Q1 2021 Chico's FAS Inc Earnings Call
Welcome to Chico's Fas first quarter 2021 conference call and webcast all participants will be almost normally boat.
Please note this call is being recorded.
I would now like to turn the call over to Dave at all of our interim CFO and SVP for sure. Mr. Oliver. Please go ahead Sir.
Good morning, and welcome to the Chico's Fas first quarter 'twenty, 1 conference call and webcast.
All of the Lincoln Stein, 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.
<unk> plans estimates judgments and projections about our business and our industry.
Which speak only as of today's date, you should not unduly rely on these 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 today's earnings release, our SEC filings and the comments 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 now ill turn the call over to Molly.
Thank you David and good morning, everyone.
Our first quarter results underscore the tremendous progress we are making in our turnaround strategy.
The power of our 3 unique brand and being a digital first customer led company.
The strong Q1 performance across all 3 brands was fueled by our significant improvement in product and marketing.
Our momentum started in Q4.2019 temporarily stalled by the pandemic is now back on track to deliver meaningful growth in the years to come.
Total first quarter sales grew 38% over last year for.
Third by phone line extraordinary sales growth of 65 per cent.
Well as fantastic customer response to Chico's, and White house, Black market, which drove 31% growth in our apparel brands.
We delivered meaningful year over year of gross margin and SG&A rate improvement.
And our balance sheet is strong with ample cash and liquidity and strategically lean inventories.
We drove much higher gross margin by dramatically, reducing the number of promotional days.
Not only at Soma post a 65 per cent sales growth over last year's first quarter.
Comparable sales grew a remarkable 39% over the first quarter of 2019.
Soma is well on its way to delivering on incremental $100 million in sales this year.
According to NPD research data store.
That outpaced the market leader in growth in bras, panties and sleepwear, excluding sports bras for the last 12 months.
These powerful results give us confidence that Soma will continue to take meaningful share of the U S intimate apparel market and explode into a billion dollar brand by 2025.
The business strategies put in place in Soma around inventory product marketing and digital are working.
And we have every confidence applying the same strategy at Chico's and White House Black market will continue at the apparel sales momentum.
Exciting things are happening at Chico's and White house Black market.
And in the first quarter of the apparel brands posted faster sell through rates and higher maintained margin than in 2019.
This is proof that our marketing efforts are increasingly more compelling and that our elevated product and styling are truly resonating with our customers.
Our first quarter results underscore the tremendous progress we were making on the 5 strategic priorities that I shared last quarter.
Let me take a few minutes to update you on each.
Number 1 continuing our ongoing digital transformation.
Over the last 2 years, we have successfully transformed into a seamless digital first customer led model for all 3 of our brands.
Making major strategic investments in talent and technology.
These efforts are paying off as year over year first quarter of digital sales grew at a very healthy $13.4 per cent.
All 3 brands digital sales grew year over year.
Customers using our proprietary digital tools style connect on my closet are more engaged and have our highest conversion rates.
These tools field, 10% sequential multichannel customer growth and these customers spend more than 3 times a single channel customer.
Number 2.
Further refining product through styling fabric and innovation at.
Each of our brands, we are laser focused on our customer and on continually elevating our product in order to increase our market share and drive results.
Innovation and creating comfortable beautiful solution, our core in the Soma brand.
Our products serve our customers lifestyles, and promote health, including a great night's sleep.
Allo infused restore and cool nights are 2 great examples.
We continually innovate and introduced 3 new bras during the corner quarter exceeding sales expectation.
In both our apparel brands, we've changed the styling of the product to more closely align with the customer.
We've embraced the comfort culture and develop innovative fabrics and technology to provide comfort features shifting her from sweat to fabrics with ease.
We are very encouraged by what we're seeing.
At Chico's, she loves our core franchise bottoms, and woven and knit tops in new fabrics.
At White House Black market, new elevated casual and denim and tops are popular of she is buying coordinating outfits.
And dresses are once again at the top of for list for both of apparel brands.
Number 3 driving significant increased customer engagement through digital storytelling.
Our enhanced marketing is driving brand awareness generating traffic and acquiring new customers through social media engagement and creative storytelling.
Newly acquired customers are being retained at a meaningfully higher rate than in fiscal 2019.
The year over year average age of new customers dropped 10 years at Chico's.
At Soma, the average age dropped 8 years and at White House Black market at the average age dropped slightly the staff reinforced the runway for all 3 brands.
At Soma, we are growing the customer base 1 in 3 new customers is under 30 for resulting from our more inclusive branding and evolved product assortment.
Our brands used digital storytelling, the use of social Influencers and building upon our organic social efforts and why to buy communications are some of the ways. We are working to elevate on marketing and reach new customers.
Oh of weekly Facebook live events for example are driving significant engagement compared to industry benchmarks.
Number for maintaining our operating and cost discipline.
Our biggest Q1 accomplishment was the strength in full price sales and corresponding reduced promotions.
Our on hand inventories for strategically lean and receipts are disciplined.
On hand inventory levels, which were down 29% versus last year's first quarter and down 21% compared to the first quarter of 2019 drove more full price sales and generated a solid gross margin in the first quarter.
Scarcity of product improved product and social proofing are driving a sense of urgency for customer purchasing these factors should continue to strength in gross margin performance.
And number 5 delivering higher productivity in our real estate portfolio.
Stores continue to be an integral part of our strategy because of data shows that digital sales are higher in markets, where we have of retail presence.
We also will support store growth, where the investment delivers profitable returns.
Soma is of Great example of that we have successfully opened 30 Soma shop in shops inside Chico's stores.
<unk> started opening in February.
And we will have 47 open by mid June.
These shop in shops are exceeding plan.
Driving brand awareness and generating both store and digital sales in markets, where Soma is not represented.
At the same time, we continue to rationalize and tightened our real estate portfolio for higher store profitability standard.
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 lease flexibility with nearly 60% of our leases coming up for renewal or kick out available over the next 3 years.
We anticipate closing, 13% to 16% of our remaining store fleet over the next 3 years.
With 40 to 45 of those closures occurring in fiscal 'twenty 1.
Our standalone boutiques outperform those in regional enclosed malls by about 7 percentage points of.
Accordingly, the vast majority of closures are expected to be mall based with a skew towards chico's and white house black market stores.
Now, let me turn the call over to David to update you on our financial performance.
Thanks Molly.
First quarter net sales totaled $388 million compared to 280 million of last year.
This 38, 4% increase reflects a 13, 4% increase in digital sales.
And recovery in store sales as of our stores were temporarily closed last year.
Looking at first quarter compared to 2019 comparable sales declined 22%.
For Soma of 39% and the apparel brands down 33%.
Total company on AD inventories for the first quarter compared to 2019 were down 21% for.
Soma of 13%.
And the apparel brands down 35%.
Illustrating the strategic investments from Soma growth at our turnaround strategy at apparel.
We reported a net loss of $8.9 billion or 8 cents per diluted share compared to a net loss of $178 million at $1.55 per diluted share of last year, which included $135 million or at all or <unk> 17 per diluted share and significant after tax noncash.
Charges.
Our gross margin was 32, 7% comp.
Compared to negative 4% last year.
The prior year margin included the impact of share based pickup.
Noncash inventory write offs at.
For asset impairments.
This year, we meaningfully expanded our margin rate as a result of disciplined inventory control strip.
Strategically reduced promotions and more full price selling.
SG&A expenses for the first quarter totaled $134 million.
Just a modest uptick from the first quarter last year what.
What our stores were closed for approximately half of the quarter.
We have continued our cost discipline of reduction initiatives generating lower SG&A expense dollars at rate than the first quarter of fiscal 19.
The sequential improvement in both dollars and rate over the fourth quarter of fiscal 'twenty.
Our balance sheet remains very solid.
We ended the first quarter with over $102 million in cash and marketable securities.
And borrowings on our 300 billion credit facility remained unchanged from fiscal year end at.
$149 million.
Our financial position liquidity continue to be bolstered by strong digital performance across all brands Inc.
Proving of retail store sales at.
On a significantly leaner expense structure that better aligns cost of sales.
In addition, our balance sheet reflects a federal income tax receivable of approximately 55 million debt, we expect to realize in the summer of fiscal 'twenty 1.
We anticipate building cash throughout fiscal 'twenty 1.
Regarding first quarter cash flows cash used in operating activities were $4.4 million.
This reflects the impact of more than $15 million on outflows for residual risk settlements.
From our fiscal 2000 real estate at rent abatement and reduction of initiatives.
As well as reductions in extended supplier payment terms implemented last year.
1 of the real estate front in March we launched phase 2 of our lease renegotiation process with AG real estate partners.
We have secured commitments from landlords of approximately $10 million of additional rent abatements and reductions the majority of which will be realized in fiscal 'twenty 1.
This is in addition to the 65 billion of payments and reductions negotiated last year.
On a cash basis, approximately $20 million of those savings are expected to be realized this year.
We expect to close up to a total of 330 stores from the beginning of fiscal 19 through the end of fiscal 'twenty 3.
In the first quarter of fiscal 'twenty, 1 we closed 9 stores and we ended the quarter with 293 boutiques.
Now, let me turn to our outlook we.
We expect continued improving demand throughout the year for Chico's Fas.
And we also realized there is economic uncertainty as we continued to emerge from the pandemic.
We do however believe it is appropriate to provide some high level outlook expectations for fiscal 2021.
We expect consolidated.
Consolidated year over year net sales improvement in the 28% to 34% range.
Gross margin rate improvement of 18 to 20 percentage points over last year.
SG&A as a percentage of sales of down 500 of 600 basis points year over year.
Income tax expense of approximately.
500000.
I'll now turn the call back over to Molly.
Thank you David.
For I conclude my remarks, I would like to briefly address the Barrington group's public letter and press release that was issued yesterday, we are committed to making all of appropriate actions to improve performance and drive shareholder value and we look forward to continuing to engage with our shareholders to discuss our progress.
Our turnaround is on track and we are uniquely positioned to build on our first quarter of momentum.
Improve our operating performance.
And generate shareholder value over the long term, we have an exciting future ahead.
We will not be making further comments on the contents of Barrington statement or our shareholder conversations at this time. The purpose of today's call is to discuss our earnings results and we ask that you keep your questions focused on this topic with that we can open up the call for Q&A operator.
Thank you at this time.
We will be happy to take your questions in the interest of time consideration for others. Please limit yourself to 1 question is at.
I'd like to join the question 2 please for stores and 1 that's of course.
<unk> has already been addressed as like to withdraw your question. Please press Star then 2.
And today's first question comes from Susan Anderson with Paul.
Paul Johnston of his first question comes from Dana Telsey with Telsey Advisory Group. Please go on.
Good morning, everyone nice to see the progress and the continuing progress on Soma.
Do you think about the marketing that you've put in place to elevate the styling and product at Chico's and White House Black market. How do you see the path of topline and margin evolving there and can you just give us any further update on expanding on inventory given the freight and port congestion disruptions. Thank you.
Yes.
Good morning, Dana and first of all of that address the of the apparel you know our turnaround strategies are on track and we're not simply bouncing back from Covid. We are retooling of company. That's had 6 years of decline in specifically the apparel brands and we are being methodical on strategic about that so the inner.
Inventory discipline and the sales are accordingly, because of what we're doing in marketing we feel confident of the of what's happening from the customer response, you in particular can see as the business opened up and vaccines were aggressively.
Aggressively being put out into the market place that our sales were improving and starting in particular in the March period, and we've seen that growth from March through May. So we are pleased with the results that we are seeing in apparel and keeping our inventory discipline as we continue to put our turnaround strategies in place and taking the disciplines that we've learned from <unk>.
To put into the apparel brands that will drive top line sales and margin because we are keeping our inventories tight. So that we can continue to drive maintained margins, which right now are back to historical highs.
Thank you and on and you asked me about supply chain exam on yes, sorry, Dana and on in terms in terms of supply chain. You know, yes. We are experiencing headwinds we are not fully out of COVID-19. There are problems to overcome and cost pressures on the supply chain sourcing production logistics for <unk>.
Film at and also the tightening of labor market. So we've done several things to mitigate these pressures we are expanding our third party footprint. We've identified alternative port strategies, we've adjusted our product lifecycle calendar actually up for weeks to adjust to some of these headwinds. We are also shifting to air when its critical we are.
Partnering with suppliers for alternative countries of production and we are continuing to keep our inventories lean. So the regular price continues to drive solid gross margin to absorb these escalating operating costs.
Thank you.
And our next question today comes from Susan I ever sort of be wrong. Lee. Please go ahead.
Hi, good morning, nice to see the improvement in the business.
I was curious if you could talk about the margins and how you view them longer term it looks like the gross margin guidance could you a little bit below 2019 gross margin levels. So I'm curious if you think you can get back to those 19 levels or would you need sales to get back to the 19 level to get there and then what other levers on margin.
Can you pull to get closer to the historical levels.
Thank you Susan the biggest factor for margin as you look back in the many years has been our over purchasing and having too much inventory and having to be too promotional. So we are very disciplined in how we are managing in particular, our apparel margins as you know we have when we look at this all of that we are in.
In the middle of our turnaround and this really is our second quarter of positive improvement on top of the queue for improvement that we had in 19 before the Covid pause. So we are learning from what the customer is responding to in our Assortments and keeping our inventories lean allows us to have dramatic reduction in promotions.
And ability to be able to bill of very thoughtful promotions inside the business at our category and item specific versus being entire inventories just as there was just too much inventory flooded in the in the market. So we feel that we're very disciplined so we've been conservative in terms of how we're projecting the outlook because of.
As many of you have pointed out we don't really know if part of the euphoria in Q1 is how sustainable that is going to be so we feel that being a disciplined is the right approach as we move forward, but the expectation and what we're seeing in the business in particular as we closed April and May end.
At the margin should continue to be very healthy and as it relates back to historical highs.
Great and then just on the inventory levels, it looks pretty lean across the brands for them. It sounds like maybe there was even some more demand than you have supply can you maybe talk about those areas, where you wish you had more inventory and then also are there still some areas that remain high maybe end.
The more fashionable apparel our work wear and then also if you could if you could talk about maybe your ability to chase to try and fulfill that demand or is that the supply chain situation with the backup at the points kind of hindering that thanks.
Sure.
The apparel product, that's selling indicates optimism and excitement actually our customers are are emotionally responding to color print and novelty theyre very at a very high level and we see strong categories are in woven and dresses and also we had strong business across bottoms in the denim pants and shorts category then.
Both of apparel brands, and we see where we've integrated new fabrics that have a touch of cool or that of anti <unk> anti microbial hand, well. We've included on technology into our bottoms. So that they are more comfortable on all of those are working of course, the apparel brands on the.
The beauty right now Susan is that we don't have a category that we are that were overstocked in them. So we are lean and tight across each 1 of our categories and classifications and see positivity in the business end and a very very lean on clearance inventory. There's a comparison to 19, so that all bodes well in.
Soma, where we've made investments because of the size of intensity of that business and also the launch of new broth. We are very pleased with the performance that we're seeing and the growth that we're continuing to get in our sales continue in all 3 brands to outperform outperform the investment in our inventory on.
And as it relates to being able to chase inventory you know we had said at the at Q4 that we felt that we would be having our inventories at the Q1, we're going to be down 30% in apparel and down more of 30% in Soma. So you can see based upon where our on hand inventories have ended that we have been chasing goods because he.
Sales have been better than we had forecasted so so far on by changing the plc calendar for weeks and really keeping a very close eye on vessel versus air and also of being able to manipulate the ports, we've been able to stay on top of of really challenging situation, but we know that there are additional headwinds in front of us in terms of.
As of year unfolds, so we're staying very close to it and moving up as many of our buys as we can to stay on top of the inventory to flow at to sales.
Great that sounds good and then if I could just add 1 last 1 I assume you saw that sells accelerate throughout for as you went throughout the first quarter and.
I'm curious at that momentum has continued into the second quarter or if you've even seen at accelerate as more and more people get back to Nader and people are starting to get out, particularly as the weather broke now. Thanks, Yes, Susan that's exactly what we are saying in particular, you know the or at the 2 of apparel brands in particular are for women.
And you know we don't have a teen business. So in comparison to other retailers you have to look at how the the woman of spending her time and how she was vaccinated and you saw at both on N. P. D data and an hour of data that the apparel business really started to open up the second week in March once they're at once at the most people had their second shots.
And it started to continue to excellent escalate up at that time, we definitely saw that in the business. If you isolate the March through May period, we saw a difference in our Q1 results being down on a 17% as compared to being down 22%. So it was really that first 5.6 weeks of the quarter.
<unk> that were still pretty depressed.
And where we saw at a business opening up overall in the apparel brands and the Soma momentum continued so we are expecting that to that to continue as we get into the summer months and into the back half of the year. So we are very encouraged.
Great. That's very helpful. Thanks, so much and good luck the rest of Europe.
Susan.
Kind of next question today comes from Marni Shapiro with retail tracker. Please go ahead.
Hey, guys, congrats great improvement I.
I guess a couple of a couple of follow ups on some of the questions could you talk a little bit about some of the delivery delays I know white house was having some issues with I think it was in the fourth quarter.
Could you talk a little bit about the impact it had to the brands in the stores. During the first quarter end is it pretty much cleaned up for the second quarter on going forward and then if you could also just touch on Soma business continues to be outstanding.
They look amazing could.
Could you talk about what percentage of those shoppers are sticky like coming back repeat shoppers coming back time on time. After time, if you have that day that I don't even know for your deal yes deliveries out of I think every every single 1 of US has been plagued with supply chain challenges and unfortunately, we are not out of that yet.
It's been a whole host of different challenges that we have we've experienced weather and none of it actually has been factory related on our factories on our deliveries have been on time, it's all been on vessel capacity vessel sailing time port delays on.
On the lack of chassis in the U S to be able to get trucks to our D. C on it.
So you know every single leg of the supply chain post our suppliers has had some kind of issue along the way so on.
The short answer is that for the moment, yes, we have cleaned up and done and mitigated everything that we've experienced so far so that we feel that we've got a very strong hold on the supply chain moving forward. However, I stayed out with caution as there is still a lot of them a lot of headwinds that are in front of every.
Free single function of stuff, that's coming into the ports. So we are we are staying very closely aligned to it I would say that probably everybody on the organization says they know more about supply chain today than they've ever known.
And but it's of critical piece in terms of keeping the flow moving and keeping good fresh goods to our customer to keep them engaged. So today, we feel confident that we've made all of the right decisions on but we're staying very close to at Marni.
At relating to them and as it relates to Soma actually yes, we are seeing within Soma that our customer is is also fiercely loyal you know we know that in chico's of customer stays with a 13 year than white house 9 but in Soma, she stays with us 6 years, and where we're finding that some of the.
The typical buying patterns for intimate apparel being less frequent or a little more frequent as we expand our broad menu and we really offer a lot of different options for her on because we feel that the bra in particular is a of very sticky category and you need a wardrobe of them you don't need just 1.
1 of them for all the different wearing occasion. So so we are encouraged by what we're seeing on the frequency of the shopper within Soma, that's fantastic best of luck on the summer guys. Thank.
Thank you Marni.
Thank you. This concludes our question is from session I would like to turn the call back over to Molly mortgage line for closing comments.
Thank you Rocco our turnaround is on track and we are uniquely positioned to build on our first quarter momentum improving our operating performance and generating shareholder value over the long term, we have an exciting future ahead.
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 August for our second quarter call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your phones from all of a wonderful day.