Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in this Quarterly
Report on Form 10-Q ("this Form 10-Q") and in our Annual Report on Form 10-K for
the fiscal year ended
Executive Overview
We utilize an integrated, omnichannel approach to managing our business. We want our customers to experience our brands holistically and to view the various commerce channels we operate as a single, integrated experience rather than as separate sales channels operating independently. This approach allows our customers to browse, purchase, return or exchange our merchandise through whatever sales channel and at whatever time is most convenient. As a result, we track total sales and comparable sales on a combined basis.
Our growth strategy is supported by the "power of three" unique brands and the "power of three" commerce channels. Our physical stores serve as community centers for entertainment, self-discovery and a home for interactions with our store associate stylists and bra experts. Our digital stores serve as a first impression of our brands and an efficient platform to teach and inspire our customers about our merchandise. Our social brand ambassadors, which are a combination of store associates, social media platform hosts and hyperlocal social stylists who arrange events within their communities, are an additional connection between our physical stores and digital.
Business Highlights
The Company's highlights for the thirteen weeks ended
•Strong first quarter results:
•Continued improving sales performance at Chico's: The positive sales trajectory
continued at Chico's, evidenced by the strong 52% first quarter increase in
comparable sales versus the thirteen weeks ended
•Continued improving sales performance at WHBM: WHBM continued to deliver exceptional sales gains, posting a 65% comparable sales increase in the first quarter versus last year's first quarter. Customers responded to versatile dressing in seasonless fabrics, including timeless tailoring, premium denim and inspiring dresses. WHBM continued its diligent inventory discipline with on-hand inventory levels below pre-pandemic levels, driving higher productivity, elevated full-price sales and positive comparable sales versus the first quarter of fiscal 2019.
•Continued market share gains at Soma: Soma posted a first quarter net sales
increase of 0.5%, driven largely by the foundations business and partially
offset by the slowdown in lounge and cozy categories. The strong foundations
business was fueled by the launch of BodifyTM, a Smart BraTM utilizing
first-to-market technology. Data from market research firm
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•Enhanced marketing continued to drive traffic and bring new customers to all
three brands:
•Improved gross margin: The first quarter gross margin rate rose to 40.0%, exceeding first quarter outlook by 230 basis points and outperforming last year's first quarter by 730 basis points. Higher average unit retail and full-price sales combined with occupancy leverage offset elevated raw material and freight costs.
•Ongoing cost discipline: Selling, general and administrative expenses ("SG&A") declined to 31.6% of net sales, an improvement of 300 basis points over last year's first quarter, reflecting the impact of sales leverage and the ongoing benefit of cost savings initiatives implemented in prior years.
Financial Results
Income per diluted share for the first quarter was
Select Financial Results
The following table depicts select financial results for the thirteen weeks
ended
Thirteen Weeks Ended April 30, 2022 May 1, 2021 (in millions, except per share amounts) Net sales $ 541 $ 388 Income (loss) from operations 45 (8) Net income (loss) 35 (9) Net income (loss) per common and common equivalent share - diluted 0.28 (0.08) Current Trends
The ongoing pandemic has resulted in significant challenges across our business
starting in
The Company remains confident that it currently has sufficient liquidity to repay its obligations as they become due for the foreseeable future as the Company continues to drive operational efficiency and effectiveness, including executing on its cost saving initiatives announced in fiscal 2020 to mitigate the macro challenges of the pandemic. However, the extent to which the pandemic impacts our business operations, financial results, and liquidity will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the pandemic; our response to and ability to mitigate the impact of the pandemic; the negative impact the pandemic has on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending; its short- and longer-term impact on the levels of consumer confidence; the ability of our suppliers, vendors and customers to successfully address the impacts of the pandemic; supply chain disruptions; actions governments, businesses and individuals take in response to the pandemic; and how quickly economies recover after the pandemic subsides.
Fiscal 2022 Second Quarter and Updated Full Year Outlook
For the fiscal 2022 second quarter, the Company currently expects:
•Consolidated net sales of
•Gross margin rate as a percent of net sales of 38.7% to 39.4%;
•SG&A expenses as a percent of net sales of 31.2% to 31.6%;
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•Effective income tax rate of 26.0%; and
•Earnings per diluted share of
For the fiscal 2022 full year, the Company currently expects:
•Consolidated net sales of
•Gross margin rate as a percent of net sales of 38.3% to 38.6%;
•SG&A expenses as a percent of net sales of 32.6% to 32.9%;
•Effective income tax rate of 26.0%;
•Earnings per diluted share of
•Capital and cloud-based expenditures of approximately
Key Performance Indicators
In assessing the performance of our business, we consider a variety of key performance and financial measures to evaluate our business, develop financial forecasts and make strategic decisions. These key measures include comparable sales, gross margin as a percent of sales, diluted income (loss) per share and return on net assets ("RONA"). In light of the pandemic, we have shifted our focus to effectively manage our liquidity position, including aligning our operating cost structure with expected sales. We will continue to evaluate our other key performance and financial measures in addition to our liquidity position. The following describes these measures.
Liquidity
Liquidity is measured through cash flow, which is the measure of cash provided by or used in operating, investing and financing activities. We believe that as a result of the Company's extensive measures to mitigate the impact of the pandemic discussed above, we were able to, and continue to, effectively manage our liquidity position.
Comparable Sales
Comparable sales is an omnichannel measure of the amount of sales generated
from products the Company sells directly to the consumer relative to the amount
of sales generated in the comparable prior-year period. Comparable sales is
defined as sales from stores open for the preceding twelve months, including
stores that have been expanded, remodeled or relocated within the same general
market and includes online and catalog sales, and beginning in the third quarter
of fiscal 2019, includes international sales. The comparable sales calculation
excludes the negative impact of stores closed four or more days. The Company
views comparable sales as a key performance indicator to measure the performance
of our business, however, we are not providing comparable sales figures for last
year's first quarter compared to the thirteen weeks ended
Gross Margin as a Percentage of
Gross margin as a percentage of net sales is computed as gross margin divided by net sales. We believe gross margin as a percentage of net sales is a primary metric to measure the performance of our business as it is used to determine the value of incremental sales, and to guide pricing and promotion decisions.
Diluted Income (Loss) per Share
Income (loss) per share is determined using the two-class method when it is more dilutive than the treasury stock method. Basic income (loss) per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period, including participating securities. Diluted income (loss) per share reflects the dilutive effect of potential common shares from non-participating securities such as stock options, performance stock units and restricted stock units. Whereas basic income (loss) per share serves as an indicator of the Company's profitability, we believe diluted income (loss) per share is a key performance measure because it gauges the Company's quality of income (loss) per share assuming all potential common shares from non-participating securities are exercised.
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RONA is defined as (a) net income (loss) divided by (b) the "five-point average" (based on balances at the beginning of the first quarter plus the final balances for each quarter of the fiscal year) of net working capital less cash and marketable securities plus fixed assets. We believe RONA is a primary metric as it helps to determine how well the Company is utilizing its assets. As such, a higher RONA could indicate that the Company is using its assets and working capital efficiently and effectively.
Our Business Strategy
Our overall business strategy is focused on building a collection of distinct high-performing retail brands primarily serving the fashion needs of women with moderate to high household income levels.
In fiscal 2020, the Company took actions to rapidly transform into a digital-first company, fast-tracking numerous innovation and digital technology investments, and we continued those investments during fiscal 2021. We have also enhanced our marketing efforts to drive traffic and new customers to our brands, while retaining newly acquired customers at a meaningfully higher rate than the pre-pandemic year of fiscal 2019.
The primary function of the Company is the production and procurement of beautiful merchandise that delivers the brand promise and brand positioning of each of our brands and resonates with customers. To that end, we continue to strengthen our merchandise and design capabilities and enhance our sourcing and supply chain to deliver product in a timely manner to our customers while also concentrating on improvements to the quality and aesthetic of our merchandise. Over the long term, we may build our brand portfolio by organic development or acquisition of other specialty retail concepts if research indicates that the opportunity complements our current brands and is appropriate and in the best interest of our shareholders.
We pursue improving the performance of our brands by building our omnichannel capabilities, growing our online presence, managing our store base, executing marketing plans, effectively leveraging expenses, considering additional sales channels and markets, and optimizing the merchandise offerings of each of our brands. We continue to invest heavily in our omnichannel capabilities so our customers can fully experience our brands in the manner they choose.
We view our stores and Company-operated e-commerce websites as a single,
integrated sales function rather than as separate, independently operated sales
channels. As a result, we maintain a shared inventory platform for our primary
operations, allowing us to fulfill orders for all channels from our distribution
center ("DC") in
We seek to acquire new customers and retain existing customers by leveraging existing customer-specific data and through targeted marketing, including digital marketing, social media, television, catalogs and mailers. We seek to optimize the potential of our brands with innovative product offerings, potential new merchandise opportunities, and brand extensions that enhance the current offerings, as well as through our continued emphasis on our trademark "Most Amazing Personal Service" standard. We also will continue to consider potential alternative sales channels for our brands, including international franchise, wholesale, licensing and other opportunities.
We continue to leverage our digital investments to convert single-channel customers to be omnichannel, or multi-channel, customers, as the average omnichannel customer spends more than three times the average single-channel customer.
We have four clearly defined strategic pillars that have guided our turnaround strategy since 2019 and will continue to guide us in the future.
1. Customer led; 2.Product obsessed; 3.Digital-first; and 4.Operationally excellent. 20
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Results of Operations
Thirteen Weeks Ended
Net Income (Loss) and Income (Loss) per Diluted Share
For the first quarter, the Company reported net income of
The following table depicts net sales by Chico's, WHBM and Soma in dollars and as a percentage of total net sales for the thirteen weeks endedApril 30, 2022 andMay 1, 2021 : Thirteen Weeks Ended April 30, 2022 May 1, 2021 (dollars in millions) (1) Chico's$ 264 48.9 %$ 177 45.6 % WHBM 169 31.2 104 26.8 Soma 107 19.9 107 27.6 Total Net Sales$ 541 100.0 %$ 388 100.0 %
(1) May not foot due to rounding.
For the first quarter, net sales were
The following table depicts comparable sales percentages by Chico's, WHBM and Soma for the first quarter: Thirteen Weeks Ended (1)April 30, 2022 Chico's 52.0 % WHBM 64.8 Soma (1.4)Total Company 40.6
(1) The Company is not providing comparable sales figures for last year's first quarter compared to the first quarter of fiscal 2020 as we do not believe it is a meaningful measure due to the significant impacts of the pandemic during fiscal 2020.
Cost of Goods Sold/Gross Margin
The following table depicts cost of goods sold and gross margin in dollars and
gross margin as a percentage of total net sales for the thirteen weeks ended
Thirteen Weeks Ended April 30, 2022 May 1, 2021 (dollars in millions) Cost of goods sold$ 324 $ 261 Gross margin 217 127 Gross margin percentage 40.0 % 32.7 %
For the first quarter, gross margin was
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Selling, General and Administrative Expenses
The following table depicts SG&A, which includes store and direct operating
expenses, marketing expenses and National Store Support Center ("NSSC")
expenses, in dollars and as a percentage of total net sales for the thirteen
weeks ended
Thirteen Weeks Ended April 30, 2022 May 1, 2021 (dollars in millions) Selling, general and administrative expenses$ 171 $ 134 Percentage of total net sales 31.6 % 34.6 %
For the first quarter, SG&A was
Income Taxes
For the first quarter, the
Cash,
At the end of the first quarter, cash and marketable securities totaled
Inventories
At the end of the first quarter, inventories totaled
Income Tax Receivable
At the end of the first quarter, our unaudited condensed consolidated balance
sheet reflected an
Liquidity and Capital Resources
The Company's material cash requirements include amounts outstanding under operating leases; open purchase orders for inventory and other operating expenses in the normal course of business; contractual commitments for future capital expenditures; long-term debt obligations; and interest payments on long-term debt. Our ongoing capital requirements will continue to be primarily for enhancing and expanding our omnichannel capabilities, including investments in our stores; information technology; and supply chain.
In response to the pandemic, the Company has taken actions to reinforce its
financial position and liquidity. Specific actions include: significantly
reducing capital and expense structures, centralizing key functions to create a
more nimble organization to better align costs with expected sales; suspending
the quarterly dividend commencing
The Company anticipates satisfying its material cash requirements from its cash flows from operating activities, our cash on hand, capacity within our credit facility and other liquidity options.
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The following table summarizes cash flows for the year-to-date period
Thirteen Weeks Ended April 30, 2022 May 1, 2021 (dollars in millions) (1) Net cash used in operating activities$ (0.2) $ (4) Net cash used in investing activities (3) (2) Net cash used in financing activities (8) (1) Net decrease in cash and cash equivalents$ (11) $ (7)
(1) May not foot due to rounding.
Operating Activities
Net cash used in operating activities for the year-to-date period of fiscal 2022
was
Investing Activities
Net cash used in investing activities for the year-to-date period of fiscal 2022
was
Financing Activities
Net cash used in financing activities for the year-to-date period of fiscal 2022
was
Credit Facility
On
The Credit Agreement contains customary representations, warranties, and affirmative covenants, as well as customary negative covenants, that, among other things restrict, subject to certain exceptions, the ability of the Company and certain of its domestic subsidiaries to: (i) incur liens, (ii) make investments, (iii) issue or incur additional indebtedness, (iv) undergo significant corporate changes, including mergers and acquisitions, (v) make dispositions, (vi) make restricted payments, (vii) prepay other indebtedness and (viii) enter into certain other restrictive agreements. The Company may pay cash dividends and repurchase shares under its share buyback program, subject to certain thresholds of available borrowings based upon the lesser of the aggregate amount of commitments under the Credit Agreement and the borrowing base, determined after giving effect to any such transaction or payment, on a pro forma basis. In addition, the Company must pay a commitment fee per annum on the unused portion of the commitments under the Credit Agreement.
As of
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Store and Franchise Activity
During the thirteen weeks ended
Stores continue to be an important part of our omnichannel strategy, and digital
sales are higher in markets where we have a retail presence, but we intend to
optimize our real estate portfolio, reflecting our emphasis on digital and our
priority for higher profitability standards. We will continue to adjust our
store base to align with these standards, primarily as leases come due, lease
kickouts are available, or buyouts make economic sense. We closed 2
underperforming locations during the thirteen weeks ended
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations
are based upon the condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in
Forward-Looking Statements This Form 10-Q may contain statements concerning our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry and other statements that are not historical facts. These are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, words or phrases such as "aim," "anticipates," "believes," "could," "estimates," "expects," "intends," "target," "will," "plans," "path," "should," "assumptions," "outlook" and similar expressions identify forward-looking statements. These forward-looking statements are based largely on information currently available to our management and are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those expressed or implied by such forward-looking statements. Although we believe our expectations are based on reasonable estimates and assumptions, they are not guarantees of performance. There is no assurance that our expectations will occur or that our estimates or assumptions will be correct, and we caution investors and all others not to place undue reliance on such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A, "Risk Factors" in our most recent Annual Report on Form 10-K and, from time to time, in Item 1A, "Risk Factors" of our Quarterly Reports on Form 10-Q and the following:
•the effects of the pandemic, including uncertainties about its depth and duration, new variants of COVID-19 that have emerged, the speed, efficacy and availability of vaccines and treatments, its impact on general economic conditions, human capital management, consumer behavior and discretionary spending, the effectiveness of any actions taken in response to the pandemic, and the impact of the pandemic on our manufacturing operations and shipping costs and timelines; •the ability of our suppliers, logistics providers, vendors and landlords, to meet their obligations to us in light of financial stress, labor shortages, liquidity challenges, bankruptcy filings by other industry participants, and supply chain and other disruptions; •increases in unemployment rates; 24
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•increases in labor shortages and our ability to sufficiently staff our retail stores; •changes in general economic conditions, including, but not limited to, consumer confidence and consumer spending patterns; •the impact of inflation on consumer spending; •market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises, war and other military conflicts (including the ongoing military conflict betweenRussia andUkraine ) or other major events, or the prospect of these events, including their impact on consumer spending; •shifts in consumer behavior, and our ability to adapt, identify and respond to new and changing fashion trends and customer preferences, and to coordinate product development with buying and planning; •changes in the general or specialty retail or apparel industries, including significant decreases in market demand and the overall level of spending for women's private branded clothing and related accessories; •our ability to secure and maintain customer acceptance of in-store and online concepts and styles; •increased competition in the markets in which we operate, including our ability to remain competitive with customer shipping terms and costs; •decreases in customer traffic at our stores; •fluctuations in foreign currency exchange rates and commodity prices; •significant increases in the costs of manufacturing, raw materials, transportation, importing, distribution, labor and advertising; •decreases in the quality of merchandise received from suppliers and increases in delivery times for receiving such merchandise; •our ability to appropriately manage our store fleet, including the closing of underperforming stores and opening of new stores, and our ability to achieve the expected results of any such store openings or store closings; •our ability to appropriately manage inventory and allocation processes and leverage targeted promotions; •our ability to maintain cost saving discipline; •our ability to operate our retail websites in a profitable manner; •our ability to successfully identify and implement additional sales and distribution channels; •our ability to successfully execute and achieve the expected results of our business, brand strategies, brand awareness programs, and merchandising and marketing programs including, but not limited to, the Company's turnaround strategy, retail fleet optimization plan, sales initiatives, multi-channel strategies and five operating priorities which are: 1) continuing our ongoing digital transformation; 2) further refining product through fit, quality, fabric and innovation in each of our brands; 3) driving increased customer engagement through marketing; 4) maintaining our operating and cost discipline; and 5) further enhancing the productivity of our real estate portfolio; •our ability to utilize our NSSC, DC and other support facilities in an efficient and effective manner; •our reliance on sourcing from foreign suppliers and significant adverse economic, labor, political or other shifts (including adverse changes in tariffs, taxes or other import regulations, particularly with respect toChina , or legislation prohibiting certain imports fromChina ); •U.S. and foreign governmental actions and policies and changes thereto; •the continuing performance, implementation and integration of our management information systems; •our ability to successfully update our information systems; •the impact of any system failure, cyber security or other data security breaches, including any security breaches resulting in the theft, transfer, or unauthorized disclosure of customer, employee, or company information; •our ability to comply with applicable domestic and foreign information security and privacy laws, regulations and technology platform rules or other obligations related to data privacy and security; •our ability to attract, hire, train, motivate and retain qualified employees in an inclusive environment; •our ability to successfully recruit leadership or transition members of our senior management team; •future unsolicited offers to buy the Company and actions of activist shareholders and others and our ability to respond effectively; 25
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•our ability to secure and protect our intellectual property rights and to protect our reputation and brand images; •unanticipated obligations or changes in estimates arising from new or existing litigation (including settlements thereto), income taxes and other regulatory proceedings; •unanticipated adverse changes in legal, regulatory or tax laws; and •our ability to comply with the terms of our Credit Agreement, including the restrictive provisions limiting our flexibility in operating our business and obtaining credit on commercially reasonable terms.
These factors should be considered in evaluating forward-looking statements contained herein. All forward-looking statements that are made or attributable to us are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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