Q1 2023 Chico's FAS Inc. Earnings Call

Welcome to the Chico's Fas first quarter 2023 conference call and webcast.

Participants will be in listen only mode. Please note. This call is being recorded I would now like to turn the call over to the company's head of Investor Relations Julia Mcmeen. This mcmahan. Please go ahead.

Good morning, and welcome to the Chico's Fas first quarter 2023 conference call and webcast for reference our earnings release can be found on our website at 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.

Plan estimate judgement and.

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.

Certain non-GAAP measures maybe referenced on today's call are GAAP to non-GAAP reconciliation schedule is included in our earnings presentation posted this morning on the Chico's Fas Investor Relations page.

Now I'll turn the call over to our CEO and President Molly Langan Stein.

Thank you Julie and good morning, everyone.

We delivered another outstanding quarter of operating income and earnings performance demonstrating.

Demonstrating solid execution and underscoring our commitment to our four strategic pillars.

Being customer led.

Good stuff.

It'll first and operationally excellent.

First quarter earnings per share exceeded last year, and our outlook driven by gross margin performance and disciplined expense management.

For all three brands full price sales remain healthy.

Spend per customer and average unit retail was up year over year, and we gain market share.

Chico's, our largest brand celebrating its 40th anniversary demonstrated outstanding performance posting comparable sales growth of four 9% on top of 52% last year.

We believe chico's is positioned for continued outsized growth.

It's almost sales trends continued to improve from prior quarters, while white house Black market sales declined as we quickly sold through stuff in inventory due to strong customer demand.

Let me cover some highlights for the quarter.

We delivered another quarter of meaningful gross margin expansion, which led to strong operating income and bottom line results.

Operating income grew to 10% of net sales improving 160 basis points over last year and diluted EPS increased 14% over last year to 32 cents.

Our powerful portfolio together delivered total sales of $535 million and a two year stacked comparable sales increase of 40%.

Our largest brand. She goes led the way as customers responded to innovation and solution oriented products building complete outfit.

Soma has had four quarters of sequential year over year improvement in comparable sales performance.

With the first quarter, improving 250 basis points over last year's fourth quarter.

Innovation and discipline drove double digit AUR and profitability growth over last year's first quarter.

Our best in class Bra, and panty offering continued to outperform for last year, indicating the overall long term power and strength of the brand.

White House Black market comparable sales fell 8% and were up 57% on a two year stack basis.

Customers responded to our newness in fabric innovation and fashion building complete outfit.

Quickly selling down our fashion inventory levels during the quarter, we expect to have more inventory in line with demand by early fall, which should drive a back half trend change.

Our brands continued to take market share.

According to corner during the last 12 months Chico's was the fastest growing apparel brand for customers over 45 with household income over 100000.

And White house Black market gained share in this key market as well.

During the same period Soma gained market share with customers over 35 with household income over 100000.

Innovative products targeted marketing and are impactful loyalty program drove more customers to our brand.

The prior 12 months multichannel customer account and spend per customer were up mid single digits and total customer account was up indicating a long term opportunity for each brand.

This same innovation and marketing has meaningfully increased spend per customer across all brands since 2019.

Demonstrating the quality and health of our customer file.

Customer that is focused on fashion and newness.

Rather than pricing and value.

We ended the quarter with customer facing inventory up 1%.

Well positioned entering the second quarter.

We further strengthened our balance sheet, ending the quarter with $131 million in cash after repaying $25 million of debt and returning nearly $20 million to shareholders through share repurchases.

Let me give you a brief update on how each of our strategic pillars drove first quarter result.

We are a customer led connecting with our customers and driving long term growth through three powerful platform.

Our physical stores or community centers, where our stylists enbrel experts showcase our product and they share their knowledge and enthusiasm driving sales and brand loyalty.

Digital is the hub for our product offerings and often the first impression of our brands.

And our social stylist can expertly connect customers to our brand and drive cool with in both channels.

For the 12 months ended with the first quarter customer count grew 2% spend per customer was up 7% and the multichannel customer count was 6% demonstrating the overall health of our brands.

We also have a significant number of customers within our we activate a file that have not shopped with us for 36 months that are coming back to each of our brands.

This means more demand in the pipeline and a very captive customer segment for us to engage with.

Our loyalty programs, we launched last summer continue to exceed expectations and customer sentiment and redemption rates.

We are product obsessed focus on delivering elevated best in class merchandise to our Chico's White house black market and Soma customer.

Offering a continued pipeline of innovation and beautiful solutions that inspire confidence enjoy.

All of it is delivering more full price selling lower promotional activity bigger basket sizes and higher AUR.

At all three brands customer continues to respond to our elevated fashion and solution oriented product.

Demonstrating that product enhancement and innovation are moving the brand forward.

Customers appreciate higher quality and they are receptive to paying for value and solution.

And she goes we are attracting new customers and driving revenue increases through newness with fit comfort and solutions.

Customers responded to our product innovation and fashion, including dresses.

New proportions in bottoms, and tops and our expanded travelers and energy collection she.

We focus on completing her head to toe looks with easy care wrinkle free climate right fabrics.

At White house Black market customers respond to newness in casual suiting, new proportions in bottoms and fluid easy fabrics in both jackets and bottom paired with layering tops for our Polish look.

Our customers responded favorably to our fashion offerings. So well in fact, we sold through much of our fashion inventory during the quarter.

We are enhancing our fashion offering with the goal to complete the rebalanced by the second half of the year.

At Soma customers responded to our standard bra, and panty assortment, including the launch of online and stretch Leif Bras and panties.

And our expanded butterfly and vanishing collection that included a wider range of raw and cup sizes.

This newness drove sales in these categories ahead of last year.

While sales of sleep or declined due to lower levels of markdown inventory, we significantly healthier margins at Soma This year.

We are digital first leveraging technology to engage and deliver to our customers across channels and brands for.

For the last 12 months digital sales represented 41% of total company revenues.

Over the trailing 12 months total customer count was up 2%.

Chico's was up 6% White house Black market was up 4% and Soma was down three.

The new customers, we are attracting to our brands are younger than existing customers by tenure that chico's two years at White house black market in three years at Soma.

Each digital touch points, including our customized digital styling tool my closet, and stuff and act and our mobile App inspires the customer to find solutions and build her wardrobe across brands.

We continue to leverage our digital tools to drive customer engagement.

Enhance our loyalty program and grow our multichannel customers.

We'll spend more than three times the single channel customer.

We continue to enhance areas such as digital marketing attribution and search personalization and order management.

This will allow us to better serve our customers by customizing product recommendation enhancing our digital user experience and providing best in class customer service.

And finally, we are operationally excellent constantly focusing on diligently managing our inventory cost of sales supply chain expenses and real estate generating.

Generating healthy cash flow and delivering a strong bottom line.

For the quarter, we had outstanding gross margin performance, driven by lower freight and higher AUR.

And we continually work to drive efficiencies and reduce expenses in our sourcing logistics and operational areas.

Now I'll turn the call over to P. J to update you on our financial performance P. J.

Thank you Molly and good morning, everyone. We posted another great quarter marked by solid overall top line performance.

Gross margin improvement.

Complimented by active expense management that demonstrates our flexibility to adapt to an uncertain operating environment.

Sales variability within our brand portfolio for.

For the quarter, we generated diluted EPS up 32 cents compared to 28% last year.

14% increase over a very strong 2022.

Sales of $535 million were down 1% from last year and down 6% on a comparable sales basis.

For the quarter digital sales were up low single digits and outpaced stores on very strong traffic.

This performance indicates that all three of our brands remains healthy and in demand for both existing and new customers.

In late March and continuing through the end of April we did experience a decline in traffic and sales at our Chico's and White house black market outlet locations.

Cater to a more price conscious customer more sensitive to economic conditions.

It did have a material impact on sales for the quarter.

Traffic at our frontline stores was still strong, but inconsistent and also had an impact for the quarter.

However, the strength of our digital platform helped to offset lower store sales. This further demonstrates the power of not only having that diversified brand portfolio, but also having two strong channel that complement one another.

We continue to see higher AUR across all three brands throughout the quarter.

Which supported total sale and also offset lower store sales relative to digital.

I would call out that we posted a 41% a terrible sales improved from last year's first quarter. So our overall level of sales remain healthy.

Looking at the brands she goes with the leading performance of the quarter posting a 4.9% comparable sales increase.

<unk> posted a first quarter comparable sales decline of two 5% with the brands showing continued comp sales trend improvement over the last four quarters what.

White house Black market comparable sales fell 8% due to selling to fashion inventory faster than planned.

Gross margin was 42, 1% compared to 40% last year.

The 210 basis point increase primarily reflected lower freight costs higher AUR and corporate expense savings.

Partially offset by higher raw material and occupancy costs.

Gross margin also benefited from a significant improvement up Soma, where margin was up substantially over last year.

Another proof point that Soma is on an upward trend compared to last year.

SG&A expenses totaled 172 million or 32, 1% of sales.

Compared to 31, 6% in the prior year.

Year over year SG&A dollar spend was essentially flat, resulting in modest deleverage of 50 basis points.

We are disciplined and thoughtful in managing expenses and will remain lean while strategically investing in areas like marketing and store payroll to support customer growth store productivity and long term top line growth.

Telling your SG&A rate was well below the low end of our outlook of 32, 8%.

Helping to drive strong double digit operating income and EPS.

All three brands contributed to consolidated operating income of 53 million or 10% upset.

Which represented 160 basis points of improvement over last year.

Driven by continued gross margin expansion and expense control.

We generated 63 million of EBITDA for the quarter and 11% increase over last year.

Because of our ability to generate strong cash flow to support our strategic plan and ongoing investment in growth.

Now, let's turn to our balance sheet and overall financial strength, which is rock solid.

Our cash position total liquidity and operating cash flow remains strong providing us with flexibility to manage the business make investments to further propel our growth and return excess cash to shareholders.

During the quarter, we paid an additional $25 million of debt, reducing our balanced by $75 million since the first quarter of last year.

This brings our debt to EBITDA ratio on a trailing 12 month basis to just point to chance.

In addition, we returned nearly 20 million to shareholders through share buybacks. After all this we still ended the quarter with 131 million of cash and total liquidity of approximately 364 million, which.

Which includes capacity on our multi year committed credit facility.

At quarter end customer facing inventories were up 1% generally pacing with sales.

Inventories totaled 294 million compared to 326 million last year.

The 10% decline primarily reflects a return to normalized supply chain conditions that resulted in significantly lower in transit inventories.

Now, let's shift our focus to real estate.

In the first quarter consistent with our strategy to optimize our portfolio, we closed seven stores ending the quarter with 1262 boutiques.

Clothing locations has been highly accretive to our P&L and due to a strengthened financial position, we've been able to negotiate longer term, new and renewed leases with more favorable terms and more desirable locations.

We believe our fleet is right sized and well positioned to deliver incremental growth and profitability going forward.

We will continue to actively manage our portfolio to enhance overall store and company profitability.

This year, we expect to upgrade approximately 60, Chico's boutiques and we May open up to 15, so it might be to get the right high return opportunities develop.

We have identified three stores, so far and are actively looking for additional locations.

Now, let me provide our updated outlook for fiscal 2023.

On top of our 18% total company sales increase last year, we are planning for low single digit top line growth for fiscal 2023.

Digital traffic and sales to remain strong and have incorporated some additional risk in our outlet and frontline store channel based on recent traffic and consistency.

Looking at the brand portfolio, we expect continued strength from Chico's and continued improvement in Soma. However.

However, we expect white house black market to be back on track in the second half of the year.

White House Black market sales were so exceptional in fiscal 2022 that we achieved our three year revenue growth target for that brand in just one year.

We're recalibrating its long term growth trajectory to meet the growing demand for the brand.

We will continue to manage expense unexpected cash flow to remain strong as we invest in our long term growth plan.

We will also make prudent investments in our business that will drive traffic conversion and customer growth and revenues across all channels for many years to come.

Our planned capital expenditures for fiscal 2023 are still expected to total between 80 and $90 million.

<unk> a cloud based investments.

As our cash flow and EBITDA remains very strong we expect our financial position to only strengthen from here in.

In addition to funding strategic investments cash flow will allow us to navigate any economic shocks that may arise over the coming quarters.

So for the second quarter, we expect total sales of 545 to 565 million.

Gross margin rate to be in the 31 to 39 and a half per cent range <unk>.

G&A rate to be in the 35% to 31% range.

The effective tax rate or approximately 28% to 29%.

And diluted EPS of <unk> 25 to 30 cents per share.

For the full year.

Each has 53 weeks, we now expect total sales of 2.18 to 2.20 billion.

Gross margin rate to be in the $38 four to 38, 8% range.

G&A rate to be in the 32, 6% to 33% range and effective tax rate of approximately 26%.

And diluted EPS of 70 to 82 cents per share.

Looking ahead, we remain cautiously optimistic on customer demand and our ability to react in this dynamic environment.

Further supported by a strong balance sheet we.

We are managing will be inventories and progressing on our key strategic initiatives and investments in digital technology and stores to deliver both topline and bottom line growth over the long term.

We look forward to keeping you posted on our progress.

Now I'll turn the call back over to the operator.

Operator.

Thank you at this time, we will 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 you touched on phone.

We are 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'll pause momentarily to assemble our roster.

Our first question comes from Dana Telsey from the Telsey Group. Please go ahead.

Hi, good morning, everyone nice to see the progress in the Chico's brand can you give any comments or color on the overall state of the consumer buy brand, what you're seeing how promotional levels are and exiting the quarter into the second quarter. How are you planning for each brand and on the inventory side given the solid receptionist.

Fashion.

What percentage of the assortment do you expect to be fashion going forward and how does that impact the margin. Thank you.

Thank you Dana and make sure that I got all three of these I'm going to start with just reiterating that we had an outstanding quarter for all three brands.

Full price sales were healthy our AUR was up in all three brands and we gained market share in each one of our brands proof point that our strategy is working what we're seeing in the customer right. Now is very positive when you look at the running 12 month basis for the first quarter, our total customer account with us.

Up 2% our spend per customer increased 7% and our multichannel customer count grew by 6% with their spend being up nearly 7% and this grew in chico's by six whitehouse by four and even though the Soma customer account was down by 3%. We look at this as a positive.

Because what we were less promotional in the brand for the quarter and that last year drove one and done customers that did not stay with the brand. So overall our customer file is much healthier than it has been in the past.

Another data point that I'd like to reference on them on the customer file when we when we dug into the spend per customer when we look at each brand in every segment of customer that's coming to us over time, we are seeing that their spend per customer is growing year over year from first quarter and 19 to 20 to 10.

One to 22 to 23, so the customer is buying full price and she is less dependent on promotion holiday and we were less promotional in the quarter, which is why we delivered such strong margins for the quarter.

Your second question was about exiting the quarter and our plan in terms of I think that was inventory is that what it was related to Dana.

Yes, exactly okay. We're confident in our inventory position, we do not have a we don't we do not believe we have any liability in our inventories our inventories up 1% customer facing are very lean on top of last year's very lean we have the appropriate amount of basics in all three brands to be able.

To manage the continued profitability and health of the three brands and where we have an opportunity is to continue to add more fashion to the assortment in particular into the White House brand and then a more opportunity and sleepwear in Soma when you break that down which was your third question about the fashion per cent assortment and weather.

That's going to be as we move forward our customer in both apparel brands by a complete outfit. So we need the core stability of the basics in the inventory position that we have in basics to fuel the fashion that complement that for her to complete the outfit, that's where we see opportunity in white house in particular.

And we believe that will be corrected and rebalanced by the starting in the back half of next of this year.

Thank you.

The next question comes from Jeff <unk> from B Riley financial Please go ahead.

Okay.

Hi, guys great quarter.

Hi.

I was wondering on gross margin.

I know you don't endorse this statistic, but I am just looking at your what I kind of back into your gross margin merchandise margin drove the 2019, if it looks like you have.

Give or take you're probably.

And basis points better than that in Q1.

When you were in 2019 I was wondering if you can just kind of speak to it.

As we flow through the rest of the year, the sustainability of that and how you're thinking about gross margin.

Yeah, Jeff It's P J I'll take that.

That one so first off the the the gross margin is up on strong fundamentals and specifically in Q1, we saw over 200 basis point benefit on higher AUR and that is you know our algorithm going forward too to ensure that AUR are always outpaces.

Average unit cost and so so healthy healthy growth in AUR in Q1, and again, we expect to continue to keep a you are elevated going forward.

We also have seen a higher raw material costs that had been embedded in gross margin for a while now I will say that inbound freight costs, which have come down have more than offset that and we also expect that relationship relationship to continue.

The remainder of the year, so so higher raw material costs offset by lower freight costs and then the balance is just good expense management, so leveraging our costs are.

Our cost structure, that's embedded in gross margin and we generated over 40 basis points of leverage.

In Q1 on corporate expense. So so those are the puts and takes but over the long term.

We're really focused on on growing that AUR. We're also focused on store productivity.

And leveraging of occupancy cost, which is also a big reason why our gross margin is up since 2019.

Just a quick follow up if I may on <unk>.

Sure.

While we obviously theres so much the one brand I think that probably is a piece.

He said that the last few years.

So much.

And then the sizzle to the Chico's stories embedded itself I'm, just kind of curious if you could kind of give me your thoughts as you look at Soma as to it.

Why.

You're optimistic.

Some of the data if you could maybe elaborate a little more I know you gave some of it.

That in the script, but maybe just a little more if you can elaborate.

Absolutely Jeff we are encouraged by the trend at Soma and we look forward to that continued improvement as we move through the balance of this year and we do expect the brand to turn positive as we for this full year, we remain bullish on our long term opportunities for Soma because this segment of the market is not crowded on and then.

There is a lot of white space for us to be able to go out and capture and when you look at our performance consistently each quarter. We have gained market share in the core components of bras and panties. So this is to me a big indicator of low long term health of the <unk>.

And that is where you get repeat customers you get the loyalty as consumers into the brand and we have been fueling our pipeline of innovation. So that there is constantly newness that we are putting in front of the consumers in and this quarter, we had new online bras and stretch leaves. We also had expanded abandon cup size.

Within our <unk> franchise and in our Vanishing collection. So you will continue to see a fuel that innovation pipeline and continue to be on the journey of expanding our bra and panty menu at which is so important to us and growing our customer file and that repeat consumer the.

The other thing that gives us total confidence just is that in a highly promotional environment that exists out there in this segment of the business. We were able to have a very significant gross margin and AUR improvement by being very very lean on promotion compared to last year. So the.

Overall health and profitability of the brand is in a very good situation for us to be able to pivot to growth.

Awesome. Thank you very much.

This concludes our question and answer session I would like to turn the conference back over to Molly letting in Stein for any closing remarks.

Thank you before I close I want to note were very pleased to welcome Julian with meeting to our team as our new head of Investor Relations. She comes to us with a wealth of IR experience within the retail sector and we know the analysts and investor community will enjoy engaging with her we have a great story to tell at Chico's and Julie will be instrumental to helping us amplify.

So welcome Julie.

Our team has transformed the company into a customer led product obsessed digital first operationally excellent organization with three powerful brands that we believe have a clear path for profitable growth. We are confident in our ability to further enhance our operating performance strengthen our balance sheet and generate meaningful shareholder value.

Over the long term.

Thank you for your interest and time, we look forward to speaking with you again during our second quarter conference call.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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