Chico's FAS (CHS) Q1 2021 Earnings Call Transcript

Chico's FAS (CHS)
Q1 2021 Earnings Call
Jun 08, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Chico's FAS first-quarter 2021 conference call and webcast. All participants will be on a listen-only mode. Please note, this call is being recorded. I would now like to turn the call over to David Oliver, interim CFO, and SVP, controller.

Mr. Oliver, please go ahead, sir.

David Oliver -- Interim CFO, Senior Vice President, and Controller

Good morning, and welcome to Chico's FAS first-quarter 2021 conference call and webcast. Molly Langenstein, our CEO and president, also joins me today. For reference, our earnings release can be found on our website at www.chicosfas.com and under press releases on the investor relations page. Today's comments will include forward-looking statements regarding our current expectations, assumptions, plans, estimates, judgments, and projections about our business and our industry, which 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 that are made on this call. We disclaim any obligation to update or revise any information discussed on this call, except as may be otherwise required by law. Now, I'll turn the call over to Molly.

Molly Langenstein -- Chief Executive Officer and President

Thank you, David, and good morning, everyone. Our first-quarter results underscore the tremendous progress we are making in our turnaround strategy and the power of our three unique brands and being a digital-first, customer-led company. The strong Q1 performance across all three 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, spurred by Soma's extraordinary sales growth of 65%, as well as fantastic customer response to Chico's and White House Black Market, which drove 31% growth in our apparel brand. We delivered meaningful year-over-year gross margin and SG&A rates improvement, and our balance sheet is strong with ample cash and liquidity and strategically lean inventories. We drove a much higher gross margin by dramatically reducing the number of promotional days. Not only did Soma post a 65% sales growth over last year's first quarter, but comparable sales also grew a remarkable 39% over the first quarter of 2019.

Soma is well on its way to delivering an incremental 100 million in sales this year. According to NPD research data, Soma 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 a meaningful share of the U.S. intimate apparel market and explode into a billion-dollar brand by 2025.

The business strategy put in place in Soma around inventory, products, marketing, and digital is working, and we have every confidence applying the same strategy as Chico's and White House Black Market will continue the apparel sales momentum. Exciting things are happening at Chico's and White House Black Market and in the first quarter, the apparel brands posted faster sell-through rates and higher maintains margins than in 2019. This is proof that our marketing efforts are increasingly more compelling and that our elevated products and styling are truly resonating with our customers. Our first-quarter results underscore the tremendous progress we are making on the five strategic priorities that I shared last quarter.

Let me take a few minutes to update you on each. Number one, continuing our ongoing digital transformation. Over the last two years, we have successfully transformed into a seamless digital-first, customer-led model for all three of our brands, making major strategic investments in talent and technology. These efforts are paying off as year-over-year first-quarter digital sales grew a very healthy 13.4%.

All three brands and digital sales grew year over year. Customers using our proprietary digital tools, Style Connect and My Closet, are more engaged and have our highest conversion rate. These tools fuel 10% sequential multi-channel customer growth, and these customers spend more than three times a single-channel customer. Number two, further refining products 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 solutions are core in the Soma brand. Our products serve our customers' lifestyles and promote health, including a great night's sleep. Aloe-infused Restore and Cool Nights are two great examples.

We continually innovate and introduce three new bras during the corner -- quarter, exceeding sales expectations. In both our apparel brands, we've changed the styling of the products to more closely aligned with the customer. We embrace the comfort culture and develop innovative fabrics and technology to provide comfort features, shifting her from sweat to fabric with ease. We are very encouraged by what we are seeing.

At Chico's, she loves our core franchise bottom, woven, and knit top in new fabrics. At White House Black Market, new elevated casual in denim and tops are popular as she is buying coordinating outfits. And dresses are once again at the top of her list for both apparel brands. Number three, driving a significant increase in 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 eight years.

And at White House Black Market, the average age dropped slightly. These stats reinforce the runway for all three brands. At Soma, we are growing the customer base. One in three new customers is under 34, resulting from our more inclusive branding and evolved product assortment.

Our brands use digital storytelling. The use of social influencers, and building upon our organic social efforts, and wider-by communications are some of the ways we are working to elevate our marketing and reach new customers. Our weekly Facebook Live events, for example, are driving significant engagement compared to industry benchmarks. Number four, 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 are 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. The density of products, improved products, and social proofing are driving a sense of urgency for customer purchasing.

These factors should continue to strengthen gross margin performance. And number five, delivering higher productivity in our real estate portfolio. Stores continue to be an integral part of our strategy because data shows that digital sales are higher in the markets where we have a retail presence. We also will support store growth where the investments deliver profitable returns.

Soma is a great example of that. We have successfully opened 30 Soma shop-in-shops inside Chico's stores. These 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 tighten our real estate portfolio for higher store profitability standards. We will continue to shrink our store base to align with these standards, primarily as leases come due, lease kickouts are available, or buyouts make economic sense. We have lease flexibility with nearly 60% of our leases coming up for renewal or kickout available over the next three years. We anticipate closing 13% to 16% of our remaining store fleet over the next three years, with 40 to 45 of those closures occurring in fiscal '21.

Our stand-alone boutiques outperform those in regional enclosed malls by about seven percentage points. Accordingly, the vast majority of closures are expected to be mall-based with the SKU toward Chico's and White House Black Market stores. Now, let me turn the call over to David to update you on our financial performance.

David Oliver -- Interim CFO, Senior Vice President, and Controller

Thanks, Molly. First-quarter net sales totaled $388 million, compared to $280 million last year. This 38.4% increase reflects a 13.4% increase in digital sales, and recovery, and store sales, as our stores were temporally closed last year. Looking at the first quarter compared to 2019, comparable sales decline 22%, with Soma up 39%, and the apparel brands down 33%.

Total company on-hand inventories for the first quarter compared to 2019 were down 21%, with Soma up 13% and the apparel brands down 35.3%, illustrating these strategic investments in Soma's growth and our turnaround strategy in apparel. We reported a net loss of $8.9 billion, or $0.08 per diluted share, compared to a net loss of $178 million, or $1.55 per diluted share last year, which included the $35 million, or $1.17 per diluted share and significant after-tax noncash charges. Our gross margin was 32.7%, compared to negative 4% last year. The prior-year margin included the impact of significant noncash inventory write-offs and store asset impairments.

This year, we meaningfully expanded our margin rate as a result of disciplined inventory control, strategically reduced promotions, and more full-price selling. SG&A expenses for the first quarter total $134 million, just a modest uptick from the first quarter last year but our stores were closed for approximately half of the quarter. We have continued our cost discipline and reduction initiatives, generating lower SG&A expense dollars and rate than the first quarter of fiscal '19 and a sequential improvement in both dollars and rate over the fourth quarter of fiscal '20. 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 million credit facility remain unchanged from the fiscal year at $149 million. Our financial position liquidity continued to be bolstered by strong digital performance across all brands, improving retail store sales, and a significant leaner expense structure that better aligns cost with sales. In addition, our balance sheet reflects a federal income tax receivable of approximately $55 million that we expect to realize in the summer of fiscal '21.

We anticipate building cash throughout fiscal '21. Regarding first-quarter cash flows, cash used in operating activities was $4.4 million. This use reflects the impact of more than $15 million in outflows or residual rental settlements for the fiscal '20 real estate rent abatement and reduction initiatives, as well as reductions in extended supply or payment terms implemented last year. On a real estate front, in March, we launched phase two of our lease renegotiation process with A&G 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 '21. This is an addition to the $65 million abatements 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 '23. In the first quarter of fiscal '21, we closed nine stores and we ended the quarter with 1,293 boutiques. Now, let me turn to our outlook. We expect continued improving demand throughout the year for Chico's FAS, and we also realized there is economic uncertainty as we continue to emerge from the pandemic.

We do, however, believe it is appropriate to provide some high-level public expectations for fiscal 2021. We expect a 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 percent of sales down 500 to 600 basis points year over year and income tax expense of approximately $500,000. I'll now turn the call back over to Molly.

Molly Langenstein -- Chief Executive Officer and President

Thank you, David. Before 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 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 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 their income 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?

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question comes from Susan Anderson with -- oh, I apologize, today's first question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good morning, everyone. Nice to see the progress and the continuing progress on Soma. As 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 top line and margin evolving there? And can you just give us any further update in expanding on inventory given the freight and port congestion disruptions? Thank you.

Molly Langenstein -- Chief Executive Officer and President

Yes. Good morning, Dana. First of all, let's address the apparel. You know, our turnaround strategies are on track and we're not simply bouncing back from COVID.

We are retooling a company that had six years of declines in -- specifically, the apparel brands and we are being methodical and strategic about that. So, the inventory discipline and the sales accordingly because of what we're doing in marketing we feel confident of what's happening from the customer response. You, in particular, can see as the business opened up and vaccines were aggressively being put out into the marketplace that our sales were improving and starting particularly in the March period, and we've seen that grow from March through May. So, we are pleased with the results that we are seeing in apparel and keeping our inventories disciplined as we continue to put our turnaround strategies in place and taking the discipline that we've learned from Soma 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 -- maintain margins, which right now are back to historical highs.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Molly Langenstein -- Chief Executive Officer and President

And, oh, and you asked me about the supply chain.

Dana Telsey -- Telsey Advisory Group -- Analyst

Exactly.

Molly Langenstein -- Chief Executive Officer and President

Yes. Sorry, Dana.

Dana Telsey -- Telsey Advisory Group -- Analyst

No.

Molly Langenstein -- Chief Executive Officer and President

And in terms of supply chain, you know, yes, we are experiencing headwinds. We are not fully out of COVID. There are problems to overcome and cost pressures in the supply chain, sourcing, production, logistics, fulfillment, and also the tightening in the 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 it's critical.

We are partnering with suppliers for alternative countries of production, and we are continuing to keep our inventories lean so that the regular price can continue to drive solid gross margin to absorb these escalating operating costs.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

And our next question is from the extension of Susan Anderson of B. Riley. Please go ahead.

Susan Anderson -- B. Riley FBR Inc. -- Analyst

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 put 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 margins can you pull to get closer to the historical levels?

Molly Langenstein -- Chief Executive Officer and President

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, when we look at this that we are in the middle of our turnaround, and this really is our second quarter of positive improvement on top of the Q4 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 a dramatic reduction in promotions and ability to be able to build very thoughtful promotions inside the business that our category and item-specific versus being entire inventories, just as there was just too much inventory flooded 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 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 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 that the margin should continue to be very healthy as it relates back to historical highs.

Susan Anderson -- B. Riley FBR Inc. -- Analyst

Great. And then just on the inventory levels, it looks pretty lean across the brands. 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 in the more fashionable apparel or workwear? And then also if you could -- if you could talk about maybe your ability to chase to try and fulfill that demand or is the supply chain situation with the backup at the ports kind of hindering that? Thanks.

Molly Langenstein -- Chief Executive Officer and President

Sure. The apparel product that's selling indicates optimism and excitement. Actually, our customers are emotionally responding to color print and novelty. They're very -- had a very high level and we see strong categories are in woven and dresses, also with strong business across bottoms, in the denim pants, and short categories in both apparel brands.

And we see where we've integrated new fabrics that have a touch of cool or that anti-microbial hand, or we've included technology into our bottoms so that they are more comfortable. All of those are working across the apparel brands. The beauty right now, Susan, is that we don't have a category that we are -- that we're overstocked in. So, we are lean and tight across each one of our categories and classifications, and see positivity in the business and very, very lean clearance inventories as a comparison to '19.

So, that all bodes well. In Soma where we've made investments because of the size intensity of that business and also the launch of new bras, we are very pleased with the performance that we are seeing and the growth that we're continuing to get. And our sales continue in all three brands to outperform the investment in our inventory. And as it relates to being able to chase inventory, you know, we've said at the -- at Q4 that we felt that we would be having our inventories at Q1, we're going to be down 30% in apparel and down more than 30% in Soma.

So, you can see based upon where on-hand inventories have ended that we have been chasing goods because the sales have been better than we had forecasted. So, so far, by changing the PLC calendar four weeks and really keeping a very close eye on vessel versus air, and also being able to manipulate the ports, we've been able to stay on top of a really challenging situation. But we know that there are additional headwinds in front of us in terms of -- as the 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 it to sales.

Susan Anderson -- B. Riley FBR Inc. -- Analyst

Great. That sounds good. And then if I could just add one last one. I assume you saw the sales accelerate throughout first -- as what you went throughout the first quarter.

I'm curious if that momentum continued into second quarter or if you've even seen it accelerate as more and more people get vaccinated and people are starting to get out particularly as the weather is bright now. Thanks.

Molly Langenstein -- Chief Executive Officer and President

Yes, Susan, that's exactly what we are seeing. In particular, you know, the -- our -- the two apparel brands, in particular, are for women. You know, we don't have a teen business, so in comparison to other retailers, you have to look at how the woman is spending her time and how she was vaccinated. And you saw it both in NPD data and in NRF data that this apparel business really started to open up the second week in March.

Once their -- once more people had their second shots and has started to continue to excel -- escalate after 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 17% as compared to being down 22%. So, it was really that first five, six weeks of the quarter that we're still pretty depressed and where we saw the business opening up overall in the apparel brand, and the summer 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.

Susan Anderson -- B. Riley FBR Inc. -- Analyst

Great. That's very helpful. Thanks so much, and good luck the rest of the year.

Molly Langenstein -- Chief Executive Officer and President

Thank you, Susan.

Operator

And our next question is from the extension of Marni Shapiro with Retail Tracker. Please go ahead.

Marni Shapiro -- The Retail Tracker -- Analyst

Hey, guys. Congrats. Great improvement. I guess a couple of follow-ups in some of the questions.

Could you talk a little bit about some of the delivery delays? I know White House was having some issues, and so -- 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 and is it pretty much cleaned up for the second quarter and going forward? And then if you could also just touch on Soma's business continues to be outstanding, obsessed, they look amazing. Could you talk about what percentage of those shoppers are sticky like coming back, repeat shoppers coming back time and -- time after time?

Molly Langenstein -- Chief Executive Officer and President

Yes.

Marni Shapiro -- The Retail Tracker -- Analyst

If you have that data. I don't even know if you do.

Molly Langenstein -- Chief Executive Officer and President

Yes. Deliveries, yeah. I think every single one of us has been tried to a supply chain challenge and unfortunately, we are not out of that yet. It's been a whole host of different challenges that we have -- we've experienced whether -- and none of it actually has been factory-related.

Our factories and our deliveries have been on time. It's all been on vessel capacity, vessel sailing time, port delays, the lack of chassis in the U.S. to be able to get trucks to our DC. So, you know, every single leg of the supply chain post our suppliers has had some kind of issue along the way.

So, 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 say that with caution as there are still a lot of -- a lot of headwinds that are in front of every single, you know, function of stuff that's coming into the port. So, we are staying very closely aligned to it. I would say that probably everybody in the organization says they know more about supply chain today than they've ever known.

And -- but it's a critical piece in terms of keeping the flow moving and keeping good -- fresh goods to our customers to keep them engaged. So, today, we feel confident that we've made all the right decisions, but we're staying very close to it, Marni.

Marni Shapiro -- The Retail Tracker -- Analyst

OK. And just Soma.

Molly Langenstein -- Chief Executive Officer and President

As it relates to -- and as it relates to Soma, actually yes, we are staying within Soma that our customer is also fiercely loyal. You know, we know that -- and she goes, the customer stays with us 13 years and White House, nine. But in Soma, she stays with us six years, and we're finding that some of the typical buying patterns for intimate apparel being less frequent are a little more frequent as we expand our bra menu and we really offer a lot of different options for her, because we feel that the bra, in particular, is a very sticky category. And you need a wardrobe of them, you don't need just one for all the different wearing occasions.

So, we are encouraged by what we're seeing on the frequency of the shopper within Soma.

Marni Shapiro -- The Retail Tracker -- Analyst

That's fantastic. Best of luck in the summer, guys.

Molly Langenstein -- Chief Executive Officer and President

Thank you, Marni.

Operator

Thank you. This concludes our question-and-answer session. I would like to turn the call back to Molly Langenstein for closing comments.

Molly Langenstein -- Chief Executive Officer and President

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. 

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

David Oliver -- Interim CFO, Senior Vice President, and Controller

Molly Langenstein -- Chief Executive Officer and President

Dana Telsey -- Telsey Advisory Group -- Analyst

Susan Anderson -- B. Riley FBR Inc. -- Analyst

Marni Shapiro -- The Retail Tracker -- Analyst

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