, Dan on when we looked at the original work that we did with AMG you know at the time, we thought there was only going to be about a disruption in a quarter of the year. So that was what we thought out to negotiate from our on.
Landlords and we're successful to achieve that as the.
Stores are opened we all know they're not normal they are opened but they still have redo.
Reduced hours they have less inventory they have social distancing guidelines you know so there is still the.
The stores are not operating as they normally would be even though they are open. So we felt that it was important to go back since the original timeline, we expected to only be you know a quarter of the year has lasted actually still through till now and that we're looking at those social distancing guidelines and the reduced hours to continue through the spring season.
And why we felt confident that we needed to go back as the situation was not normal to go back to our landlords since the situation has been longer than the quarter than we had expected in 2020.
I don't expect it to be material to the levels that we had last year, but material enough that we wanted to launch a phase two.
Thank you.
In regards to the digital margins on the digital margins in Soma are encouraging and we feel confident that we've built and strategically engineered a strategy that didnt happened by Happenstance you know we went after a.
Three year strategy within Soma, because we saw the market share away before Covid started and materially wanted to go after owning the intimate apparel space, we made strategic decisions to eliminate categories within the business and drive those some of those which included the launch of lounge, which we had in the pipeline before COVID-19 even.
Even came into impact. So we are really excited about how we were able to drive the digital margins in the Soma brand and confident that we have a playbook to mimic within the apparel brands.
The pause within Covid starts to lift and she starts to get out of the house.
Thank you.
Youre welcome.
Thank you. This concludes our question and answer session I'd like to turn the conference back over to Martin for closing remarks.
Okay.
Thank you so much Rocco we are a company of three unique brands.
Each with well defined competitive advantages and unique growth opportunities.
I am encouraged by our results and bullish about our company's future. The Soma increase with strategically engineered and I have every confidence in the opportunity in all three brands as the Covid pause lists.
Our vision to be a digital first company customer led company building a larger more engaged customer community, we have a talented and nimble leadership team and lean organizational structure, our balance sheet and financial position are solid and 2021. Our goal is to build on our strength and execute on our five key.
Focus areas to maximize the opportunities in each of our brands and create meaningful value for our shareholders.
Thank you so much for your interest in Chico's Fas and for joining US today, we look forward to speaking with you again in June for our first quarter call.
Thank you and ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines.