UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended: | | Commission File Number: |
July 29, 2017May 5, 2018 | | 001-16435 |
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Chico’s FAS, Inc. (Exact name of registrant as specified in charter) |
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Florida | | 59-2389435 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
11215 Metro Parkway, Fort Myers, Florida 33966
(Address of principal executive offices)
239-277-6200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | | ý | | Accelerated filer | | ¨ |
Non-accelerated filer | | ¨ (do not check if a smaller reporting company) | | Smaller reporting company | | ¨ |
| | | | Emerging growth company | | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
At August 21, 2017,May 14, 2018, the registrant had 128,313,769129,163,264 shares of Common Stock, $0.01 par value per share, outstanding.
CHICO’S FAS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE
FISCAL THIRTEEN WEEKS ENDED MAY 5, 2018
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS |
CHICO’S FAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended | Thirteen Weeks Ended |
| July 29, 2017 | | July 30, 2016 | | July 29, 2017 | | July 30, 2016 | May 5, 2018 | | April 29, 2017 |
| | | | | | | | | | | | | | |
| Amount | | % of Sales | | Amount | | % of Sales | | Amount | | % of Sales | | Amount | | % of Sales | Amount | | % of Sales | | Amount | | % of Sales |
Net sales | $ | 578,581 |
| | 100.0 | | $ | 635,732 |
| | 100.0 |
| | $ | 1,162,309 |
| | 100.0 |
| | $ | 1,278,709 |
| | 100.0 |
| |
Net Sales | | $ | 561,815 |
| | 100.0 | % | | $ | 583,728 |
| | 100.0 | % |
Cost of goods sold | 369,480 |
| | 63.9 | | 394,922 |
| | 62.1 |
| | 715,795 |
| | 61.6 |
| | 775,564 |
| | 60.7 |
| 334,947 |
| | 59.6 |
| | 346,315 |
| | 59.3 |
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Gross margin | 209,101 |
| | 36.1 | | 240,810 |
| | 37.9 |
| | 446,514 |
| | 38.4 |
| | 503,145 |
| | 39.3 |
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Gross Margin | | 226,868 |
| | 40.4 |
| | 237,413 |
| | 40.7 |
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Selling, general and administrative expenses | 173,642 |
| | 30.0 | | 186,626 |
| | 29.4 |
| | 356,181 |
| | 30.6 |
| | 394,767 |
| | 30.9 |
| 186,419 |
| | 33.2 |
| | 182,539 |
| | 31.3 |
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Restructuring and strategic charges | — |
| | 0.0 | | 16,556 |
| | 2.6 |
| | — |
| | 0.0 |
| | 20,207 |
| | 1.5 |
| |
Income from operations | 35,459 |
| | 6.1 | | 37,628 |
| | 5.9 |
| | 90,333 |
| | 7.8 |
| | 88,171 |
| | 6.9 |
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Income from Operations | | 40,449 |
| | 7.2 |
| | 54,874 |
| | 9.4 |
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Interest expense, net | (443 | ) | | 0.0 | | (489 | ) | | (0.1 | ) | | (898 | ) | | (0.1 | ) | | (948 | ) | | (0.1 | ) | (245 | ) | | 0.0 |
| | (455 | ) | | (0.1 | ) |
Income before income taxes | 35,016 |
| | 6.1 | | 37,139 |
| | 5.8 |
| | 89,435 |
| | 7.7 |
| | 87,223 |
| | 6.8 |
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Income before Income Taxes | | 40,204 |
| | 7.2 |
| | 54,419 |
| | 9.3 |
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Income tax provision | 12,300 |
| | 2.2 | | 14,100 |
| | 2.2 |
| | 33,100 |
| | 2.9 |
| | 33,100 |
| | 2.6 |
| 11,200 |
| | 2.0 |
| | 20,800 |
| | 3.5 |
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Net income | $ | 22,716 |
| | 3.9 | | $ | 23,039 |
| | 3.6 |
| | $ | 56,335 |
| | 4.8 |
| | $ | 54,123 |
| | 4.2 |
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Per share data: | | | | | | | | | | | | | | |
Net Income | | $ | 29,004 |
| | 5.2 | % | | $ | 33,619 |
| | 5.8 | % |
Per Share Data: | | | | | | | | |
Net income per common share-basic | $ | 0.18 |
| | $ | 0.17 |
| | | | $ | 0.44 |
| | | | $ | 0.41 |
| | | $ | 0.23 |
| | | | $ | 0.26 |
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Net income per common and common equivalent share–diluted | $ | 0.18 |
| | $ | 0.17 |
| | | | $ | 0.44 |
| | | | $ | 0.41 |
| | | $ | 0.23 |
| | | | $ | 0.26 |
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Weighted average common shares outstanding–basic | 125,643 |
| | 129,215 |
| | | | 125,847 |
| | | | 130,406 |
| | | 125,277 |
| | | | 126,050 |
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Weighted average common and common equivalent shares outstanding–diluted | 125,677 |
| | 129,362 |
| | | | 125,890 |
| | | | 130,516 |
| | | 125,316 |
| | | | 126,103 |
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Dividends declared per share | $ | 0.0825 |
| | $ | 0.0800 |
| | | | $ | 0.2475 |
| | | | $ | 0.2400 |
| | | $ | 0.1700 |
| | | | $ | 0.1650 |
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The accompanying notes are an integral part of these condensed consolidated statements.
3
CHICO’S FAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
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| | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| July 29, 2017 | | July 30, 2016 | | July 29, 2017 | | July 30, 2016 |
Net income | $ | 22,716 |
| | $ | 23,039 |
| | $ | 56,335 |
| | $ | 54,123 |
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Other comprehensive income: | | | | | | | |
Unrealized gains on marketable securities, net of taxes | 10 |
| | 6 |
| | 32 |
| | 39 |
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Foreign currency translation gains (losses) | 133 |
| | 4 |
| | 109 |
| | (27 | ) |
Comprehensive income | $ | 22,859 |
| | $ | 23,049 |
| | $ | 56,476 |
| | $ | 54,135 |
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| | | | | | | |
| Thirteen Weeks Ended |
| May 5, 2018 | | April 29, 2017 |
Net Income | $ | 29,004 |
| | $ | 33,619 |
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Other comprehensive income: | | | |
Unrealized (losses) gains on marketable securities, net of taxes | (31 | ) | | 21 |
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Foreign currency translation losses | (68 | ) | | (24 | ) |
Comprehensive Income | $ | 28,905 |
| | $ | 33,616 |
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The accompanying notes are an integral part of these condensed consolidated statements.
4
CHICO’S FAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
| | | July 29, 2017 | | January 28, 2017 | | July 30, 2016 | | | | | | | |
| | | | | | May 5, 2018 | | February 3, 2018 | | April 29, 2017 |
ASSETS | | | | | | | | | | |
Current Assets: | | | | | | | | | | |
Cash and cash equivalents | $ | 135,324 |
| | $ | 142,135 |
| | $ | 100,532 |
| $ | 193,547 |
| | $ | 160,071 |
| | $ | 119,142 |
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Marketable securities, at fair value | 50,878 |
| | 50,370 |
| | 50,612 |
| 61,196 |
| | 60,060 |
| | 50,629 |
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Inventories | 235,167 |
| | 232,363 |
| | 235,636 |
| 253,777 |
| | 233,726 |
| | 273,878 |
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Prepaid expenses and other current assets | 49,381 |
| | 52,758 |
| | 64,872 |
| 53,494 |
| | 60,668 |
| | 46,900 |
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Total Current Assets | 470,750 |
| | 477,626 |
| | 451,652 |
| 562,014 |
| | 514,525 |
| | 490,549 |
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Property and Equipment, net | 443,833 |
| | 477,185 |
| | 515,088 |
| 407,569 |
| | 421,038 |
| | 460,845 |
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Other Assets: | | | | | | | | | | |
Goodwill | 96,774 |
| | 96,774 |
| | 96,774 |
| 96,774 |
| | 96,774 |
| | 96,774 |
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Other intangible assets, net | 38,930 |
| | 38,930 |
| | 38,930 |
| 38,930 |
| | 38,930 |
| | 38,930 |
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Other assets, net | 16,745 |
| | 18,479 |
| | 18,989 |
| 10,707 |
| | 16,338 |
| | 18,432 |
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Total Other Assets | 152,449 |
| | 154,183 |
| | 154,693 |
| 146,411 |
| | 152,042 |
| | 154,136 |
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| $ | 1,067,032 |
| | $ | 1,108,994 |
| | $ | 1,121,433 |
| $ | 1,115,994 |
| | $ | 1,087,605 |
| | $ | 1,105,530 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | |
Accounts payable | $ | 125,945 |
| | $ | 116,378 |
| | $ | 136,761 |
| $ | 138,439 |
| | $ | 118,253 |
| | $ | 133,278 |
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Current debt | 15,000 |
| | 16,250 |
| | 10,000 |
| 15,000 |
| | 15,000 |
| | 15,000 |
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Other current and deferred liabilities | 123,137 |
| | 170,232 |
| | 151,823 |
| 145,893 |
| | 133,715 |
| | 149,151 |
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Total Current Liabilities | 264,082 |
| | 302,860 |
| | 298,584 |
| 299,332 |
| | 266,968 |
| | 297,429 |
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Noncurrent Liabilities: | | | | | | | | | | |
Long-term debt | 61,068 |
| | 68,535 |
| | 77,252 |
| 49,868 |
| | 53,601 |
| | 64,801 |
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Deferred liabilities | 112,218 |
| | 118,543 |
| | 126,377 |
| 99,330 |
| | 103,282 |
| | 115,543 |
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Deferred taxes | 11,222 |
| | 9,883 |
| | 9,377 |
| 6,560 |
| | 7,372 |
| | 14,613 |
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Total Noncurrent Liabilities | 184,508 |
| | 196,961 |
| | 213,006 |
| 155,758 |
| | 164,255 |
| | 194,957 |
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Commitments and Contingencies |
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| |
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Shareholders’ Equity: | | | | | | | | | | |
Preferred stock | — |
| | — |
| | — |
| |
Common stock | 1,283 |
| | 1,288 |
| | 1,320 |
| |
Preferred stock, $0.01 par value; 2,500 shares authorized; no shares issued and outstanding | | — |
| | — |
| | — |
|
Common stock, $0.01 par value; 400,000 shares authorized; 158,330 and 156,585 and 156,601 shares issued respectively; and 129,216 and 127,471 and 129,488 shares outstanding, respectively | | 1,292 |
| | 1,275 |
| | 1,295 |
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Additional paid-in capital | 458,172 |
| | 452,756 |
| | 440,038 |
| 471,458 |
| | 468,806 |
| | 453,999 |
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Treasury stock, at cost | (406,776 | ) | | (386,094 | ) | | (346,062 | ) | |
Treasury stock, at cost, 29,114 and 29,114 and 27,113 shares, respectively | | (413,465 | ) | | (413,465 | ) | | (395,585 | ) |
Retained earnings | 565,650 |
| | 541,251 |
| | 514,495 |
| 601,801 |
| | 599,810 |
| | 553,466 |
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Accumulated other comprehensive income (loss) | 113 |
| | (28 | ) | | 52 |
| |
Accumulated other comprehensive loss | | (182 | ) | | (44 | ) | | (31 | ) |
Total Shareholders’ Equity | 618,442 |
| | 609,173 |
| | 609,843 |
| 660,904 |
| | 656,382 |
| | 613,144 |
|
| $ | 1,067,032 |
| | $ | 1,108,994 |
| | $ | 1,121,433 |
| $ | 1,115,994 |
| | $ | 1,087,605 |
| | $ | 1,105,530 |
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The accompanying notes are an integral part of these condensed consolidated statements.
5
CHICO’S FAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | Twenty-Six Weeks Ended | Thirteen Weeks Ended |
| July 29, 2017 | | July 30, 2016 | May 5, 2018 | | April 29, 2017 |
Cash Flows From Operating Activities: | | | | |
Cash Flows from Operating Activities: | | | | |
Net income | $ | 56,335 |
| | $ | 54,123 |
| $ | 29,004 |
| | $ | 33,619 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 50,012 |
| | 55,445 |
| 22,445 |
| | 25,145 |
|
Loss on disposal and impairment of property and equipment | 1,183 |
| | 3,542 |
| 1,031 |
| | 513 |
|
Deferred income taxes | 1,653 |
| | (7,492 | ) | (838 | ) | | 4,905 |
|
Stock-based compensation expense | 10,232 |
| | 9,623 |
| |
Share-based compensation expense | | 5,055 |
| | 5,794 |
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Deferred rent and lease credits | (9,345 | ) | | (9,523 | ) | (5,594 | ) | | (4,358 | ) |
Changes in assets and liabilities: | | | | | | |
Inventories | (2,804 | ) | | (1,802 | ) | (20,875 | ) | | (41,516 | ) |
Prepaid expenses and other current assets | 4,690 |
| | (3,379 | ) | 12,270 |
| | 5,955 |
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Income tax receivable | 332 |
| | 26,087 |
| |
Accounts payable | (903 | ) | | (3,130 | ) | 9,253 |
| | 6,358 |
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Accrued and other liabilities | (44,076 | ) | | (1,588 | ) | 10,143 |
| | (19,724 | ) |
Net cash provided by operating activities | 67,309 |
| | 121,906 |
| 61,894 |
| | 16,691 |
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Cash Flows From Investing Activities: | | | | |
Cash Flows from Investing Activities: | | | | |
Purchases of marketable securities | (14,264 | ) | | (28,708 | ) | (9,123 | ) | | (8,491 | ) |
Proceeds from sale of marketable securities | 13,794 |
| | 28,334 |
| 7,965 |
| | 8,259 |
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Purchases of property and equipment, net | (18,040 | ) | | (25,231 | ) | (9,991 | ) | | (9,531 | ) |
Net cash used in investing activities | (18,510 | ) | | (25,605 | ) | (11,149 | ) | | (9,763 | ) |
Cash Flows From Financing Activities: | | | | |
Cash Flows from Financing Activities: | | | | |
Payments on borrowings | (8,750 | ) | | (5,000 | ) | (3,750 | ) | | (5,000 | ) |
Proceeds from issuance of common stock | 1,095 |
| | 1,272 |
| 605 |
| | 1,062 |
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Dividends paid | (21,467 | ) | | (21,405 | ) | (11,065 | ) | | (10,862 | ) |
Repurchase of common stock | (20,700 | ) | | (56,298 | ) | — |
| | (9,498 | ) |
Payments of tax withholdings related to stock-based awards | (5,897 | ) | | (4,262 | ) | |
Payments of tax withholdings related to share-based awards | | (2,991 | ) | | (5,599 | ) |
Net cash used in financing activities | (55,719 | ) | | (85,693 | ) | (17,201 | ) | | (29,897 | ) |
Effects of exchange rate changes on cash and cash equivalents | 109 |
| | (27 | ) | (68 | ) | | (24 | ) |
Net (decrease) increase in cash and cash equivalents | (6,811 | ) | | 10,581 |
| |
Net increase (decrease) in cash and cash equivalents | | 33,476 |
| | (22,993 | ) |
Cash and Cash Equivalents, Beginning of period | 142,135 |
| | 89,951 |
| 160,071 |
| | 142,135 |
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Cash and Cash Equivalents, End of period | $ | 135,324 |
| | $ | 100,532 |
| $ | 193,547 |
| | $ | 119,142 |
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Supplemental Disclosures of Cash Flow Information: | | | | | | |
Cash paid for interest | $ | 1,203 |
| | $ | 1,101 |
| $ | 710 |
| | $ | 593 |
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Cash paid for income taxes, net | $ | 39,553 |
| | $ | 15,507 |
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Cash (received) paid for income taxes, net | | $ | (174 | ) | | $ | 337 |
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The accompanying notes are an integral part of these condensed consolidated statements.
6
Chico’sCHICO’S FAS, Inc.INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 29, 2017per share amounts and where otherwise indicated)
(Unaudited)
Note 1. Basis of PresentationBASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of Chico’s FAS, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by accounting principles generally accepted in the U.S. (“U.S. GAAP”) for complete financial statements. In the opinion of management, such interim financial statements reflect all normal, recurring adjustments considered necessary to present fairly the condensed consolidated financial position, the results of operations and cash flows for the interim periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. For further information, refer to the consolidated financial statements and notes thereto for the fiscal year ended January 28, 2017,February 3, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2017.13, 2018.
As used in this report, all references to “we,” “us,” “our,”“our” and “the Company,” refer to Chico’s FAS, Inc. and all of its wholly-owned subsidiaries.
Our fiscal years end on the Saturday closest to January 31 and are designated by the calendar year in which the fiscal year commences. Operating results for the thirteen and twenty-six weeks ended July 29, 2017May 5, 2018 are not necessarily indicative of the results that may be expected for the entire year.
Adoption of New Accounting Pronouncements
In the first quarter of 2017,fiscal 2018, we early adopted the guidance of Accounting Standards Update (“ASU”) 2018-02, Income Statement - Reporting Comprehensive Income, which provides entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income (“OCI”) that have been stranded in accumulated OCI as a result of the Tax Cuts and Jobs Act (the “Tax Act”). The provisions of ASU 2018-02 were adopted on a prospective basis with a cumulative adjustment to opening retained earnings, and prior period amounts have not been adjusted and continue to be reported in accordance with the previous guidance. In the first quarter of fiscal 2018, the Company recorded an immaterial cumulative effect adjustment as an increase to opening retained earnings upon adoption of ASU 2018-02 as detailed in the table below.
In the first quarter of fiscal 2018, we adopted the guidance of Accounting Standard Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The provision of ASU 2016-09 related to the recognition of excess tax benefits and deficiencies in the income statement was adopted on a prospective basis whereas the provision related to the classification in the statement of cash flows was adopted retrospectively and the prior periods were adjusted accordingly. The Company has elected to continue estimating forfeitures of share-based awards when determining compensation cost to be recognized each period. The adoption of ASU 2016-09 did not have a material impact on the accompanying condensed consolidated financial statements.
Note 2. New Accounting Pronouncements
In October 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.Inventory ASU 2016-16 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU 2016-16, which requires companies to recognize the income tax effects of intercompany sales or transfers of other assets in the income statement as income tax expense (benefit) in the period the sale or transfer occurs. Additionally, companies wouldare required to evaluate whether the tax effects of the intercompany sales ofor transfers of non-inventory assets should be included in their estimates of annual effective tax rates by using today's interim guidance on income tax accounting. The provisions of ASU 2016-16 will requirewere adopted on a modified retrospective transitionbasis with a cumulative catch-up adjustment to opening retained earnings, and prior period amounts have not been adjusted and continue to be reported in accordance with the periodprevious guidance. In the first quarter of adoption, which we expect to implement in fiscal 2018. At July 29, 2017,2018, the Company had $6.0recorded a cumulative effect adjustment of $5.7 million as a decrease to opening retained earnings upon adoption of ASU 2016-16. Any further tax impacts on sales or transfers of intercompany assets other than inventory will be recognized as incurred.
In the first quarter of fiscal 2018, we adopted the guidance of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, under which entities are no longer able to recognize unrealized holding gains and losses on equity securities they classify as available-for-sale in assets relatedother comprehensive income but instead must recognize the change in fair value in net income. The updated guidance further eliminated equity security classification categories (i.e., trading and available-for-sale). The new standard does not change the guidance for classifying and measuring investments in debt securities. The provisions of ASU 2016-01 were adopted on a prospective basis and did not have an impact on the Company’s consolidated financial statements.
CHICO’S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
In the first quarter of fiscal 2018, we adopted the guidance of ASU No. 2014-09, Revenue from Contracts with Customers. The updated guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of intra–promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Through our evaluation of the impact of this ASU 2014-09, we identified certain changes that were made to our accounting policies, practices, systems and controls which include: 1) revenue related to our online sales will be recognized at the shipping point rather than upon delivery to customer; 2) timing of our recognition of advertising expenses, whereby certain expenses that previously were amortized over their expected period of future benefit will be expensed the first time the advertisement appears; 3) presentation of estimated merchandise returns as both an asset, transfers.equal to the inventory value net of processing costs, and a corresponding return liability, compared to the previous practice of recording an estimated net return liability; and 4) the recognition of any future franchise development fees will be recognized over the license period. Upon adoption, the Company's accounting policies and treatment over revenue recognition are consistent with the provisions of ASU 2014-09 and represent a faithful depiction of the transfer of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The provisions of ASU 2014-09 were adopted on a modified retrospective basis with a cumulative adjustment to opening retained earnings, and prior period amounts have not been adjusted and continue to be reported in accordance with the previous guidance. In the first quarter of fiscal 2018, the Company recorded a cumulative effect adjustment of $0.7 million as an increase to opening retained earnings upon adoption of ASU 2014-09.
Adjustments to Presentation Upon Adoption of New Accounting Pronouncements
The following table presents the effects of the aforementioned adopted accounting standards on our February 3, 2018 condensed consolidated balance sheet:
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| | | | | | | | | | | | | | | | | | | | | | | |
| February 3, 2018 (As Reported) | | ASU 2018-02 | | ASU 2016-16 | | ASU 2016-01 | | ASU 2014-09 | | February 3, 2018 (As Adjusted) |
ASSETS |
Inventories | $ | 233,726 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (824 | ) | | $ | 232,902 |
|
Prepaid expenses and other current assets | 60,668 |
| | — |
| | (500 | ) | | — |
| | 5,389 |
| | 65,557 |
|
Other assets, net | 16,338 |
| | — |
| | (5,206 | ) | | — |
| | — |
| | 11,132 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Other current and deferred liabilities | $ | 133,715 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,677 |
| | $ | 137,392 |
|
Deferred taxes | 7,372 |
| | — |
| | — |
| | — |
| | 236 |
| | 7,608 |
|
Retained earnings | 599,810 |
| | 39 |
| | (5,706 | ) | | — |
| | 652 |
| | 594,795 |
|
Accumulated other comprehensive loss | (44 | ) | | (39 | ) | | — |
| | — |
| | — |
| | (83 | ) |
Had the Company not adopted the provisions of ASU 2014-09, the effects of adoption of this standard on our unaudited condensed consolidated statement of income for the thirteen weeks ended May 5, 2018 and unaudited condensed consolidated balance sheet as of May 5, 2018 were as follows:
|
| | | | | | | | | | | |
| May 5, 2018 |
| As Reported | | Effects of Standard | | Balances Without Adoption of ASU 2014-09 |
Sales | $ | 561,815 |
| | $ | (6,662 | ) | | $ | 555,153 |
|
Cost of Goods Sold | 334,947 |
| | (2,865 | ) | | 332,082 |
|
Selling, general and administrative expenses | 186,419 |
| | (2,196 | ) | | 184,223 |
|
CHICO’S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
|
| | | | | | | | | | | |
| May 5, 2018 |
| As Reported | | Effects of Standard | | Balances Without Adoption of ASU 2014-09 |
ASSETS |
Inventory | $ | 253,777 |
| | $ | 2,453 |
| | $ | 256,230 |
|
Prepaid expenses and other current assets | 53,494 |
| | (2,304 | ) | | 51,190 |
|
LIABILITIES AND SHAREHOLDER'S EQUITY |
Other current and deferred liabilities | $ | 145,893 |
| | $ | 1,750 |
| | $ | 147,643 |
|
2. NEW ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU No. 2016-02, Leases, which replaces the existing guidance in Accounting Standard Codification (“ASC”) 840, Leases.Leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and shouldwill be applied on a modified retrospective basis. ASU 2016-02basis upon adoption. The standard requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and for operating leases, the lessee would recognize straight-line total rent expense. Upon adoption of the standard in fiscal 2019, we expect to record material right–of–use assets and lease liabilities on the balance sheetsheets approximating the present value of future lease payments.
3. REVENUE RECOGNITION
Disaggregated Revenue
In January 2016,The following table disaggregates our operating segment revenue by brand, which we believe provides a meaningful depiction of the FASBnature of our revenue. Amounts shown include licensing and wholesale income, which is not a significant component of total revenue, and is aggregated within the respective brands in the table below. |
| | | | | | | | | | | | | |
| Thirteen Weeks Ended |
| May 5, 2018 | | April 29, 2017 |
Chico's | $ | 300,936 |
| | 53.6 | % | | $ | 310,127 |
| | 53.1 | % |
WHBM | 182,648 |
| | 32.5 |
| | 193,332 |
| | 33.1 |
|
Soma | 78,231 |
| | 13.9 |
| | 80,269 |
| | 13.8 |
|
Total Net Sales | $ | 561,815 |
| | 100.0 | % | | $ | 583,728 |
| | 100.0 | % |
Accounting Policies
The Company recognizes revenue pursuant ASC 606 as established by ASU 2014-09 (“ASC 606”). Retail sales by our stores are recorded at the point of sale and are net of estimated customer returns, sales discounts under rewards programs and Company issued ASU No. 2016-01, Recognitioncoupons, promotional discounts and Measurementemployee discounts. Sales from our websites and catalogs are recognized at the time of Financial Assetsshipment. Amounts related to shipping and Financial Liabilities, under which entities will no longer be ablehandling costs billed to recognize unrealized holding gains and losses on equity securities they classify as available-for-sale in other comprehensive income but instead recognize the change in fair valuecustomers are recorded in net sales and the related shipping and handling costs are recorded in cost of goods sold in the accompanying unaudited condensed consolidated statements of income. The standardAmounts paid by customers to cover shipping and handling costs are immaterial. Our policy towards taxes assessed by a government authority directly imposed on revenue producing transactions between a seller and a customer is, effective for interim and annual reporting periods beginning after December 15, 2017. We dohas been, to exclude all such taxes from revenue. Licensing and wholesale income, which is not anticipate adoption to have a material impact to our consolidated financial statements.significant component of total revenue, is recognized based upon delivery of products, except when the customer has a contractual right of return.
Chico’sCHICO’S FAS, Inc.INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 29, 2017per share amounts and where otherwise indicated)
(Unaudited)
We sell gift cards in stores, on our e-commerce website and through third parties. Our gift cards do not have expiration dates. We account for gift cards by recognizing a liability at the time the gift card is sold. The liability is relieved and revenue is recognized, net of third party sales commissions, for gift cards upon redemption. In May 2014,addition, we recognize revenue for the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers.amount of gift cards expected to go unredeemed (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We determine the gift card breakage rate based on our historical redemption patterns. We recognize revenue on the remaining unredeemed gift cards based on determining that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions.
Soma offers a points-based loyalty program in which customers earn points based on purchases. Attaining specified loyalty point levels results in the issuance of reward coupons to discount future purchases. As program members accumulate points, we accrue the estimated future liability, adjusted for expected redemption rates and expirations. The update outlines a single comprehensive modelliability is relieved and revenue is recognized for entitiesloyalty point reward coupons upon redemption. In addition, we recognize revenue on unredeemed points when it can be determined that the likelihood of the point being redeemed is remote and there is no legal obligation to useremit the point value. We determine the loyalty point breakage rate based on historical and redemption patterns.
As part of the normal sales cycle, we receive customer merchandise returns related to store, website and catalog sales. To account for the financial impact of potential customer merchandise returns, we estimate future returns on previously sold merchandise. Reductions in sales and gross margin are recorded for estimated merchandise returns based on return history, current sales levels and projected future return levels.
The Company's accounting for revenue arising from contracts with customerspolicies and supersedes most currenttreatment over revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires entities to recognize revenue inare consistent with the provisions of ASC 606 and represent a way that depictsfaithful depiction of the transfer of promised goods or services to customers in an amount that reflects the consideration the entityCompany expects to be entitled to in exchange for those goods or services. In August 2015,
Contract Liability
Contract liabilities on the FASB approved a one year deferralunaudited condensed consolidated balance sheet were comprised of obligations associated with our gift card and customer loyalty programs. As of May 5, 2018 and February 3, 2018, contract liabilities primarily consisted of gift cards of $35.4 million and $43.6 million, respectively. For the effective date, to make it effectivethirteen weeks ended May 5, 2018, the Company recognized $15.0 million of revenue that was previously included in the gift card contract liability as of February 3, 2018. The contract liability for annualour loyalty program was not material as of May 5, 2018 and interim reporting periods beginning after December 15, 2017. The standard allows for either a full retrospective or a modified retrospective transition method. The FASB has issued subsequent ASUsFebruary 3, 2018.
Performance Obligation
For the thirteen weeks ended May 5, 2018, revenue recognized from performance obligations related to ASU No. 2014-09, which detail amendmentsprior periods was not material. Revenue recognized in future periods related to the ASU, implementation considerations, narrow-scope improvements and practical expedients. Through our evaluation of the impact of this ASU, we have identified certain changes that areperformance obligations is not expected to be made to our accounting policies, practices, systems and controls including: the timing of our recognition of advertising expenses, whereby certain expenses that are currently amortized over their expected period of future benefit will be expensed the first time the advertisement appears, and presentation of estimated merchandise returns as both an asset, equal to the inventory value net of processing costs, and a corresponding return liability, compared to the current practice of recording an estimated net return liability. The Company is also evaluating and identifying appropriate changes to internal control over financial reporting in connection with preparation for adoption of this ASU. We plan to adopt this ASU under the modified retrospective approach beginning in the first quarter of fiscal 2018 with a cumulative adjustment to retained earnings as opposed to retrospectively adjusting prior periods. We are continuing to evaluate the impact this ASU, and related amendments and interpretive guidance, will have on our consolidated financial statements.
Note 3. Restructuring and Strategic Charges
During the fourth quarter of fiscal 2014, we initiated a restructuring program, including the acceleration of domestic store closures and an organizational realignment, to ensure that resources align with long-term growth initiatives. In fiscal 2015, in connection with the restructuring program, we completed an evaluation of the Boston Proper brand, completed the sale of the Boston Proper direct-to-consumer business, and closed its stores.
During the first quarter of fiscal 2016, we expanded our restructuring program to include components of our strategic initiatives that further align the organizational structure with long-term growth initiatives and to reduce cost of goods sold ("COGS") and selling, general and administrative expenses ("SG&A") through strategic initiatives. These strategic initiatives include realigning marketing and digital commerce, improving supply chain efficiency, reducing non-merchandise expenses, optimizing marketing spend, and transition of executive leadership. In connection with this program, during the second quarter of fiscal 2016, we recorded pre-tax restructuring and strategic charges of $16.6 million, primarily related to severance charges, proxy solicitation costs and consulting fees, which are included in restructuring and strategic charges in the accompanying condensed statement of income. Effective in the third quarter of fiscal 2016, we substantially completed our restructuring program and did not record any similar charges for the twenty-six weeks ended July 29, 2017. We have closed 124 stores in connection with our restructuring program through the second quarter of fiscal 2017, including 20 Boston Proper stores.
A summary of the pre-tax restructuring and strategic charges is presented in the table below:
|
| | | | | | | | |
| | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | July 30, 2016 | | July 30, 2016 |
| | | | |
| | (in thousands) |
Impairment charges | | $ | 1,453 |
| | $ | 1,453 |
|
Continuing employee-related costs | | — |
| | 1,015 |
|
Severance charges | | 8,236 |
| | 9,420 |
|
Proxy solicitation costs | | 4,524 |
| | 5,589 |
|
Lease termination charges | | 127 |
| | 348 |
|
Outside Services | | 2,234 |
| | 2,234 |
|
Other charges | | (18 | ) | | 148 |
|
Total restructuring and strategic charges, pre-tax | | $ | 16,556 |
| | $ | 20,207 |
|
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 29, 2017
(Unaudited)
As of July 29, 2017, a reserve of $1.3 million related to restructuring and strategic activities was included in other current and deferred liabilities in the accompanying condensed consolidated balance sheets. A roll-forward of the reserve is presented as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Continuing Employee-related Costs | | Severance Charges | | Lease Termination Charges | | Outside Services & Other | | Total |
| | | | | | | | | |
| (in thousands) |
Beginning Balance, January 28, 2017 | $ | 671 |
| | $ | 2,413 |
| | $ | 846 |
| | $ | 7,299 |
| | $ | 11,229 |
|
Payments | (360 | ) | | (2,151 | ) | | (142 | ) | | (7,299 | ) | | (9,952 | ) |
Ending Balance, July 29, 2017 | $ | 311 |
| | $ | 262 |
| | $ | 704 |
| | $ | — |
| | $ | 1,277 |
|
material.
Note 4. Stock-Based CompensationSHARE-BASED COMPENSATION
For the twenty-sixthirteen weeks ended JulyMay 5, 2018 and April 29, 2017, and July 30, 2016, stock-basedshare-based compensation expense was $10.2$5.1 million and $9.6$5.8 million, respectively. As of July 29, 2017,May 5, 2018, approximately 9.17.0 million shares remain available for future grants of equity awards under our Amended and Restated 2012 Omnibus Stock and Incentive Plan. The AmendedPlan, which was amended and Restated Plan was approved by the Company’s Board of Directors on April 6, 2017 and becamerestated effective upon shareholder approval at the 2017 Annual Meeting on June 22, 2017.
CHICO’S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
Restricted Stock Awards
Restricted stock awards vest in equal annual installments over a three-year period from the date of grant.
Restricted stock award activity for the twenty-sixthirteen weeks ended July 29, 2017May 5, 2018 was as follows:
| |
| Number of Shares | | Weighted Average Grant Date Fair Value | Number of Shares | | Weighted Average Grant Date Fair Value |
Unvested, beginning of period | 2,463,186 |
| | $ | 13.87 |
| 2,328,259 |
| | $ | 13.08 |
|
Granted | 1,324,380 |
| | 13.64 |
| 1,695,950 |
| | 9.85 |
|
Vested | (971,616 | ) | | 14.52 |
| (752,782 | ) | | 14.16 |
|
Forfeited | (132,685 | ) | | 14.76 |
| (51,576 | ) | | 13.15 |
|
Unvested, end of period | 2,683,265 |
| | 13.47 |
| 3,219,851 |
| | 11.13 |
|
Performance-based Stock Units
For the twenty-sixthirteen weeks ended July 29, 2017,May 5, 2018, we granted performance-based restricted stock units (“PSUs”), contingent upon the achievement of a Company-specific performance goalgoals during the three fiscal 2017.years 2018-2020. Any units earned as a result of the achievement of this goal will vest 100% three years from the date of grant and will be settled in unvested shares of our common stock on the first anniversary of the grant date. Such unvested shares will then vest on the second and third anniversary dates.stock.
Performance-based restricted stock unit activity for the twenty-sixthirteen weeks ended July 29, 2017May 5, 2018 was as follows:
|
| | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Unvested, beginning of period | 652,248 |
| | $ | 13.28 |
|
Granted | 601,137 |
| | 13.93 |
|
Vested | (274,774 | ) | | 13.54 |
|
Forfeited | (77,628 | ) | | 13.08 |
|
Unvested, end of period | 900,983 |
| | 13.65 |
|
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 29, 2017
(Unaudited)
|
| | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Unvested, beginning of period | 690,950 |
| | $ | 13.65 |
|
Granted | 725,300 |
| | 9.87 |
|
Vested | (186,782 | ) | | 13.08 |
|
Forfeited | (14,466 | ) | | 14.13 |
|
Unvested, end of period | 1,215,002 |
| | 11.41 |
|
Stock Option Awards
For the twenty-sixthirteen weeks ended JulyMay 5, 2018 and April 29, 2017, and July 30, 2016, we did not grant any stock options.
Stock option activity for the twenty-sixthirteen weeks ended July 29, 2017May 5, 2018 was as follows:
| | | Number of Shares | | Weighted Average Exercise Price | Number of Options | | Weighted Average Exercise Price |
Outstanding, beginning of period | 577,246 |
| | $ | 13.58 |
| 368,745 |
| | $ | 12.36 |
|
Granted | — |
| | — |
| — |
| | — |
|
Exercised | (8,000 | ) | | 10.15 |
| (5,050 | ) | | 7.40 |
|
Forfeited or expired | (77,334 | ) | | 19.21 |
| (85,000 | ) | | 13.72 |
|
Outstanding and exercisable at July 29, 2017 | 491,912 |
| | 12.75 |
| |
Outstanding and exercisable at May 5, 2018 | | 278,695 |
| | 12.03 |
|
Note CHICO’S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
5. Income TaxesINCOME TAXES
The provision for income taxes is based on a current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. Our effective income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items and the mix of earnings.
For the thirteen weeks ended July 29, 2017 and July 30, 2016,May 5, 2018, the Company's 27.9% effective tax rate was 35.1% and 38.0%, respectively. Forfor income taxes differed from the thirteen weeks ended July 29, 2017, theCompany’s federal income tax provision was $12.3 million compared tostatutory rate of 21% primarily because of the effects of state and local taxes. The Company's provisions for income tax provision of $14.1 milliontaxes for the thirteen weeks ended July 30, 2016. The reductionMay 5, 2018 and April 29, 2017 included the recognition of approximately $1.1 million and $0.3 million, respectively, of net tax deficiencies associated with share-based payment accounting. These items as well as the enactment of the Tax Act resulted in an effective tax rate for the thirteen weeks ended May 5, 2018 of 290 basis points primarily27.9% compared to 38.2% for the thirteen weeks ended April 29, 2017.
In accordance with Staff Accounting Bulletin No. 118, the Company is performing an ongoing analysis of information necessary to estimate the accounting for the impacts of the Tax Act. We will continue to analyze additional information and guidance related to favorable federal and state settlements, partially offset by a 67 basis point charge from the adoptionTax Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. Consequently, reasonable estimates of the new share-based payment accounting standard (the "Standard") effectiveimpact of the firstTax Act on the Company’s deferred tax balances and executive compensation deductions have been reported as provisional, as defined in Staff Accounting Bulletin No. 118. We expect to complete our analysis no later than the fourth quarter of 2017.
For the twenty-six weeks ended July 29, 2017 and July 30, 2016, the effective tax rate was 37.0% and 37.9%, respectively. For the twenty-six weeks ended July 29, 2017, the income tax provision was $33.1 million compared to the income tax provision of $33.1 million for the twenty-six weeks ended July 30, 2016. This 90 basis points reduction in the effective tax rate primarily related to favorable federal and state settlements, partially offset by a 58 basis point charge from the adoption of the Standard effective the first quarter of 2017.fiscal 2018.
Note 6. Earnings Per ShareEARNINGS PER SHARE
In accordance with relevant accounting guidance, unvested share-based payment awards that include non-forfeitable rights to dividends, whether paid or unpaid, are considered participating securities. As a result, such awards are required to be included in the calculation of earnings per common share pursuant to the “two-class” method. For the Company, participating securities are comprised entirely of unvested restricted stock awards and performance-based restricted stock units (“PSUs”)PSUs that have met their relevant performance criteria.
Earnings per share (“EPS”) is determined using the two-class method when it is more dilutive than the treasury stock method. Basic EPS excludes dilution and 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 EPS reflects the dilutive effect of potential common shares from non-participating securities such as stock options, PSUs and restricted stock units.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 29, 2017
(Unaudited)
The following table sets forth the computation of basic and diluted EPS shown on the face of the accompanying condensed consolidated statements of operations (in thousands, except per share amounts):income:
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended | | | | | |
| July 29, 2017 | | July 30, 2016 | | July 29, 2017 | | July 30, 2016 | Thirteen Weeks Ended |
| | | | | | | | May 5, 2018 | | April 29, 2017 |
Numerator | | | | | | | | | | |
Net income | $ | 22,716 |
| | $ | 23,039 |
| | $ | 56,335 |
| | $ | 54,123 |
| $ | 29,004 |
| | $ | 33,619 |
|
Net income and dividends declared allocated to participating securities | (537 | ) | | (506 | ) | | (1,286 | ) | | (1,155 | ) | (714 | ) | | (741 | ) |
Net income available to common shareholders | $ | 22,179 |
| | $ | 22,533 |
| | $ | 55,049 |
| | $ | 52,968 |
| $ | 28,290 |
| | $ | 32,878 |
|
Denominator | | | | | | | | | | |
Weighted average common shares outstanding – basic | 125,643 |
| | 129,215 |
| | 125,847 |
| | 130,406 |
| 125,277 |
| | 126,050 |
|
Dilutive effect of non-participating securities | 34 |
| | 147 |
| | 43 |
| | 110 |
| 39 |
| | 53 |
|
Weighted average common and common equivalent shares outstanding – diluted | 125,677 |
| | 129,362 |
| | 125,890 |
| | 130,516 |
| 125,316 |
| | 126,103 |
|
Net income per share: | | | | | | | | |
Net Income Per Share: | | | | |
Basic | $ | 0.18 |
| | $ | 0.17 |
| | $ | 0.44 |
| | $ | 0.41 |
| $ | 0.23 |
| | $ | 0.26 |
|
Diluted | $ | 0.18 |
| | $ | 0.17 |
| | $ | 0.44 |
| | $ | 0.41 |
| $ | 0.23 |
| | $ | 0.26 |
|
For the thirteen weeks ended JulyMay 5, 2018 and April 29, 2017, and July 30, 2016, 0.80.6 million and 0.8 million potential shares of common stock, respectively, were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.
For the twenty-six weeks ended July 29, 2017 and July 30, 2016, 0.7 million and 0.90.4 million potential shares of common stock, respectively, were excluded from the diluted per share calculation relating to non-participating securities, because the effect of including these potential shares was antidilutive.
CHICO’S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
Note 7. Fair Value MeasurementsFAIR VALUE MEASUREMENTS
Our financial instruments consist of cash, money market accounts, marketable securities, assets held in our non-qualified deferred compensation plan, accounts receivable and payable, and debt. Cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value due to the short-term nature of the instruments.
Marketable securities are classified as available-for-sale and as of July 29, 2017May 5, 2018 generally consist of corporate bonds, U.S. government agencies, municipal securities, and commercial paper with $30.5$35.7 million of securities with maturity dates within one year or less and $20.4$25.5 million with maturity dates over one year and less than two years.
We consider all marketable securities available-for-sale, including those with maturity dates beyond 12 months, and therefore classify these securities within current assets on the condensed consolidated balance sheets as they are available to support current operational liquidity needs. Marketable securities are carried at fair value, with the unrealized holding gains and losses, net of income taxes, reflected in accumulated other comprehensive income until realized. For the purposes of computing realized and unrealized gains and losses, cost is determined on a specific identification basis.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Entities are required to use a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 29, 2017
(Unaudited)
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
|
| | | |
| Level 1 | — | Unadjusted quoted prices in active markets for identical assets or liabilities |
| | | |
| Level 2 | — | Unadjusted quoted prices in active markets for similar assets or liabilities, or; Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or; Inputs other than quoted prices that are observable for the asset or liability |
| | | |
| Level 3 | — | Unobservable inputs for the asset or liability |
We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as available-for-sale securities, certain cash equivalents, specifically our money market accounts and assets held in our non-qualified deferred compensation plan. The money market accounts are valued based on quoted market prices in active markets. Our marketable securities are generally valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third party pricing entities, except for U.S. government securities which are valued based on quoted market prices in active markets. The investments in our non-qualified deferred compensation plan are valued using quoted market prices and are included in other assets on our condensed consolidated balance sheets.
From time to time, we measure certain assets at fair value on a non-recurring basis, includingbasis. This includes the evaluation of long-lived assets, goodwill and other intangible assets for impairment using Company-specific assumptions which would fall within Level 3 of the fair value hierarchy. We estimate
To assess the fair value of assets held for sale usinggoodwill, we utilize both an income approach and a market values for similar assets which would fall within Level 2 ofapproach. Inputs used to calculate the fair value hierarchy.based on the income approach primarily include estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant. Inputs used to calculate the fair value based on the market approach include identifying sales and EBITDA multiples based on guidelines for similar publicly traded companies and recent transactions.
To assess the fair value of trade names, we utilize a relief from royalty approach. Inputs used to calculate the fair value of the trade names primarily include future sales projections, discounted at a rate that approximates the cost of capital of a market participant and an estimated royalty rate.
To assess the fair value of long-term debt, we utilize a discounted future cash flow model using current borrowing rates for similar types of debt of comparable maturities.
Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.
CHICO’S FAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and per share amounts and where otherwise indicated)
(Unaudited)
During the quarter ended July 29, 2017,May 5, 2018, we did not make any transfers between Level 1 and Level 2 financial instruments.assets. Furthermore, as of JulyMay 5, 2018, February 3, 2018 and April 29, 2017, January 28, 2017 and July 30, 2016, we did not have any Level 3 financial instruments.assets measured on a recurring basis. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
Chico’sCHICO’S FAS, Inc.INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 29, 2017per share amounts and where otherwise indicated)
(Unaudited)
In accordance with the provisions of the guidance, we categorized our financial instruments,assets and liabilities which are valued on a recurring basis, based on the priority of the inputs to the valuation technique for the instruments, as follows: | | | | | Fair Value Measurements at Reporting Date Using | | | | | | | | | |
| Balance as of July 29, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | | Fair Value Measurements at Reporting Date Using |
| (in thousands) | Balance as of May 5, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Financial Assets: | | | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | | | |
Money market accounts | $ | 288 |
| | $ | 288 |
| | $ | — |
| | $ | — |
| $ | 311 |
| | $ | 311 |
| | $ | — |
| | $ | — |
|
Marketable securities: | | | | | | | | | | | | | | |
Municipal securities | 6,705 |
| | — |
| | 6,705 |
| | — |
| 3,462 |
| | — |
| | 3,462 |
| | — |
|
U.S. government agencies | 16,754 |
| | — |
| | 16,754 |
| | — |
| 12,755 |
| | — |
| | 12,755 |
| | — |
|
Corporate bonds | 20,897 |
| | — |
| | 20,897 |
| | — |
| 42,992 |
| | — |
| | 42,992 |
| | — |
|
Commercial paper | 6,522 |
| | — |
| | 6,522 |
| | — |
| 1,987 |
| | — |
| | 1,987 |
| | — |
|
Non Current Assets | | | | | | | | |
Noncurrent Assets | | | | | | | | |
Deferred compensation plan | 6,487 |
| | 6,487 |
| | — |
| | — |
| 7,044 |
| | 7,044 |
| | — |
| | — |
|
Total | $ | 57,653 |
| | $ | 6,775 |
| | $ | 50,878 |
| | $ | — |
| $ | 68,551 |
| | $ | 7,355 |
| | $ | 61,196 |
| | $ | — |
|
| | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | |
Long-term debt1 | $ | 76,068 |
| | $ | — |
| | $ | 76,552 |
| | $ | — |
| $ | 64,868 |
| | $ | — |
| | $ | 65,309 |
| | $ | — |
|
| | | | | | | | | | | | | | |
| Balance as of January 28, 2017 | | | | | | | Balance as of February 3, 2018 | | | | | | |
Financial Assets: | | | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | | | |
Money market accounts | $ | 471 |
| | $ | 471 |
| | $ | — |
| | $ | — |
| $ | 1,250 |
| | $ | 1,250 |
| | $ | — |
| | $ | — |
|
Marketable securities: | | | | | | | | | | | | | | |
Municipal securities | 5,634 |
| | — |
| | 5,634 |
| | — |
| 6,557 |
| | — |
| | 6,557 |
| | — |
|
U.S. government agencies | 23,071 |
| | — |
| | 23,071 |
| | — |
| 12,744 |
| | — |
| | 12,744 |
| | — |
|
Corporate bonds | 15,799 |
| | — |
| | 15,799 |
| | — |
| 37,030 |
| | — |
| | 37,030 |
| | — |
|
Commercial paper | 5,866 |
| | — |
| | 5,866 |
| | — |
| 3,729 |
| | — |
| | 3,729 |
| | — |
|
Non Current Assets | | | | | | | | |
Noncurrent Assets | | | | | | | | |
Deferred compensation plan | 7,523 |
| | 7,523 |
| | — |
| | — |
| 7,315 |
| | 7,315 |
| | — |
| | — |
|
Total | $ | 58,364 |
| | $ | 7,994 |
| | $ | 50,370 |
| | $ | — |
| $ | 68,625 |
| | $ | 8,565 |
| | $ | 60,060 |
| | $ | — |
|
| | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | |
Long-term debt1 | $ | 84,785 |
| | $ | — |
| | $ | 85,139 |
| | $ | — |
| |
Long-term debt1 | | $ | 68,601 |
| | $ | — |
| | $ | 69,036 |
| | $ | — |
|
| | | | | | | | | | | | | | |
| Balance as of July 30, 2016 | | | | | | | Balance as of April 29, 2017 | | | | | | |
Financial Assets: | | | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | | | |
Money market accounts | $ | 110 |
| | $ | 110 |
| | $ | — |
| | $ | — |
| $ | 375 |
| | $ | 375 |
| | $ | — |
| | $ | — |
|
Marketable securities: | | | | | | | | | | | | | | |
Municipal securities | 1,537 |
| | — |
| | 1,537 |
| | — |
| 6,774 |
| | — |
| | 6,774 |
| | — |
|
U.S. government agencies | 23,928 |
| | — |
| | 23,928 |
| | — |
| 20,024 |
| | — |
| | 20,024 |
| | — |
|
Corporate bonds | 21,672 |
| | — |
| | 21,672 |
| | — |
| 17,336 |
| | — |
| | 17,336 |
| | — |
|
Commercial paper | 3,475 |
| | — |
| | 3,475 |
| | — |
| 6,495 |
| | — |
| | 6,495 |
| | — |
|
Non Current Assets | | | | | | | | |
Noncurrent Assets | | | | | | | | |
Deferred compensation plan | 8,401 |
| | 8,401 |
| | — |
| | — |
| 7,733 |
| | 7,733 |
| | — |
| | — |
|
Total | $ | 59,123 |
| | $ | 8,511 |
| | $ | 50,612 |
| | $ | — |
| $ | 58,737 |
| | $ | 8,108 |
| | $ | 50,629 |
| | $ | — |
|
| | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | |
Long-term debt1 | $ | 87,252 |
| | $ | — |
| | $ | 87,677 |
| | $ | — |
| $ | 79,801 |
| | $ | — |
| | $ | 80,120 |
| | $ | — |
|
1 The carrying value of long-term debt includes the current and long-term portions and the remaining unamortized debt issuance costs.
Chico’sCHICO’S FAS, Inc.INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 29, 2017per share amounts and where otherwise indicated)
(Unaudited)
Note 8. DebtDEBT
In fiscal 2015, we entered into a credit agreement (the "Agreement"“Agreement”) providing for a term loan of $100.0 million and a revolving credit facility of $100.0 million. The term loan and revolving credit facility mature on May 4, 2020 and accrue interest by reference, at our election, at either an adjusted eurodollar rate tied to LIBOR or an Alternate Base Rate plus an interest rate margin, as defined in the Agreement. The Agreement contains customary representations, warranties and affirmative covenants, including the requirement to maintain certain financial ratios. The Company was in compliance with the applicable ratio requirements and other covenants at July 29, 2017.May 5, 2018. As of July 29, 2017,May 5, 2018, we had total available borrowing capacity of $100.0 million under our revolving credit facility.
The following table provides additional detail on our outstanding debt:
| | | July 29, 2017 | | January 28, 2017 | | July 30, 2016 | | | | | | | |
| (in thousands) | May 5, 2018 | | February 3, 2018 | | April 29, 2017 |
Credit Agreement, net | $ | 76,068 |
| | $ | 84,785 |
| | $ | 87,252 |
| $ | 64,868 |
| | $ | 68,601 |
| | $ | 79,801 |
|
Less: current portion | (15,000 | ) | | (16,250 | ) | | (10,000 | ) | (15,000 | ) | | (15,000 | ) | | (15,000 | ) |
Total long-term debt | $ | 61,068 |
| | $ | 68,535 |
| | $ | 77,252 |
| |
Total Long-Term Debt | | $ | 49,868 |
| | $ | 53,601 |
| | $ | 64,801 |
|
Note 9. Share Repurchases
During the twenty-six weeks ended July 29, 2017, under our $300 million share repurchase program announced in November 2015, we repurchased 1.9 million shares at a total cost of approximately $20.7 million, at a weighted average of $10.96 per share. As of July 29, 2017, the Company has $142.9 million remaining for future repurchases under the program. However, we have no continuing obligation to repurchase shares under this authorization, and the timing, actual number and value of any additional shares to be purchased will depend on the performance of our stock price, market conditions and other considerations.
Note 10. Commitments and ContingenciesCOMMITMENTS AND CONTINGENCIES
In July 2015, White House Black Market, Inc. (WHBM) was named as a defendant in Altman v. White House Black Market, Inc., a putative class action filed in the United States District Court for the Northern District of Georgia. The complaint alleges that WHBM, in violation of federal law, willfully published more than the last five digits of a credit or debit card number on customers' point-of-sale receipts. PlaintiffThe plaintiff seeks an award of statutory damages of $100 to $1,000 for each alleged willful violation of the law, as well as attorneys’ fees, costs and punitive damages. The Company denies the material allegations of the complaint and believes the case is without merit. TheOn February 12, 2018, the District Court deniedissued an order certifying the Company’s motion to dismiss on July 13, 2016, andclass. On February 26, 2018, the parties have engaged in extensive discovery since then. PlaintiffCompany filed a motionpetition with the District Court for permission to appeal its decision to the Eleventh Circuit Court of Appeals. Thereafter, WHBM filed a petition with the Eleventh Circuit Court of Appeals seeking immediate review of the class certification order, which was denied on April 11, 2018. Discovery closed on February 28, 2018. Thereafter, WHBM filed with the District Court two motions for summary judgment: one arguing that the plaintiff lacks standing (filed on March 12, 2018) and one arguing that WHBM’s alleged violation of federal law was not willful (filed on March 30, 2018).
On April 9, 2018, the District Court, sua sponte, issued an order granting WHBM’s earlier 2016 request to appeal, to the Eleventh Circuit Court of Appeals, the District Court’s ruling that the plaintiff has standing to maintain the lawsuit. On April 19, 2018, WHBM filed a petition for review in May 2017, which WHBM opposedthe Eleventh Circuit Court of Appeals. In the meantime, the District Court stayed all further proceedings in a brief filedthe case pending the outcome of the appeal in June 2017. the Eleventh Circuit Court of Appeals.
The Company will continue to vigorously defend the matter, including a planned motion for summary judgment to dismiss all claims.matter. At this time, the Company is unable to reasonably estimate the potential loss or range of loss, if any, related to the lawsuit because there are a number of unknown facts and unresolved legal issues that may impact the amount of any potential liability, including, without limitation, (a) whether the action will ultimately be permitted to proceed, (b) if the action proceeds as a class, (b) if a class is certified, the resolution of certain disputed statutory interpretation issues that may impact the size of the putative class and (c) whether or not the plaintiff is entitled to statutory damages. No assurance can be given that these issues will be resolved in the Company’s favor or that the Company will be successful in its defense on the merits or otherwise. If the case were to proceed as a class action and the Company were to be unsuccessful in its defense on the merits, the ultimate resolution of the case could have a material adverse effect on the Company’s consolidated financial condition or results of operations.
In June 2015, the Company was named as a defendant in Ackerman v. Chico’s FAS, Inc., a putative representative Private Attorney General action filed in the Superior Court of California, County of Los Angeles. The complaint alleged numerous violations of California law related to wages, meal periods, rest periods, wage statements and failure to reimburse business expenses, among other things. Plaintiff subsequently amended her complaint to make the same allegations on a class action basis. The parties entered into a settlement agreement, and the Court issued final approval and entry of judgment on June 5, 2017. The settlement did not have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Chico’s FAS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 29, 2017
(Unaudited)
In July 2016, the Company was named as a defendant in Calleros v. Chico’s FAS, Inc., a putative class action filed in the Superior Court of California, County of Santa Barbara. Plaintiff alleged that the Company failed to comply with California law requiring it to provide consumers cash for gift cards with a stored value of less than $10.00. Following voluntary mediation of the matter in November of 2016, the parties entered into a settlement agreement, which was approved by the court on July 25, 2017. The settlement will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Other than as noted above, we are not currently a party to any material legal proceedings other than claims and lawsuits arising in the normal course of business. All such matters are subject to uncertainties, and outcomes may not be predictable. Consequently, the ultimate aggregate amounts of monetary liability or financial impact with respect to these matters as of July 29, 2017May 5, 2018 are not estimable. However, while such matters could affect our consolidated operating results when resolved in future periods, management believes that upon final disposition, any monetary liability or financial impact to us would not be material to our annual consolidated financial statements.
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto and our 20162017 Annual Report to Shareholders.on Form 10-K.
Executive Overview
We are a leading omni-channel specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing,apparel, intimates and complementary accessories, operating under the Chico’s, White House Black Market (“WHBM”) and Soma brand names.names in the United States, Puerto Rico, the U.S. Virgin Islands and Canada. Our distinct lifestyle brands serve the needs of fashion-savvy women 35 years and older. We earn revenues and generate cash through the sale of merchandise in our domestic and international retail stores, our various e-commerce websites and our call center, which takes orders for all of our brands, and through an unaffiliated franchise partner in Mexico.Mexico and through third party channels.
We utilize an integrated, omni-channel approach to managing our business. We want our customers to experience our brands holistically and to view ourthe various retail 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.
|
|
SecondFirst Quarter of Fiscal 20172018 Financial Highlights
|
Ÿ HighlightsReported first quarter EPS of $0.23 per diluted share |
Ÿ Delivered second quarter EPS of $0.18Announced new sales-driving initiatives |
Ÿ Continuing to execute on strategic priorities and cost saving initiativesContinued strong cash flow generation |
Income from Operations and Select Charges
Business Highlights
The following table depicts,Company continues to make progress on a pre-tax basis, income from operationsits strategic initiative to build new channels of growth and restructuring and strategic charges forincrease brand awareness. During the secondfirst quarter of fiscal 20172018:
The Company announced its collaboration with Amazon.com, Inc. to offer a select assortment of Chico’s brand merchandise on Amazon.com.
| |
• | Soma, the Company's Intimate Apparel brand, debuted on the multi-platform retailer QVC on May 5th during the “AM Style” broadcast. The brand’s popular Vanishing collection sold out in minutes. |
The Company launched its partnership with ShopRunner, the free two-day shipping and 2016:
|
| | | | | | | |
| Thirteen Weeks Ended |
| July 29, 2017 | | July 30, 2016 |
| | | |
| (dollars in millions) |
Income from operations | $ | 35.5 |
| | $ | 37.6 |
|
Restructuring and strategic charges | — |
| | 16.6 |
|
Earnings per diluted share for the second quarter of fiscal 2017 was $0.18 compared to $0.17 in last year's second quarter. Results for the second quarter of fiscal 2016 include the impact of restructuring and strategic charges of $10.3 million after-tax, or $0.08 per diluted share. The change in earnings per share reflects the impact of approximately 5.1 million shares repurchased sinceseamless payment e-commerce network, at the end of March. All three of the second quarter last year, partially offset by a decrease in net income.Company’s brands, Chico’s, White House Black Market and Soma are available to ShopRunner’s several million active members.
Our Business Strategy
Our overall business strategy is focused on building a collection of distinct high-performing retail brands serving the fashion needs of women ages 35 and older. We seek to accomplish this strategy through our fourfive focus areas: (1) evolving the customer experience, (2) strengthening our brands' positions, (3) leveraging actionable retail science, (4) building growth platforms and (4) sharpening our financial principles.(5) achieving operational excellence. 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 the shareholders.
We pursue improving the performance of our brands by building our omni-channel capabilities, which includes managing our store base and growing our online presence, by executing marketing plans, by effectively leveraging expenses, by considering additional sales channels and markets, and by optimizing the merchandise offerings of each of our three brands. We continue to invest heavily in our omni-channel capabilities in order to allow customers to fully experience our brands through more than one channel. In essence, wein the manner they choose.
We view our various sales channelsstores and Company-operated e-commerce websites as a single, integrated processsales function rather than as separate sales channels operating independently. To that end, we often refer to our brands'brands’ respective websites as "our largest store" within the brand.
Under this integrated, omni-channel approach, we encourage our customers to take advantage of each of our sales channels in whatever way best fits their needs.brand’s “largest store”. Customers may shop our products throughin one channelplace and consummate the purchase through a different channel.somewhere else. Our domestic customers have the option of returningcan return merchandise to a store or to our distribution center, regardless of the channel used for purchase. We believe this omni-channel approach meets our customers’ expectations, enhances the customer experience, contributes to the overall success of our brands, reflects that our customers do not differentiate between channels, and is consistent with how we plan and manage our business.where they purchased it. As a result, we maintain a shared inventory platform for our operations, allowing us to fulfill orders for all channels from our distribution center (“DC”) in Winder, Georgia. We also fulfill in-store orders directly from other stores or our distribution center.stores.
We seek to acquire and retain omni-channel customers by leveraging existing customer-specific data and through targeted marketing, including e-marketing,digital marketing, social media, television, catalogs and mailers. We seek to optimize the potential of our brands with improved product offerings, which includes potential new merchandise opportunities, and brand extensions that enhance the current offerings, as well as through our continued emphasis on our “Most Amazing Personal Service” standard. We also will continue to consider potential alternative sales channels for our brands, including international franchising and licensing, wholesale opportunities and others.
In fiscal 2016, we announced and began implementing cost reduction and operating efficiency initiatives, including realigning marketing and digital commerce, improving supply chain efficiency and reducing non-merchandise expenses,expenses. In fiscal 2017, we strengthened our brand positioning and optimizing marketing spend. Actions taken as part of thesebegan preparing for future growth. We are now intently focused on evolving the customer experience and leveraging actionable retail science to drive profitable retail sales. Additionally, we have launched multiple initiatives are expectedthat utilize technology and new platforms to continue to reduce expenses and complexity, standardize processes and improve the Company's ability to respond to changes in customer demand for merchandise.drive growth.
RESULTS OF OPERATIONS
Thirteen Weeks Ended July 29, 2017May 5, 2018 Compared to the Thirteen Weeks Ended July 30, 2016April 29, 2017
Net Sales
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 ended JulyMay 5, 2018 and April 29, 2017 and July 30, 2016:2017:
| | | Thirteen Weeks Ended | Thirteen Weeks Ended |
| July 29, 2017 | | July 30, 2016 | May 5, 2018 | | April 29, 2017 |
| | |
| (dollars in millions) | (dollars in millions) |
Chico's | $ | 302 |
| | 52.2 | % | | $ | 334 |
| | 52.6 | % | $ | 301 |
| | 53.6 | % | | $ | 310 |
| | 53.1 | % |
WHBM | 184 |
| | 31.9 |
| | 208 |
| | 32.7 |
| 183 |
| | 32.5 |
| | 193 |
| | 33.1 |
|
Soma | 92 |
| | 15.9 |
| | 94 |
| | 14.7 |
| 78 |
| | 13.9 |
| | 80 |
| | 13.8 |
|
Total net sales | $ | 579 |
| | 100.0 | % | | $ | 636 |
| | 100.0 | % | |
Total Net Sales | | $ | 562 |
| | 100.0 | % | | $ | 584 |
| | 100.0 | % |
For the secondfirst quarter of fiscal 2017,2018, net sales were $579$562 million compared to $636$584 million in last year’s secondfirst quarter. This decrease of 9.0%3.8% primarily reflects a decline in comparable sales decline of 8.4%,5.9% and the impact of 41 net store closures since last year's first quarter, partially offset by the favorable impact of the calendar shift due to the fifty-third week in fiscal 2017. The comparable sales decline was primarily driven by lower average dollar sales and a decline in transaction count. Net sales also reflects 35 net store closures, or a 2.3% net decrease in selling square footage, since last year's second quarter.
The following table depicts comparable sales percentages by Chico's, WHBM and Soma for the thirteen weeks ended JulyMay 5, 2018 and April 29, 2017 and July 30, 2016:2017:
| | | Thirteen Weeks Ended | Thirteen Weeks Ended |
| July 29, 2017 | | July 30, 2016 | May 5, 2018 (1) | | April 29, 2017 |
Chico's | (9.0 | )% | | (5.1 | )% | (5.5 | )% | | (10.0 | )% |
WHBM | (10.6 | ) | | (1.3 | ) | (6.6 | )% | | (9.7 | )% |
Soma | (1.8 | ) | | 0.7 |
| (5.8 | )% | | 0.2 | % |
Total Company | (8.4 | )% | | (3.1 | )% | (5.9 | )% | | (8.7 | )% |
(1)Comparable sales for the first quarter have been adjusted to eliminate the impact of the calendar shift due to the fifty-third week in fiscal 2017. Fiscal 2018 comparable sales represents sales for the thirteen weeks ended May 5, 2018 compared to sales for the thirteen weeks ended May 4, 2017.
Cost of Goods Sold/Gross Margin
The following table depicts COGScost of goods sold (“COGS”) and gross margin in dollars and gross margin as a percentage of total net sales for the thirteen weeks ended JulyMay 5, 2018 and April 29, 2017 and July 30, 2016:2017:
| | | Thirteen Weeks Ended | Thirteen Weeks Ended |
| July 29, 2017 | | July 30, 2016 | May 5, 2018 | | April 29, 2017 |
| | | | | | |
| (dollars in millions) | (dollars in millions) |
Cost of goods sold | $ | 369 |
| | $ | 395 |
| $ | 335 |
| | $ | 346 |
|
Gross margin | 209 |
| | 241 |
| 227 |
| | 237 |
|
Gross margin percentage | 36.1 | % | | 37.9 | % | 40.4 | % | | 40.7 | % |
For the secondfirst quarter of fiscal 2017,2018, gross margin was $209$227 million, or 36.1%40.4% of net sales, compared to $241$237 million, or 37.9%40.7% of net sales, in last year’s secondfirst quarter. This 18030 basis point decrease primarily reflects sales deleveragethe initial implementation costs and launch of store occupancy expenses and increased promotional activity to reduce inventory levels.a new expedited shipping program, partially offset by a 70 basis point improvement in maintained margin.
Selling, General and Administrative Expenses
The following table depicts selling, general and administrative expenses (“SG&A,&A”), which includes direct operating expenses, marketing expenses and National Store Support Center expenses, in dollars and as a percentage of total net sales for the thirteen weeks ended JulyMay 5, 2018 and April 29, 2017 and July 30, 2016:2017:
| | | Thirteen Weeks Ended | Thirteen Weeks Ended |
| July 29, 2017 | | July 30, 2016 | May 5, 2018 | | April 29, 2017 |
| | | | | | |
| (dollars in millions) | (dollars in millions) |
Selling, general and administrative expenses | $ | 174 |
| | $ | 187 |
| $ | 186 |
| | $ | 183 |
|
Percentage of total net sales | 30.0 | % | | 29.4 | % | 33.2 | % | | 31.3 | % |
For the secondfirst quarter of fiscal 2017,2018, SG&A was $174$186 million, or 30.0%33.2% of net sales, compared to $187$183 million, 29.4%or 31.3% of net sales, in last year's secondfirst quarter. This $13.0increase of $4 million, decreaseor 2.1%, primarily reflects a reductioninvestments in store operating expenses to align with sales as well as a decrease in unproductivefirst quarter marketing spend.
Restructuring and Strategic Charges
In the fourth quarter of fiscal 2014, we initiated a restructuring program, including the acceleration of domestic store closures and an organizational realignment, to ensure that resources align with long-term growth initiatives. During the second quarter of fiscal 2016, we recorded pre-tax restructuring and strategic charges of $16.6 million, primarily consisting of severance, proxy solicitation costs and consulting fees. The fiscal 2016 after-tax impact of the restructuring and strategic charges totaled $10.3 million, or $0.08 per diluted share. Effective in the third quarter of fiscal 2016, we substantially completed our restructuring program and did not record any similar charges for the second quarter of fiscal 2017. We have closed 124 stores in connection with our restructuring program through the second quarter of fiscal 2017, including 20 Boston Proper stores.technology.
Provision for Income Taxes
For the secondfirst quarter of fiscal 2017,2018, the effective tax rate was 35.1%27.9% compared to 38.0%38.2% for last year's secondfirst quarter. The reduction in our effective tax rate for current year of 290 basis points10.3% is primarily relatedthe result of the Tax Act which reduced the U.S. corporate income tax rate from 35% to favorable federal and state settlements,21%. This reduction is partially offset by a 67225 basis point charge fromincrease related to excess tax benefits on the adoption of the newaccounting for employee share-based payment accounting standard (the "Standard") effective the first quarter of 2017.awards.
Net Income and Earnings Per Diluted Share
We reported net income for the secondfirst quarter of fiscal 20172018 of $22.7$29 million, or $0.18$0.23 per diluted share, compared to net income of $23.0$34 million, or $0.17$0.26 per diluted share in last year’s second quarter. Results for the second quarter of 2016 include the impact of restructuring and strategic charges of $10.3 million after-tax, or $0.08 per diluted share, primarily related to severance, proxy solicitation costs and consulting fees.
Twenty-Six Weeks Ended July 29, 2017 Compared to the Twenty-Six Weeks Ended July 30, 2016
Net Sales
The following table depicts net sales by Chico’s, WHBM and Soma in dollars and as a percentage of total net sales for the twenty-six weeks ended July 29, 2017 and July 30, 2016:
|
| | | | | | | | | | | | | |
| Twenty-Six Weeks Ended |
| July 29, 2017 | | July 30, 2016 |
| |
| (dollars in millions) |
Chico's | $ | 612 |
| | 52.7 | % | | $ | 683 |
| | 53.4 | % |
WHBM | 378 |
| | 32.5 |
| | 423 |
| | 33.1 |
|
Soma | 172 |
| | 14.8 |
| | 173 |
| | 13.5 |
|
Total net sales | $ | 1,162 |
| | 100.0 | % | | $ | 1,279 |
| | 100.0 | % |
Net sales for the year-to-date period ended July 29, 2017 decreased to $1,162 million from $1,279 million in last year’s year-to-date period. This decrease of 9.1% primarily reflects a decline in comparable sales of 8.4% driven by lower average dollar sales and a decline in transaction count. Net sales also reflects 35 net store closures, or a 2.4% net decrease in selling square footage, since last year's secondfirst quarter.
Cash and Marketable Securities
The following table depicts comparable sales percentages by Chico's, WHBMthe first quarter, cash and Soma for the twenty-six weeks ended July 29, 2017 and July 30, 2016:
|
| | | | | |
| Twenty-Six Weeks Ended |
| July 29, 2017 | | July 30, 2016 |
Chico's | (9.4 | )% | | (5.3 | )% |
WHBM | (10.1 | ) | | (2.7 | ) |
Soma | (0.8 | ) | | 0.6 |
|
Total Company | (8.4 | )% | | (3.7 | )% |
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 twenty-six weeks ended July 29, 2017 and July 30, 2016:
|
| | | | | | | |
| Twenty-Six Weeks Ended |
| July 29, 2017 | | July 30, 2016 |
| | | |
| (dollars in millions) |
Cost of goods sold | $ | 716 |
| | $ | 776 |
|
Gross margin | 447 |
| | 503 |
|
Gross margin percentage | 38.4 | % | | 39.3 | % |
Gross margin for the year-to-date period ended July 29, 2017 was $447 million, or 38.4%, compared to $503 million, or 39.3%, in last year’s year-to-date period. This 90 basis point decrease primarily reflects sales deleverage of store occupancy expenses, partially offset by savings related to cost reduction initiatives.
Selling, General and Administrative Expenses
The following table depicts SG&A, which includes store and direct operating expenses, marketing expenses and NSSC expenses, in dollars and as a percentage of total net sales for the twenty-six weeks ended July 29, 2017 and July 30, 2016:
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| | | | | | | |
| Twenty-Six Weeks Ended |
| July 29, 2017 | | July 30, 2016 |
| | | |
| (dollars in millions) |
Selling, general and administrative expenses | $ | 356 |
| | $ | 395 |
|
Percentage of total net sales | 30.6 | % | | 30.9 | % |
For the year-to-date period ended July 29, 2017, SG&A was $356marketable securities totaled $254.7 million compared to $395$169.8 million in last year’s year-to-date period. This $39 million decrease primarily reflects a decrease in unproductive marketing spend and a decline in store operating expenses, partially offset by sales deleverage of employee-related expenses and corporate costs.
Restructuring and Strategic Charges
In the fourth quarter of fiscal 2014, we initiated a restructuring program, including the acceleration of domestic store closures and an organizational realignment, to ensure that resources align with long-term growth initiatives. Restructuring and strategic charges for the year-to-date period of fiscal 2016 were $20.2 million pre-tax, primarily consisting of severance, proxy solicitation costs and consulting fees. The fiscal 2016 after-tax impact of the restructuring and strategic charges totaled $12.5 million, or $0.09 per diluted share. Effective in the third quarter of fiscal 2016, we substantially completed our restructuring program and did not record any similar charges for the for the year-to-date period ended July 29, 2017. We have closed 124 stores in connection with our restructuring program through the second quarter of fiscal 2017, including 20 Boston Proper stores.
Provision for Income Taxes
For the twenty-six weeks ended July 29, 2017 and July 30, 2016, the effective tax rate was 37.0% and 37.9%, respectively. The income tax provision was $33.1 million for the twenty-six weeks ended July 29, 2017 and July 30, 2016. This 90 basis point reduction in the effective tax rate primarily related to favorable federal and state settlements, partially offset by a 58 basis point charge from the adoption of the Standard effective the first quarter of 2017.
Net Income and Earnings Per Diluted Share
Net income for the year-to-date period ended July 29, 2017 was $56.3 million, or $0.44 per diluted share, compared to net income of $54.1 million, or $0.41 per diluted share, in last year's year-to-date period. Results for the year-to-date period ended July 30, 2016 include the impact of restructuring and strategic charges of $12.5 million after- tax, or $0.09 per diluted, primarily related to severance, proxy solicitation costs and consulting fees.
Inventories
Inventory at the end of the secondfirst quarter last year. This $85.0 million increase primarily reflects cash generated from operating activities.
Inventories
At the end of the first quarter of fiscal 20172018, inventories totaled $235.2$254 million compared to $235.6$274 million inat the same periodend of the first quarter last year. Inventories for the second quarter of fiscal 2017 included a $16.9This $20 million increase duedecrease, or 7.3%, primarily reflects our ability to a change in shipping termsalign inventory levels with a supplier.sales.
Liquidity and Capital Resources
We believe that our existing cash and marketable securities balances, cash generated from operations, available credit facilities and potential future borrowings will be sufficient to fund capital expenditures, working capital needs, dividend payments, potential share repurchases, commitments and other liquidity requirements associated with our operations for the foreseeable future. Furthermore, while it is our intention to repurchase our stock and pay a quarterly cash dividend in the future, any determination to repurchase additional shares of our stock or pay future dividends will be made by the Board of Directors and will depend on our stock price, future earnings, financial condition and other factors considered by the Board.
Our ongoing capital requirements will continue to be primarily for enhancing and expanding our omni-channel capabilities, including:including expanded, relocated and remodeled stores; and information technology and relocated, remodeled and new stores.technology.
Operating Activities
Net cash provided by operating activities for the year-to-date period of fiscal 20172018 was $67.3$62 million, a decreasean increase of approximately $54.6$45 million from last year's year-to-date period. This decreaseincrease primarily results from the settlement of prior year accrualsreflects payments made in fiscal 2017 for outside services and severance, the timing of income tax payments, andrelated to our previously disclosed restructuring program, the impact of lower incentive compensation payments in fiscal 2018 compared to fiscal 2017, a reduction in income taxes payable and deferred taxes as a result of the Tax Act, and a decrease in the incentive compensation accrual.inventories primarily as a result of improved inventory management.
Investing Activities
Net cash used in investing activities for the year-to-date period of fiscal 20172018 was $18.5$11 million compared to $25.6$10 million in last year's year-to-date period. This decreaseperiod, primarily reflectedreflecting a $7.2$1 million declineincrease in net purchasesmarketable securities related to the investment of property and equipment consistent with our overall business strategy.cash from operations.
Financing Activities
Net cash used in financing activities for the year-to-date period of fiscal 20172018 was $55.7$17 million compared to $85.7$30 million in last year's year-to-date period. The decrease in net cash used in financing activities primarily reflects a decrease of $35.6$9 million decline in share repurchases partially offset by higher payments on borrowings under our Credit Agreement.and a $3 million impact associated with tax withholdings upon vesting of share-based payment awards.
Store and Franchise Activity
During the fiscal 20172018 year-to-date period, we had 19 net9 store closures consisting of net closures of 84 Chico's stores, 91 WHBM storesstore and 24 Soma stores. Currently, we expect an additional 2830 to 40 net store closures in fiscal 2017, reflecting approximately 11 net closures of Chico's stores, 13 net closures of WHBM stores, and 4 net closures of Soma stores.2018. We continuously evaluate the appropriate store positioning in light of economic conditions and may adjust our strategy as conditions require or as opportunities arise. As of July 29, 2017,May 5, 2018, we also sold merchandise through 6364 Chico's and 30 Soma international franchise locations.
Critical Accounting Policies and 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 the United States. The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors and believes the assumptions and estimates, as set forth in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017,February 3, 2018, are significant to reporting our results of operations and financial position. ThereOther than adoption of recent accounting standards as discussed in Note 2 to the notes of our unaudited condensed consolidated financial statements, there have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.February 3, 2018.
Forward-Looking Statements
This Form 10-Q may contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to certain events that could have an effect on our future financial performance, including but without limitation, statements regarding our plans, objectives, the effectiveness of our 2016 restructuring and organizational redesign for improved business performance and the future success of our store concepts.concepts and our business initiatives. These statements may address items such as future sales and sales initiatives, customer traffic, gross margin expectations, SG&A expectations, (particularly estimatedincluding expected savings),savings, operating margin expectations, earnings per share expectations, planned store openings, closings and expansions, proposed business ventures, new channels of sales or distribution, the expected impact of the Tax Act, expected impact of ongoing litigation, future stock repurchase plans, future plans to pay dividends, future comparable sales, future product sourcing plans, future inventory levels, including the ability to leverage inventory management and targeted promotions, planned marketing expenditures, planned capital expenditures and future cash needs.
These statements relate to expectations concerning matters that are not historical fact and may include the words or phrases such as “will,” “should,” “expects,” “believes,” “anticipates,” “plans,” “intends,” “estimates,” “approximately,” “our planning assumptions,” “future outlook,”outlook” and similar expressions. Except for historical information, matters discussed in this Form 10-Q are forward-looking statements. These forward-looking statements are based largely on information currently available to our management and on our current expectations, assumptions, plans, estimates, judgments and projections about our business and our industry, and are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those currently anticipated. Although we believe our expectations are based on reasonable estimates and assumptions, they are not guarantees of performance and there are a number of known and unknown risks, uncertainties, contingencies and other factors (many of which are outside our control) that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Accordingly, there is no assurance that our expectations will, in fact, 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 Annual Report on Form 10-K filed with the SEC on March 7, 201713, 2018 and the following:
The financial strength of retailing in particular and the economy in general; the extent of financial difficulties or economic uncertainty that may be experienced by customers; our ability to secure and maintain customer acceptance of styles and in-store and online concepts; the ability to effectively manage and maintain an appropriate level of inventory; the extent and nature of competition in the markets in which we operate; the ability to remain competitive with customer shipping terms and costs pertaining to product deliveries and returns; the extent of the market demand and overall level of spending for women’s private branded clothing and related accessories; the effectiveness of our brand awareness and marketing programs; the ability to coordinate product development with buying and planning; the quality and timeliness of merchandise received from suppliers; the ability to efficiently, timely and successfully manage our business in the face of significant economic, labor, political or other shifts in the countries from which our merchandise is supplied; the changes in the costs of manufacturing, raw materials, transportation, distribution, labor and advertising; the availability of quality store sites; our ability to manage our store fleet and the risk that our investments in merchandise or marketing initiatives may not deliver the results we anticipate; our ability to successfully navigate the increasing use of on-line retailers for fashion purchases and the pressure that puts on traffic and transactions in our physical stores; the ability to operate our own retail websites in a manner that produces profitable sales; the ability to successfully identify and implement additional sales and distribution channels; the ability to successfully execute our business strategies including our previously announced restructuring program and expense initiatives, and to achieve the expected results from them; the continuing performance, implementation and integration of management information systems; the impact of any systems failures, cyber security or other data or security breaches, including any security breaches that result in theft, transfer, or unauthorized disclosure of customer, employee, or company information or our compliance with information security and privacy laws and regulations in the event of such an incident; the
ability to hire, train, motivate and retain qualified sales associates, managerial employees and other employees; the successful integration of the new members of our newsenior management team; the ability to respond effectively to actions of activist shareholders and others; the ability to utilize our distribution center and other support facilities in an efficient and effective manner; the ability to secure and protect trademarks and other intellectual property rights and to protect our reputation and brand images; and the risk that natural disasters, public health crises, political uprisings, uncertainty or unrest, or other catastrophic events could adversely affect our operations and financial results; the impact of unanticipated changes in legal, regulatory or tax laws; the potential risks and uncertainties that are related to our reliance on sourcing from foreign suppliers, including the impact of changes in tariffs, taxes (such as the passage of a "border adjustment" or similar tax)or other import regulations; and changes in governmental policies in or towards foreign countries; currency exchange rates and other similar factors; and the impact of our recent shift to a predominantly FOB (free on board) shipping structure.factors.
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 Quarterly Report on 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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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The market risk of our financial instruments as of July 29, 2017May 5, 2018 has not significantly changed since January 28, 2017.February 3, 2018. We are exposed to market risk from changes in interest rates on any future indebtedness and our marketable securities and from foreign currency exchange rate fluctuations.
Our exposure to interest rate risk relates in part to our revolving line of credit with our bank. In 2015, we entered into a credit agreement, as further discussed in Note 8. The Agreement, which matures on May 4, 2020, has borrowing options which accrue interest by reference, at our election, at either an adjusted eurodollar rate tied to LIBOR or an Alternate Base Rate plus an interest rate margin, as defined in the Agreement. An increase or decrease in market interest rates of 100 basis points would not have a material effect on annual interest expense.
Our investment portfolio is maintained in accordance with our investment policy which identifies allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. Our investment portfolio consists of cash equivalents and marketable securities including municipal securities, corporate bonds, U.S. government agencies and commercial paper. The marketable securities portfolio as of July 29, 2017,May 5, 2018, consisted of $30.5$35.7 million of securities with maturity dates within one year or less and $20.4$25.5 million with maturity dates over one year and less than or equal to two years. We consider all marketable securities available-for-sale, including those with maturity dates beyond 12 months, and therefore classify these securities as short-term investments within current assets on the condensed consolidated balance sheets as they are available to support current operational liquidity needs. As of July 29, 2017,May 5, 2018, an increase or decrease of 100 basis points in interest rates would not have a material effect on the fair value of our marketable securities portfolio.
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ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective in providing reasonable assurance in timely alerting them to material information relating to us (including our consolidated subsidiaries) and that information required to be disclosed in our reports is recorded, processed, summarized and reported as required to be included in our periodic SEC filings.
Changes in Internal Controls
There were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of the above referenced evaluation. Furthermore, there was no change in our internal control over financial reporting or in other factors during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
In July 2015, White House Black Market, Inc. (WHBM) was named as a defendant in Altman v. White House Black Market, Inc., a putative class action filed in the United States District Court for the Northern District of Georgia. The complaint alleges that WHBM, in violation of federal law, willfully published more than the last five digits of a credit or debit card number on customers' point-of-sale receipts. PlaintiffThe plaintiff seeks an award of statutory damages of $100 to $1,000 for each alleged willful violation of the law, as well as attorneys’ fees, costs and punitive damages. The Company denies the material allegations of the complaint and believes the case is without merit. TheOn February 12, 2018, the District Court deniedissued an order certifying the Company’s motion to dismiss on July 13, 2016, andclass. On February 26, 2018, the parties have engaged in extensive discovery since then. PlaintiffCompany filed a motionpetition with the District Court for permission to appeal its decision to the Eleventh Circuit Court of Appeals. Thereafter, WHBM filed a petition with the Eleventh Circuit Court of Appeals seeking immediate review of the class certification order, which was denied on April 11, 2018. Discovery closed on February 28, 2018. Thereafter, WHBM filed with the District Court two motions for summary judgment: one arguing that the plaintiff lacks standing (filed on March 12, 2018) and one arguing that WHBM’s alleged violation of federal law was not willful (filed on March 30, 2018).
On April 9, 2018, the District Court, sua sponte, issued an order granting WHBM���s earlier 2016 request to appeal, to the Eleventh Circuit Court of Appeals, the District Court’s ruling that the plaintiff has standing to maintain the lawsuit. On April 19, 2018, WHBM filed a petition for review in May 2017, which WHBM opposedthe Eleventh Circuit Court of Appeals. In the meantime, the District Court stayed all further proceedings in a brief filedthe case pending the outcome of the appeal in June 2017. the Eleventh Circuit Court of Appeals.
The Company will continue to vigorously defend the matter, including a planned motion for summary judgment to dismiss all claims.matter. At this time, the Company is unable to reasonably estimate the potential loss or range of loss, if any, related to the lawsuit because there are a number of unknown facts and unresolved legal issues that may impact the amount of any potential liability, including, without limitation, (a) whether the action will ultimately be permitted to proceed, (b) if the action proceeds as a class, (b) if a class is certified, the resolution of certain disputed statutory interpretation issues that may impact the size of the putative class and (c) whether or not the plaintiff is entitled to statutory damages. No assurance can be given that these issues will be resolved in the Company’s favor or that the Company will be successful in its defense on the merits or otherwise. If the case were to proceed as a class action and the Company were to be unsuccessful in its defense on the merits, the ultimate resolution of the case could have a material adverse effect on the Company’s consolidated financial condition or results of operations.
In June 2015, the Company was named as a defendant in Ackerman v. Chico’s FAS, Inc., a putative representative Private Attorney General action filed in the Superior Court of California, County of Los Angeles. The complaint alleged numerous violations of California law related to wages, meal periods, rest periods, wage statements and failure to reimburse business expenses, among other things. Plaintiff subsequently amended her complaint to make the same allegations on a class action basis. The parties entered into a settlement agreement, and the Court issued final approval and entry of judgment on June 5, 2017. The settlement did not have a material adverse effect on the Company’s consolidated financial condition or results of operations.
In July 2016, the Company was named as a defendant in Calleros v. Chico’s FAS, Inc., a putative class action filed in the Superior Court of California, County of Santa Barbara. Plaintiff alleged that the Company failed to comply with California law requiring it to provide consumers cash for gift cards with a stored value of less than $10.00. Following voluntary mediation of the matter in November of 2016, the parties entered into a settlement agreement, which was approved by the court on July 25, 2017. The settlement will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Other than as noted above, we are not currently a party to any material legal proceedings other than claims and lawsuits arising in the normal course of business. All such matters are subject to uncertainties, and outcomes may not be predictable. Consequently, the ultimate aggregate amounts of monetary liability or financial impact with respect to these matters as of July 29, 2017May 5, 2018 are not estimable. However, while such matters could affect our consolidated operating results when resolved in future periods, management believes that upon final disposition, any monetary liability or financial impact to us would not be material to our annual consolidated financial statements.
In addition to the other information discussed in this report, the factors described in Part I, Item 1A. “Risk Factors” in our 20162017 Annual Report on Form 10-K filed with the SEC on March 7, 201713, 2018 should be considered as they could materially affect our business, financial condition or future results.
There have not been any significant changes with respect to the risks described in our 20162017 Form 10-K, except as
amended and restated below, but these are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.
The risk factor listed below updates and supersedes the risk factor associated with our business previously disclosed in Part I, Item 1A. "Risk Factors" in our 2016 Annual Report on Form 10-K for the fiscal year ended January 28, 2017.
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2. Competition | The women's specialty retail industry is highly competitive. We compete with local, national and international department stores, specialty and discount stores, catalogs and internet businesses offering similar categories of merchandise. Many of our competitors have advantages over us, including substantially greater financial, marketing and other resources. Increased levels of promotional activity by our competitors, some of whom may be able to adopt more aggressive pricing policies than we can, both online and in stores, may negatively impact our sales and profitability. There is no assurance that we can compete successfully with these companies in the future. In addition to competing for sales, we compete for favorable store locations, lease terms and qualified associates. The growth of fast fashion and value fashion retailers and expansion of off-price retailers has shifted shopper expectations to more affordable pricing of well-known brands and continued promotional pressure and a shift in customer shipping terms and costs pertaining to product deliveries and returns. If we do not identify and respond to these emerging trends in consumer spending as well as the shift in shopping preferences from brick-and-mortar stores to online e-commerce channels, we may harm our ability to retain our existing customers or attract new customers. Increased competition in any of these areas may result in higher costs or otherwise reduce our sales or operating margins. |
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table sets forth information concerning our purchases of common stock for the periods indicated (amounts in thousands, except share and per share amounts):
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Period | Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans (b) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Publicly Announced Plans |
April 30, 2017 - May 27, 2017 | 6,716 |
| | $ | 13.87 |
| | — |
| | $ | 154,144 |
|
May 28, 2017 - July 1, 2017 | 1,214,992 |
| | | 9.39 |
| | 1,193,300 |
| | | 142,941 |
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July 2, 2017 - July 29, 2017 | — |
| | | — |
| | — |
| | | 142,941 |
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Total | 1,221,708 |
| | | 9.41 |
| | 1,193,300 |
| | |
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Period | Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans (b) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Publicly Announced Plans |
February 4, 2018 - March 3, 2018 | 295,663 |
| | $ | 9.84 |
| | — |
| | $ | 136,243 |
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March 4, 2018 - April 7, 2018 | 2,590 |
| | | 8.96 |
| | — |
| | | 136,243 |
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April 8, 2018 - May 5, 2018 | 6,403 |
| | | 9.15 |
| | — |
| | | 136,243 |
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Total | 304,656 |
| | | 9.82 |
| | — |
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(a) Total number of shares purchased includes 28,408consists of 304,656 shares of restricted stock repurchased in connection with employee tax withholding obligations under employee compensation plans, which are not purchases under any publicly announced plan.
(b) In November 2015, we announced a $300.0 million share repurchase plan. There was approximately $142.9$136.2 million remaining under the program as of the end of the secondfirst quarter. The repurchase program has no specific termination date and will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors. The Company has no continuing obligation to repurchase shares under this authorization, and the timing, actual number and value of any additional shares to be purchased will depend on the performance of our stock price, market conditions and other considerations.
As previously disclosed in the Company’s Current Report on Form 8-K, filed with the SEC on June 27, 2017 (the “Prior Form 8-K”), the Company’s 2018 Annual Meeting of Shareholders is currently expected to be held on June 21, 2018. The deadlines for receipt of shareholder proposals and director nominations (including proxy access director nominations) for the 2018 Annual Meeting of Shareholders have not changed from the deadlines previously disclosed in the Company’s proxy materials for the 2017 Annual Meeting of Shareholders, filed with the SEC on May 5, 2017, and in the Prior Form 8-K.
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(a) | The following documents are filed as exhibits to this Quarterly Report on Form 10-Q (exhibits marked with an asterisk have been previously filed with the Commission as indicated and are incorporated herein by this reference):10-Q: |
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| Exhibit 10.43 | | |
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| Exhibit 10.44 | | |
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| Exhibit 10.210.48 | | |
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| Exhibit 10.3 | | |
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| Exhibit 10.4 | | |
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| Exhibit 10.5 | | |
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| Exhibit 10.6 | | |
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| Exhibit 10.55* | | |
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| Exhibit 31.1 | | |
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| Exhibit 31.2 | | |
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| Exhibit 32.1 | | |
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| Exhibit 32.2 | | |
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| Exhibit 101.INS | | XBRL Instance Document |
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| Exhibit 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| Exhibit 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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| Exhibit 101.DEF | | XBRL Taxonomy Definition Linkbase Document |
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| Exhibit 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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| Exhibit 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | | | CHICO’S FAS, INC. |
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Date: | AugustMay 31, 20172018 | | | | By: | /s/ Shelley G. Broader |
| | | | | | Shelley G. Broader |
| | | | | | Chief Executive Officer, President and Director |
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Date: | AugustMay 31, 20172018 | | | | By: | /s/ Todd E. Vogensen |
| | | | | | Todd E. Vogensen |
| | | | | | Executive Vice President, Chief Financial Officer and Assistant Corporate Secretary |
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Date: | AugustMay 31, 20172018 | | | | By: | /s/ David M. Oliver |
| | | | | | David M. Oliver |
| | | | | | GroupSenior Vice President - Finance, Controller and Chief Accounting Officer |