Q2 2021 Chico's FAS Inc Earnings Call
Welcome to Chico's Fas second quarter, 2021 conference call and webcast all participants will be in listen only mode. Please note. This call is being recorded.
Now I'd like to turn the call over to David Oliver Interim CFO and senior Vice President Controller. Mr. Oliver. Please go ahead.
Good morning, and welcome to the Chico's Fas second quarter 'twenty, One conference call and webcast Bally Lincoln Stein, our CEO and President also joins me today.
For reference our earnings release can be found on our website.
Www Dot Chico's Fas Dot com 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 speak only as of today's date.
You should not unduly rely on these statements.
Yes.
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.
As may be otherwise required by law now.
Now I'll turn the call over to Molly.
Thank you David and good morning, everyone I'm excited to share our second quarter results and they underscore the incredible progress we continue to make in our turnaround strategy. Despite pandemic challenges.
Our earnings per share of 21% is.
The second.
Second quarter performance, we have posted since 2013.
This return to profitability was driven by our turnaround action plan that grew sales.
Expanded gross margin and diligently control our expenses.
Our robust second quarter sales growth of 54% with across all three brands and was propelled by our meaningful enhancements in product and marketing, which continued to significantly drive full price selling reduce markdowns and increase gross margin.
Soma achieved the highest second quarter sales results in the brand history.
Not only did soma posted a 53% sales growth over last year's second quarter.
Comparable sales grew a remarkable 38% over the second quarter of 2019.
In fact.
We have had four consecutive quarters of comp growth at Soma, congratulations to the Soma team.
Thermal remains on track delivering an incremental $100 million in sales this year.
According to NPD research data.
Most growth outpaced the market in non sports bras.
Nancy and sleepwear for the past 12 months.
Compared to the same period in 2019.
In addition, our customers preferences have shifted to comfort Soma.
Soma strategically increased its wireless bra assortment.
Taking more market share than any other brand for the last 12 months compared to the same period in 2019.
We believe this data along with our recent performance is a strong indication that soma is well positioned to capture additional market share and explode into a billion dollar brands by 2025.
The business strategies put in place in Soma around inventory product marketing and digital are working and we are confident applying this proven playbook at chico's and White house Black market will continue their sales momentum.
Exciting things are indeed happening at both Chico's and White house Black market.
As indicated by second quarter sales growth of 59% and 48% percent respectively.
At both apparel brand customers are enthusiastically responding to our elevated quality and styling enhancements, which are leading to meaningfully faster sell through rates higher productivity and more full price sales and better maintained margins.
Our second quarter results once again highlight the incredible progress we are making on our five strategic priorities.
So let me take a few minutes to update you on each.
Priority number one continuing our ongoing digital transformation.
Over the last two and a half years, we have successfully transformed into a seamless digital first customer led company, adding resources and making strategic investments in talent and technology.
We have been thrilled with the trajectory of our digital sales over this timeframe.
As our store revenues continue to rebound our second quarter digital sales grew 23% over 2019 levels.
Style connect and my closet continued to gain traction.
And customers using its proprietary digital tools are more engaged and have our highest conversion rate U P Ts and average order values.
These tools continue to drive new multichannel customer growth and these customers are our most valuable spending more than three times a single channel customer.
After pay the popular benefit launched in time for holiday last year, allowing for customers to pay for their purchases and installment has also proven to be a terrific UPC and sales driver and is beating our expectations.
Priority to further refining product through styling fabric and innovation.
At each of our brands, we are leveraging customer data and insights.
And continually elevating our product to take market share and drive results.
Customers are clearly responding across all three brands.
Continuing newness and creating comfortable beautiful solution are core to the Soma brand.
We are feeding a conveyor belt of innovation.
For wireless and sports bras, ensuring she has the absolute right bra for everything she does her life.
LIBOR and panties continued to be strong and drove double digit growth over last year in 2019 levels.
Chico's customers are continually responding to newness.
It features novel technology and innovative fabrics.
With pronounced acceleration in the quarter in denim pants dresses knits and woven tops.
White House Black market also continued to benefit from elevated styling and quality improvements and customers responded to our new pant in short programs as well as niche and dresses.
Congratulations to the apparel team for a great quarter.
Net driving significant increased customer engagement through digital storytelling.
Through our enhanced customer data analytics and insights we have elevated and targeted our marketing efforts, which are driving brand awareness generating traffic and acquiring new customers.
We continue to allocate more resources to digital storytelling, social influencers and other social efforts.
Our social media customer engagement continues to grow and customers are responding to Influencers and associates.
We continue to acquire new customers and their average age continues to trend in younger than existing customers, which reinforces the runway for all three brands.
Yeah.
Priority for maintaining our operating cost disciplines.
Our most meaningful second quarter accomplishment with our gross margin performance in fact, we posted our highest gross margin rate in 13 consecutive quarters.
This was driven by strength in full price sales and a corresponding reduction in promotion.
Our on hand inventories remain strategically lien down 27% versus last year's second quarter and down 20% compared to the second quarter of 2019.
Scarcity of product and social proofing continued to drive a sense of urgency for customer purchasing.
These factors should continue to strengthen gross margin performance.
However, we are facing certain headwinds in the back half of the year that will impact gross margin and sales.
Including cost pressures from logistics sourcing fulfillment and the labor market.
These considerations are included in our guidance that David will cover later in the call.
And finally, our last priority delivering higher productivity in our real estate portfolio.
We delivered strong store growth during the quarter and stores continue to be an integral part of our overall strategy as data indicate that digital sales are higher in markets, where we have a strong retail presence.
Prudent store growth makes sense, where the investment delivers profitable returns.
We have successfully opened 47 soma shop in shops inside Chico's stores.
Which are exceeding expectations.
Driving new customers to both brands.
And further expanding our digital business.
More of these shop in shops are scheduled going forward with a total of 70 expected by first quarter of next year.
At the same time, we continue to rationalize and tightened our real estate portfolio for higher store profitability standards.
Accordingly, we will continue to shrink our store base, 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 a bit available over the next two to three years.
We are still on track to close 13% to 16% of our remaining store fleet through the end of fiscal 2023 with 45 to 50 of those closures occurring this fiscal year.
During the quarter, we closed nine stores, bringing our year to date closings to 18, and we ended the quarter with 1284 boutiques.
Now, let me turn the call over to David to update you on our financial performance.
Thanks Molly.
We are very pleased with our company's return to profitability posting diluted earnings per share of 21 for the second quarter compared to a 40% loss per share last year's second quarter and a two seven loss per share for the second quarter of fiscal 2019.
Q2 is our first quarter earnings performance since 2013.
Second quarter, net sales totaled $472 million compared to $306 million last year.
This 54% increase reflects meaningful improvement in product and marketing, which drove full price selling.
As well as a recovery in store sales.
Our stores were temporarily closed or operating at reduced hours last year.
Partially offset by 29 net store closures in the last 12 months.
Looking at the second quarter compared to 2019, our comparable sales were basically flat.
Declining just one 6% with Soma improving 38%.
And Chico's and White house, black market declining, 14% and 5% respectively.
Total company on hand inventories compared to 2019 declined 20%.
With Soma up, 19% and Chico's and White house, black market down, 32% and 49% respectively.
Illustrating that the strategic investments in service growth and our turnaround strategy in Chico's and White House Black market are working.
Second quarter gross margin was 38, 4% compared to 14, 6% last year, which included the impact of significant noncash inventory write offs.
This year, we meaningfully expanded our margin rate as a result of disciplined inventory control.
Strategically reduced promotions and more full price selling.
This was our highest gross margin rate and 13 consecutive quarters.
SG&A expenses for the second quarter totaled $146 million or 35% of sales an improvement of more than 400 basis points from last year's second quarter, and nearly 300 basis points better than the second quarter of 2019.
We have continued our cost discipline and reduction initiatives, enabling us to realize.
Leverage in the current year.
Regarding our financial position.
We continue to build cash on our balance sheet continues to strengthen.
We ended the quarter with over $137 million of cash and marketable securities and.
An increase of nearly $35 million over the first quarter.
Borrowings on our 300 million credit facility remain unchanged from fiscal year end at $149 million.
Our financial position liquidity continues to be bolstered by improving retail sales.
And a lean expense structure that better aligns cost with cells.
In addition, during the second quarter, we received a 16 million dollar income tax refund.
Related to the $55 million income tax receivable reported in the first quarter.
And we expect to receive the balance of the $55 million in the third quarter, we anticipate building cash throughout the remainder of fiscal 2021.
In the second quarter, we continued our lease renegotiation initiatives with <unk> real estate partners securing year to date commitments of approximately $15 million in incremental savings from landlords.
The majority of which will be realized this fiscal year.
This is in addition to the $65 million and abatements and reductions negotiated last year for a total savings to date of $80 million.
Now turning to our outlook.
During the balance of fiscal 'twenty, one, we expect improving year over year demand, but recognize.
There is economic uncertainty as we continue to manage through the pandemic.
In addition, we are facing macro supply chain headwinds in the back half of the year that we expect will impact sales and gross margin, including higher freight cost.
Extended transit times.
And product supplier handover delays driven by the pandemic.
Accordingly.
Given this uncertainty we are not providing specific guidance, but instead offering high level outlook expectations for the third quarter and fiscal year.
For the third quarter, we expect.
Consolidated year over year sales improvement in the 18% to 22% range.
Gross margin rate improvement of 13% to 15 percentage points over third quarter last year.
SG&A as a percentage of sales to improve 500 to 600 basis points year over year.
And an income tax rate of 34% to 35%.
For the full fiscal year, we expect.
Consolidated year over year net sales improvement in the 32% to 35% range.
Gross margin rate improvement of 20 to 22 percentage points over fiscal 2020.
SG&A as a percent of sales to improve 500 to 600 basis points year over year, and an income tax rate of 34% to 35%.
I'll now turn the call back over to the operator for Q&A.
Thank you at this time, we would be happy to take your questions in the interest of time and consideration to others. Please limit yourself to one question.
To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Susan Anderson from B Riley. Please go ahead.
Hi, good morning, really nice job on the quarter, it's nice to see the significant improvement there.
I'm curious just looking out to third quarter it looks like your guidance.
It may be expecting a slowdown versus 19 levels from second quarter. So just curious if theres something driving that and then also.
Have you seen that impact from the Delta variant.
Thank you Susan.
Let me start with the third quarter. A question that you mentioned in terms of the slowdown to second quarter, and then I'll follow up with the impact on the Delta variant. So the biggest headwind that we see in front of us is in sourcing and with the with the back half in terms of being with less strict.
Inventories, we need to make sure that we ensure our pipeline coming into us. So we've done several things on the sourcing front, which really is whats impacting the guidance on the sales.
First of all we are managing and pivoting our supply chain responding to the rising Covid cases that right now are resulting in manufacturing delays in countries like Vietnam specifically.
Today, 73% of our ex factory is leaving on time and the sourcing team is doing an excellent job managing what they can and we've been successful moving 9% of our overall production out of Vietnam into other countries.
Having said that even though we are moving deliveries and we have protected those goods from Vietnam at least partially.
We are experiencing additional delays in terms of the ports and also in terms of road. So that is why we are more cautious in the back half of the year knowing that we have some of these supply chain headwinds.
In regards to the impact on the Delta variant, we are not seeing if we look at the month of August are any differences in traffic to our stores theres been a little tiny bit that we've seen in the last couple of days, but some of that is part of the hurricane impact overall to the traffic, but we are watch.
It very closely.
Great that's good to hear.
And then also maybe if you could talk about the gross margin very nice performance in the second quarter, how much of that sustainable longer term and then also do you see more opportunity on the gross margin front as we look out over the next couple of years.
Sure. Thanks, Susan regarding gross margin, we're not providing guidance long term on gross margin first time, but the biggest factors regarding gross margin as you look back over the years as we've been over purchasing and we've had poor product in recent years in particular and the apparel brands. So we.
Become more disciplined in how we manage our inventories.
We're improving our product I think both would benefit gross margin performance.
Moving forward.
Great. Thank you and then if I could just add one more follow up on Soma. You mentioned you expect it to be a much larger brand as we have.
Look out into the future maybe if you could talk about where you see that brand going and also just in terms of product categories is there still opportunity to expand into new product categories.
Susan we are excited about the opportunities in Soma and the record performance that we had for this quarter with a record sales in Q2. The key point in terms of Soma is the aggressive market share that we are taking in broth.
And how that also complement the additional market share with panties and we are finding that there are many additional categories within bras that we can we can expand into so we just launched two new bra is actually this past month and we have a pipeline of innovation that we have.
Put into place in front of us to be able to continue to grow that category. Additionally, we enjoy a fantastic sleepwear program within the brand and we see the changes that we've made within marketing to be able to invite more people into the brand have been working for us over the last two.
Here's the shop in shop additions into Chico's has introduced it to additional customers and they are also responding positively. So this is about growth and the brand not only in stores and shop in shops and online I and also recognition from getting additional customers into the brand from an age standpoint.
And diversity inside.
Craig there's a lot of online in front of US yeah. Thank you.
The next question comes from Janet Kloppenberg from <unk> Research. Please go ahead.
Hi, everybody.
Can you hear me.
Yes.
Thank you congratulations on the progress.
If you look at your sales guidance for the year, you get to about something.
Something close to $9.0 billion bushes.
2 billion you did in 19 can you adjust the 19 number for store closings. So we know how much closer you are on a like for like store base.
When we shared that the comp for the quarter was down one 6%, which would include the store closures and in totality. So that is in that number.
And that includes the stores it up close to this date yet.
So I take the 2 billion.
You did put 19 down about 2% and I get the like for like numbers that way, Yes, and then we've also lifted out of the stores that we've closed so far through Q2 and that we have additional stores to close in the back half of the year.
Right, so it'll be a greater impact in the back half of the year, yes.
Yes.
And and then that was.
That decline versus 19, then would be reflective of.
Loss productivity at Chico's and White House Black market. So I'm wondering how you're thinking about that Bali and when you think you might be able to get back to pre pandemic levels fail.
Janet we we don't look at it as loss productivity. We look at is this is part of our turnaround strategy and how we are resetting the brand something that been key to our strategy is walking away from promotion.
And that has been intentional so key to being able to deliver them a a new brand to consumers is resetting that brand image and keeping our inventories tight this year as part of our strategy.
Okay and then thank you and when you look at Chico's and White House, how far along do you think you are in that channel out.
In terms of getting winning new customer back.
Maybe you look at loyalty attachment those kinds of things repeat purchases.
Some of what's going on in women's apparel, all has to do with just you know.
The fact that women didnt buy any closed last year, so sometimes not a meaningful amount of closed for work or social occasion. So the question is where are you in terms of.
Winning back your customer on a repeat basis as we look forward how much more work to do in these repositioning programs.
I would give you a statistic of our spend per customer or spend per customer in the second quarter. In all three brands was at its highest level in five years and so that is a testimony that the customers are not buying just single items, but multiple items at a higher AUR and that includes new.
Customers to the brand reactivated customers and are loyal.
Okay, Great that's great and when you think about the supply chain issues that are going on right. Now do you think this is a scenario that could continue into next year.
Yes, we have every indication from the market that these will certainly continue into the first half of the year.
And why we have them moved up our lifecycle calendar for weeks.
We have partnered with suppliers to find alternative countries for production and how and also we have found a different ports to be able to use. So we are using every strategy and tactic to be able to manage and get in front of us going forward and and when need to be we are definitely flipping to err to ensure.
We have a flow of inventory.
So to think that the inventory picture for both Chico's and White House.
Will be improved as we enter the fourth quarter and the first quarter still constrained, but improved versus where it is now.
We have a we have a thoughtful plan on a part of setting strategy in our turnaround plan on on gradually moving those brands forward. So you will see our continued investment in both of those brand and we are also not taking our foot off the gas on Soma.
Alright, well you've done much better on the inventory levels that so much.
I must be doing that.
We have a combination and all three of the brands and we are prioritizing our biggest key items and drivers and those differentiator of categories to make sure that we have them on time in making that decision between the three brands.
Okay. Thanks, so much you are welcome.
The next question comes from Marni Shapiro from retail tracker. Please go ahead.
Hey, guys congratulations on the improvement and I'm happy to say your latest FICO set is absolutely beautiful.
Thank you Martin could you just walk.
Welcome. So could you talk a little bit two topics one on marketing if you could talk a little bit about your thoughts on marketing spend for the back half of the year you had that outstanding viral tick tock, I'm and I'm I'm just curious.
Aggregate, what your thoughts are about marketing it and what you spend looks in the back half of the year and then just a quick question on traffic are you seeing traffic at the stores improve whereas this or sales being driven more by conversion and AUR just curious with the mix.
[laughter] shifted there.
So let me start with the marketing spend on the back half and then I'll come back to the the traffic and mix and kind of what we're seeing in the in the stores. So for marketing we continue to push more of the budget towards a digital in fact, our digital spend is double that of the traditional marketing spend and that is our allocation.
For the back half as well and in that digital spend we are pushing more dollars into social not only for our Facebook live events, but also influencers.
And and we also even have associates that are that are using that platform with great success and that continues to drive traffic and revenue.
So.
And we are also spending you know so we have a.
How we look at in terms of acquiring customers and reactivating and and really literally do a plan by customer to make sure that we hit our numbers. So that's how we're thinking about the back half of the year in terms of traffic in stores. The store traffic is still down and so year over year. It has improved as stores have fully reopened.
Overall compared to 2019 traffic at Chico's and White House Black market is still down and it's up modestly at Soma.
Okay. So this is all being driven by conversion and AUR, yes, yes conversion.
<unk>.
Fantastic. Thanks, so much guidance I'll take the rest offline. Thank you marni.
The next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead, good morning, nice to see the progress.
Can you unpack the performance between stores and digital by brand. What did you see was there anything different that you noticed and with the full price sell through on raw materials are you taking price increases that you think are sticky and then I have a quick follow up.
So let me start with these stores and are things that we've noticed between the different channels.
The the customer that we saw when we really first started to open up more in the second quarter was excited to come back to the stores.
However, we do still see that her behavior of pre shopping online has not waned. So she is spending a lot of looking online and then either contacting her style is to make sure that she can get things in the fitting room for her to try on them, which then makes her trip to the store much shorter and I and and fast.
But in terms of the transaction. So we're still seeing that behavior between both channels and a very interactive, but there's there was early in the quarter a lot of euphoria for customers to get back into stores and meet with that person and that traffic is pretty much remained consistent between the three brands during the during the quarter. So if that answers your question.
In terms of how we're seeing the stores and the digital they're definitely playing and supporting one another which is what we hoped it to do in terms of prices and how we're thinking about in prices. You know there are there are cost pressures as the as.
As you know in logistics sourcing fulfillment and even fabric and manufacturing and our primary goal is to maintain or improve the quality of our product and then deliver that product as quickly as possible to customers. So having said that we have surgically looked at ticket prices by style and by category and raise ticket prices, where we feel it is in.
Our price value that our customer would expect but we've done that very judiciously.
Judiciously and surgically.
Got it and then just following up on the real estate commentary that you made so it sounds like there's a little bit more on renegotiated lease terms and dollars that you get back anything as you look out to 'twenty 'twenty two what we should look at that way and the Soma shop in shops, and she goes appears to be successful.
What are you, replacing by putting that in and does that go chain wide.
I'll take on the shop in shops, and then I will give David the other question.
And so what what the shop in shops are replacing is actually clearance and so we are serious about making sure that we have reset the brand for regular price for the future and making sure that we've got a.
A we picked we have selected stores that are very big footprint. So that the 350 square feet that occupies a soma shop in shops that it fits in nicely and it actually is not disrupting the chico's business. So it's a it's a plus one not a not so it's definitely an AD and right now we see.
He that by first quarter, we will have up to 70 open there might be a few more stores dana than not to look at that for the future, but really where we will focus our growth in 'twenty. Two is opening a new soma stores.
And put our attention there.
Thank you.
Regarding the <unk> real estate initiatives.
Yes.
You know, we had 65 million in savings last year, we've added to that in phase III with additional $15 million. We're currently nearing the end of phase two with the $15 million savings and I stated this morning.
We expect a $15 million most of that to be realized this fiscal year.
That stated.
The earnings impact or is it translates into the P&L.
Is based over the remaining lease term and so youre not going to see that in the P&L you will ultimately see that in the cash balance.
Thank you.
This concludes our question and answer session I would like to turn the call back over to my only langoustine for closing comments.
Thank you we are a digital first customer led company with three unique brand each with tremendous growth potential our turnaround is on track and we are well positioned to build on our first half momentum continued to improve our operating performance and generate shareholder value over the long term we have an <unk>.
And 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 November for our third quarter call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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