SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT
For the Quarter Ended: | Commission File Number: | |
0-21258 | ||
Chico’s FAS, Inc.
Florida | 59-2389435 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
11215 Metro Parkway, Fort Myers, Florida 33912
239-277-6200
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, and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
At November 26, 2003,May 24, 2004, there were 87,119,13889,144,053 shares outstanding of Common Stock, $.01 par value per share.
CHICO’SFAS, Inc.
Index
2
CHICO’SFAS, Inc. and Subsidiaries
November 1, | February 1, | |||||||||||
2003 | 2003 | |||||||||||
ASSETS | ||||||||||||
Current Assets: | ||||||||||||
Cash and cash equivalents | $ | 18,627 | $ | 8,753 | ||||||||
Marketable securities, at market | 70,243 | 91,195 | ||||||||||
Receivables | 5,302 | 2,226 | ||||||||||
Inventories | 60,146 | 44,908 | ||||||||||
Prepaid expenses | 8,363 | 6,223 | ||||||||||
Deferred taxes | 10,187 | 7,125 | ||||||||||
Total Current Assets | 172,868 | 160,430 | ||||||||||
Property and Equipment: | ||||||||||||
Land and land improvements | 5,310 | 5,166 | ||||||||||
Building and building improvements | 23,584 | 19,668 | ||||||||||
Equipment, furniture and fixtures | 91,663 | 71,769 | ||||||||||
Leasehold improvements | 98,398 | 78,792 | ||||||||||
Total Property and Equipment | 218,955 | 175,395 | ||||||||||
Less accumulated depreciation and amortization | (51,445 | ) | (36,686 | ) | ||||||||
Property and Equipment, Net | 167,510 | 138,709 | ||||||||||
Other Assets: | ||||||||||||
Deferred taxes | – | 92 | ||||||||||
Goodwill | 59,425 | – | ||||||||||
Other intangible assets | 34,065 | – | ||||||||||
Other assets | 4,669 | 2,313 | ||||||||||
Total Other Assets | 98,159 | 2,405 | ||||||||||
$ | 438,537 | $ | 301,544 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Accounts payable | $ | 38,283 | $ | 28,489 | ||||||||
Accrued liabilities | 35,509 | 26,200 | ||||||||||
Current portion of deferred liabilities | 833 | 171 | ||||||||||
Total Current Liabilities | 74,625 | 54,860 | ||||||||||
Noncurrent Liabilities: | ||||||||||||
Deferred taxes | 11,476 | – | ||||||||||
Deferred liabilities | 12,386 | 6,551 | ||||||||||
Total Noncurrent Liabilities | 23,862 | 6,551 | ||||||||||
Stockholders’ Equity: | ||||||||||||
Common stock | 871 | 853 | ||||||||||
Additional paid-in capital | 89,409 | 63,986 | ||||||||||
Retained earnings | 249,702 | 175,109 | ||||||||||
Accumulated other comprehensive income | 68 | 185 | ||||||||||
Total Stockholders’ Equity | 340,050 | 240,133 | ||||||||||
$ | 438,537 | $ | 301,544 | |||||||||
May 1, | January 31, | |||||||
2004 | 2004 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 22,133 | $ | 15,676 | ||||
Marketable securities, at market | 160,692 | 104,453 | ||||||
Receivables | 5,066 | 6,368 | ||||||
Inventories | 60,686 | 54,896 | ||||||
Prepaid expenses | 9,982 | 8,655 | ||||||
Deferred taxes | 8,491 | 7,525 | ||||||
Total Current Assets | 267,050 | 197,573 | ||||||
Property and Equipment: | ||||||||
Land and land improvements | 6,035 | 5,976 | ||||||
Building and building improvements | 25,678 | 25,014 | ||||||
Equipment, furniture and fixtures | 108,565 | 100,589 | ||||||
Leasehold improvements | 107,271 | 99,806 | ||||||
Total Property and Equipment | 247,549 | 231,385 | ||||||
Less accumulated depreciation and amortization | (64,997 | ) | (57,660 | ) | ||||
Property and Equipment, Net | 182,552 | 173,725 | ||||||
Other Assets: | ||||||||
Goodwill | 60,370 | 60,114 | ||||||
Other intangible assets | 34,020 | 34,043 | ||||||
Other assets, net | 6,285 | 5,399 | ||||||
Total Other Assets | 100,675 | 99,556 | ||||||
$ | 550,277 | $ | 470,854 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 35,575 | $ | 27,796 | ||||
Accrued liabilities | 41,305 | 43,187 | ||||||
Current portion of deferred liabilities | 213 | 599 | ||||||
Total Current Liabilities | 77,093 | 71,582 | ||||||
Noncurrent Liabilities: | ||||||||
Deferred liabilities | 13,452 | 12,713 | ||||||
Deferred taxes | 10,863 | 11,724 | ||||||
Total Noncurrent Liabilities | 24,315 | 24,437 | ||||||
Stockholders’ Equity: | ||||||||
Common stock | 891 | 875 | ||||||
Additional paid-in capital | 137,034 | 98,586 | ||||||
Retained earnings | 311,004 | 275,339 | ||||||
Accumulated other comprehensive (loss) income | (60 | ) | 35 | |||||
Total Stockholders’ Equity | 448,869 | 374,835 | ||||||
$ | 550,277 | $ | 470,854 | |||||
See Accompanying Notes.
3
CHICO’SFAS, Inc. and Subsidiaries
Thirty-Nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||||||||||||||||||
November 1, 2003 | November 2, 2002 | November 1, 2003 | November 2, 2002 | ||||||||||||||||||||||||||||||
Amount | % of Sales | Amount | % of Sales | Amount | % of Sales | Amount | % of Sales | ||||||||||||||||||||||||||
Net Sales by Company stores | $ | 530,026 | 95.8 | $ | 376,953 | 96.0 | $ | 201,716 | 95.8 | $ | 131,560 | 95.9 | |||||||||||||||||||||
Net Sales by catalog & Internet | 17,084 | 3.1 | 10,924 | 2.8 | 6,578 | 3.1 | 3,867 | 2.8 | |||||||||||||||||||||||||
Net Sales to Franchisees | 5,880 | 1.1 | 4,906 | 1.2 | 2,275 | 1.1 | 1,834 | 1.3 | |||||||||||||||||||||||||
Net sales | 552,990 | 100.0 | 392,783 | 100.0 | 210,569 | 100.0 | 137,261 | 100.0 | |||||||||||||||||||||||||
Cost of goods sold | 211,725 | 38.3 | 153,465 | 39.1 | 81,202 | 38.6 | 54,885 | 40.0 | |||||||||||||||||||||||||
Gross profit | 341,265 | 61.7 | 239,318 | 60.9 | 129,367 | 61.4 | 82,376 | 60.0 | |||||||||||||||||||||||||
General, administrative and store operating expenses | 206,522 | 37.4 | 145,796 | 37.1 | 80,815 | 38.4 | 53,666 | 39.1 | |||||||||||||||||||||||||
Depreciation and amortization | 15,137 | 2.7 | 10,740 | 2.7 | 5,547 | 2.6 | 3,868 | 2.8 | |||||||||||||||||||||||||
Income from operations | 119,606 | 21.6 | 82,782 | 21.1 | 43,005 | 20.4 | 24,842 | 18.1 | |||||||||||||||||||||||||
Interest income, net | 705 | 0.2 | 621 | 0.2 | 155 | 0.1 | 228 | 0.2 | |||||||||||||||||||||||||
Income before taxes | 120,311 | 21.8 | 83,403 | 21.3 | 43,160 | 20.5 | 25,070 | 18.3 | |||||||||||||||||||||||||
Income tax provision | 45,718 | 8.3 | 31,694 | 8.1 | 16,401 | 7.8 | 9,526 | 7.0 | |||||||||||||||||||||||||
Net income | $ | 74,593 | 13.5 | $ | 51,709 | 13.2 | $ | 26,759 | 12.7 | $ | 15,544 | 11.3 | |||||||||||||||||||||
Per share data: | |||||||||||||||||||||||||||||||||
Net income per common share–basic | $ | 0.87 | $ | 0.63 | $ | 0.31 | $ | 0.19 | |||||||||||||||||||||||||
Net income per common and common equivalent share–diluted | $ | 0.85 | $ | 0.60 | $ | 0.30 | $ | 0.18 | |||||||||||||||||||||||||
Weighted average common shares outstanding–basic | 86,100 | 82,700 | 86,818 | 83,745 | |||||||||||||||||||||||||||||
Weighted average common and common equivalent shares outstanding–diluted | 87,827 | 85,720 | 88,509 | 86,158 | |||||||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||
May 1, 2004 | May 3, 2003 | |||||||||||||||
Amount | % of Sales | Amount | % of Sales | |||||||||||||
Net sales by Company stores | $ | 248,487 | 96.7 | $ | 161,440 | 95.5 | ||||||||||
Net sales by catalog & Internet | 6,082 | 2.4 | 5,683 | 3.4 | ||||||||||||
Net sales to franchisees | 2,222 | 0.9 | 1,861 | 1.1 | ||||||||||||
Net sales | 256,791 | 100.0 | 168,984 | 100.0 | ||||||||||||
Cost of goods sold | 96,955 | 37.8 | 64,689 | 38.3 | ||||||||||||
Gross profit | 159,836 | 62.2 | 104,295 | 61.7 | ||||||||||||
General, administrative and store operating expenses | 95,805 | 37.3 | 62,284 | 36.9 | ||||||||||||
Depreciation and amortization | 6,777 | 2.6 | 4,625 | 2.7 | ||||||||||||
Income from operations | 57,254 | 22.3 | 37,386 | 22.1 | ||||||||||||
Interest income, net | 269 | 0.1 | 303 | 0.2 | ||||||||||||
Income before taxes | 57,523 | 22.4 | 37,689 | 22.3 | ||||||||||||
Income tax provision | 21,858 | 8.5 | 14,322 | 8.5 | ||||||||||||
Net income | $ | 35,665 | 13.9 | $ | 23,367 | 13.8 | ||||||||||
Per share data: | ||||||||||||||||
Net income per common share–basic | $ | 0.40 | $ | 0.27 | ||||||||||||
Net income per common and common equivalent share–diluted | $ | 0.40 | $ | 0.27 | ||||||||||||
Weighted average common shares outstanding–basic | 88,470 | 85,513 | ||||||||||||||
Weighted average common and common equivalent shares outstanding–diluted | 89,778 | 87,183 | ||||||||||||||
See Accompanying Notes.
4
CHICO’SFAS, Inc. and Subsidiaries
Thirty-Nine Weeks Ended | |||||||||||
November 1, 2003 | November 2, 2002 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Net income | $ | 74,593 | $ | 51,709 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization, cost of goods sold | 1,280 | 638 | |||||||||
Depreciation and amortization, other | 15,137 | 10,740 | |||||||||
Deferred tax benefit | (1,794 | ) | (2,528 | ) | |||||||
Tax benefit of options exercised | 11,826 | 19,735 | |||||||||
Deferred rent expense, net | 1,337 | 1,055 | |||||||||
Loss on impairment and disposal of property and equipment | 3,551 | 1,073 | |||||||||
Net change in: | |||||||||||
Receivables | (887 | ) | (4,111 | ) | |||||||
Inventories | (9,525 | ) | (10,759 | ) | |||||||
Prepaid expenses and other, net | (802 | ) | (1,437 | ) | |||||||
Accounts payable | 3,814 | 12,463 | |||||||||
Accrued liabilities | 6,855 | 2,626 | |||||||||
Total adjustments | 30,792 | 29,495 | |||||||||
Net cash provided by operating activities | 105,385 | 81,204 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
Sales (purchases) of marketable securities, net | 20,834 | (32,112 | ) | ||||||||
Acquisition, net of cash acquired | (87,305 | ) | – | ||||||||
Purchases of property and equipment | (38,308 | ) | (51,434 | ) | |||||||
Net cash used in investing activities | (104,779 | ) | (83,546 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
Proceeds from issuance of common stock | 9,350 | 6,385 | |||||||||
Payments on capital leases | (82 | ) | – | ||||||||
Principal payments on debt | – | (100 | ) | ||||||||
Deferred finance costs | – | (97 | ) | ||||||||
Net cash provided by financing activities | 9,268 | 6,188 | |||||||||
Net increase in cash and cash equivalents | 9,874 | 3,846 | |||||||||
CASH AND CASH EQUIVALENTS – Beginning of Period | 8,753 | 13,377 | |||||||||
CASH AND CASH EQUIVALENTS – End of Period | $ | 18,627 | $ | 17,223 | |||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||
Common stock issued in business combination | $ | 4,266 | $ | – | |||||||
Thirteen Weeks Ended | ||||||||
May 1, 2004 | May 3, 2003 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 35,665 | $ | 23,367 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization, cost of goods sold | 718 | 343 | ||||||
Depreciation and amortization, other | 6,777 | 4,625 | ||||||
Deferred tax benefit | (1,827 | ) | (1,366 | ) | ||||
Tax benefit of options exercised | 21,472 | 2,233 | ||||||
Deferred rent expense, net | 592 | 446 | ||||||
(Gain) loss from disposal of property and equipment | (133 | ) | 258 | |||||
Net change in: | ||||||||
Receivables | 1,302 | (1,195 | ) | |||||
Inventories | (5,790 | ) | 242 | |||||
Prepaid expenses and other, net | (1,151 | ) | (633 | ) | ||||
Accounts payable | 7,780 | (2,556 | ) | |||||
Accrued liabilities | (1,882 | ) | 10,580 | |||||
Total adjustments | 27,858 | 12,977 | ||||||
Net cash provided by operating activities | 63,523 | 36,344 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of marketable securities, net | (56,334 | ) | (9,879 | ) | ||||
Purchases of property and equipment | (16,445 | ) | (16,975 | ) | ||||
Net cash used in investing activities | (72,779 | ) | (26,854 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of common stock | 16,991 | 2,817 | ||||||
Payments on capital leases | (1,278 | ) | — | |||||
Net cash provided by financing activities | 15,713 | 2,817 | ||||||
Net increase in cash and cash equivalents | 6,457 | 12,307 | ||||||
CASH AND CASH EQUIVALENTS – Beginning of period | 15,676 | 8,753 | ||||||
CASH AND CASH EQUIVALENTS – End of period | $ | 22,133 | $ | 21,060 | ||||
See Accompanying Notes.
5
CHICO’SFAS, Inc. and Subsidiaries
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Chico’s FAS, Inc. and its wholly-owned subsidiaries (collectively, “Chico’s” or 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. for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. 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 February 1, 2003,January 31, 2004, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 28, 2003.9, 2004. The February 1, 2003January 31, 2004 balance sheet amounts were derived from audited financial statements included in the Company’s Annual Report.
Operating results for the thirty-ninethirteen weeks ended NovemberMay 1, 20032004 are not necessarily indicative of the results that may be expected for the entire year.
Note 2. The White House, Inc. Acquisition
On September 5, 2003, the Company acquired all of the outstanding common stock of The White House, Inc. (The White House) for approximately $92.9 million, consisting of approximately $88.6 million in cash (including acquisition costs of $2.7 million) and approximately $4.3 million in the Company’s common stock represented by the issuance of approximately 151,000 shares of the Company’s common stock. The Company funded the cash portion of the purchase price from current cash balances and from the sale of certain marketable securities. Of the cash consideration, $12.5 million was placed in a one-year escrow to cover certain indemnification obligations of the Sellers. As a result of the transaction, The White House has become a wholly-owned subsidiary of the Company.
As of September 5, 2003, The White House operated 107 stores in 30 states, the Virgin Islands, Puerto Rico and the District of Columbia that sell high-quality fashion and basic merchandise assorted primarily in the classic and timeless colors of white and black and related shades. As a result of the acquisition, the Company believes it can strengthen its position in the specialty retail market and continue with its overall growth strategy. The transaction was accounted for under the purchase method of accounting, and accordingly the results of operations of The White House have been consolidated in the Company’s financial statements since the date of acquisition.
6
CHICO’SFAS, Inc. and SubsidiariesNotes to Consolidated Financial StatementsNovember 1, 2003(Unaudited)(in thousands, except share and per share amounts)
Note 2. The White House, Inc. Acquisition (continued)
The total purchase consideration has been allocated to the assets and liabilities acquired, including an identifiable intangible asset (trademark), based on their respective estimated fair values as summarized below. The allocation of the purchase price to the assets and liabilities acquired resulted in excess purchase consideration over the net assets and identifiable intangible asset acquired of $59.4 million and this excess has been assigned to goodwill. Such goodwill and the amounts allocated to the intangible asset are not expected to be deductible for tax purposes. The purchase price allocation is subject to change and will be finalized upon review and refinement of certain estimates. A summary of the allocation of the purchase price follows:
Cash | $ | 1,280 | |||
Accounts receivable | 2,189 | ||||
Inventories | 5,713 | ||||
Other current assets | 2,257 | ||||
Property, plant and equipment | 10,458 | ||||
Intangible asset not subject to amortization–Trademark | 34,000 | ||||
Goodwill | 59,425 | ||||
Total assets acquired | 115,322 | ||||
Current liabilities | 9,104 | ||||
Noncurrent liabilities | 1,998 | ||||
Net deferred tax liability | 11,369 | ||||
Total liabilities assumed | 22,471 | ||||
Net assets acquired | $ | 92,851 | |||
The following table presents unaudited pro forma results of operations for the thirty-nine weeks ended and thirteen weeks ended November 1, 2003 and for the thirty-nine weeks and thirteen weeks ended November 2, 2002 as if the acquisition of The White House had occurred on February 2, 2003 and February 3, 2002, respectively. The unaudited pro forma information presented below is for illustrative purposes only and is not indicative of results that would have been achieved or results which may be achieved in the future:
Thirty-Nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||
November 1, 2003 | November 2, 2002 | November 1, 2003 | November 2, 2002 | ||||||||||||||
Net sales | $ | 601,965 | $ | 441,506 | $ | 217,467 | $ | 152,309 | |||||||||
Net income | 75,545 | (1) | 54,019 | 24,972 | (1) | 15,596 | |||||||||||
Net income per common share: | |||||||||||||||||
Basic | $ | 0.88 | $ | 0.65 | $ | 0.29 | $ | 0.19 | |||||||||
Diluted | $ | 0.86 | $ | 0.63 | $ | 0.28 | $ | 0.18 |
(1) Includes approximately $2.7 million (pre-tax) of nonrecurring charges related to the acquisition recorded by The White House in its historical results prior to September 5, 2003.
7
CHICO’SFAS, Inc. and SubsidiariesNotes to Consolidated Financial StatementsNovember 1, 2003(Unaudited)(in thousands, except share and per share amounts)
Note 3. Property and Equipment Impairment
During the third quarter of fiscal 2003, the Company decided to conclude the Pazo test concept and initiated the closing/conversion process for the 10 Pazo stores, which it expects to essentially complete by the end of the current fiscal year. In connection with the decision to conclude the Pazo test concept, the Company completed an impairment review of Pazo’s property and equipment. Upon completion of the review, the Company determined that the carrying value of certain Pazo assets exceeded their future undiscounted cash flows. As a result, in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), the Company recorded an impairment charge of $2.9 million during the third quarter of fiscal 2003. The provision for the asset impairment is included in general, administrative and store operating expenses in the accompanying consolidated statements of income.
Note 4.2. Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure” (SFAS 148). SFAS 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure provisions of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 does not amend SFAS 123 to require companies to account for their employee stock-based awards using the fair value method. However, the disclosure provisions are required for all companies with stock-based employee compensation, regardless of whether they utilize the fair value method of accounting described in SFAS 123 or the intrinsic value method described in Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25).
The Company uses the intrinsic value method for valuing its awards of stock options and recording the related compensation expense, if any, in accordance with APB 25.Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations. No stock-based employee or director compensation cost for stock options is reflected in net income for the thirteen weeks ended May 1, 2004 and May 3, 2003, as all options granted during the periodperiods have exercise prices equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), as amended by SFAS 123No. 148, “Accounting for Stock-Based Compensation- Transition and Disclosure”, to all stock-based employee compensation.
Thirteen Weeks Ended | ||||||||
May 1, 2004 | May 3, 2003 | |||||||
Net income, as reported | $ | 35,665 | $ | 23,367 | ||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of taxes | 2,479 | 2,029 | ||||||
Net income, pro forma | $ | 33,186 | $ | 21,338 | ||||
Net income per common share: | ||||||||
Basic – as reported | $ | 0.40 | $ | 0.27 | ||||
Basic – pro forma | $ | 0.38 | $ | 0.25 | ||||
Diluted – as reported | $ | 0.40 | $ | 0.27 | ||||
Diluted – pro forma | $ | 0.37 | $ | 0.24 |
86
CHICO’SFAS, Inc. and Subsidiaries
Notes to Consolidated Financial StatementsNovemberMay 1, 20032004
(Unaudited)
(in thousands, except share and per share amounts)
Note 4. Stock-Based Compensation (continued)
Thirty-Nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||
November 1, 2003 | November 2, 2002 | November 1, 2003 | November 2, 2002 | ||||||||||||||
Net income, as reported | $ | 74,593 | $ | 51,709 | $ | 26,759 | $ | 15,544 | |||||||||
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of taxes | 6,934 | 6,829 | 2,448 | 1,889 | |||||||||||||
Net income, pro forma | $ | 67,659 | $ | 44,880 | $ | 24,311 | $ | 13,655 | |||||||||
Net income per common share: | |||||||||||||||||
Basic – as reported | $ | 0.87 | $ | 0.63 | $ | 0.31 | $ | 0.19 | |||||||||
Basic – pro forma | $ | 0.79 | $ | 0.54 | $ | 0.28 | $ | 0.16 | |||||||||
Diluted – as reported | $ | 0.85 | $ | 0.60 | $ | 0.30 | $ | 0.18 | |||||||||
Diluted – pro forma | $ | 0.77 | $ | 0.52 | $ | 0.27 | $ | 0.16 |
Note 5.3. Net Income Per Share
Basic Earnings Per Share (EPS) is based uponon the weighted average number of common shares outstanding and diluted EPS is based uponon the weighted average number of common shares outstanding plus the dilutive effect of stock optionscommon equivalent shares outstanding during the period. The following is a reconciliation of the denominators of the basic and diluted EPS computations shown on the face of the accompanying consolidated statements of income:
Thirty-Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
November 1, 2003 | November 2, 2002 | November 1, 2003 | November 2, 2002 | |||||||||||||
Basic weighted average outstanding shares | 86,100,039 | 82,699,669 | 86,818,106 | 83,744,659 | ||||||||||||
Dilutive effect of options outstanding | 1,726,765 | 3,020,706 | 1,690,746 | 2,413,565 | ||||||||||||
Diluted weighted average shares outstanding | 87,826,804 | 85,720,375 | 88,508,852 | 86,158,224 | ||||||||||||
Thirteen Weeks Ended | ||||||||
May 1, 2004 | May 3, 2003 | |||||||
Weighted average common shares outstanding - basic | 88,469,746 | 85,512,752 | ||||||
Dilutive effect of stock options outstanding | 1,308,576 | 1,670,360 | ||||||
Weighted average common and common equivalent shares outstanding – diluted | 89,778,322 | 87,183,112 | ||||||
9Note 4. Goodwill and Intangible Assets
The Company’s goodwill and indefinite-lived intangible asset are reviewed annually for impairment or more frequently if impairment indicators arise. The annual valuation will be performed during the fourth quarter of each year. The changes in the carrying amount of goodwill for the quarter ended May 1, 2004 is as follows:
Balance as of January 31, 2004 | $ | 60,114 | ||
Purchase price adjustment, The White House, Inc. | 256 | |||
Balance as of May 1, 2004 | $ | 60,370 | ||
The purchase price allocation is subject to further adjustment and will be finalized upon review and refinement of certain estimates.
Note 5. Accounting Developments
The Company currently applies APB 25 and related interpretations in accounting for its stock-based compensation plans. In March 2004, the Financial Accounting Standards Board (FASB) issued the Exposure Draft, “Share-Based Payment – an amendment of Statements No. 123 and 95” (Proposed Statement of Financial Accounting Standards). The Proposed Statement would replace existing requirements under SFAS 123 and APB 25. Under the Proposed Statement, all equity-based awards to employees would be required to be recognized in the income statement based on their fair value. The Exposure Draft is projected to be finalized in late 2004 and, if so finalized and adopted, would be effective for the Company beginning in 2005. The Company is currently assessing the impact on the Company’s financial statements of the adoption of the Exposure Draft, if issued in final form by the FASB.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Chico’s FAS, Inc. (together with its subsidiaries, the “Company”) is a specialty retailer of exclusively designed, private label, sophisticated, casual-to-dressy clothing, complementary accessories, and other non-clothing gift items under the Chico’s and White House | Black Market brand names.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the accompanying unaudited consolidated financial statements and notes thereto and the Company’s 2003 Annual Report to Stockholders.
Overview
Factors that will be critical to determining the Company’s future success include, among others, managing the overall growth strategy, including the ability to open and operate stores effectively, maximizing efficiencies in the merchandising, product development and sourcing processes, maintaining high standards for customer service and assistance, maintaining the newness, fit and comfort in the merchandise offerings, and generating cash to fund the Company’s expansion needs. In order to monitor the Company’s success in regards to these critical success factors, the Company’s senior management monitors certain key performance indicators, including:
• | Comparable store sales growth– For the thirteen week period ended May 1, 2004, the Company’s comparable store sales growth (sales from stores open for at least twelve full months, including stores that have been expanded or relocated within the same general market) reached 20.1%. This increase represents the third consecutive quarter of comparable store sales growth of at least 20%, as well as 26 out of the last 28 quarterly periods with at least double digit increases in comparable store sales. The Company believes that comparable store sales growth is a critical success factor and a positive indication of the Company’s ability to manage its expansion and its ability to open and operate stores effectively. |
• | Positive operating cash flow– For the thirteen week period ended May 1, 2004 (the “current period”), cash flow from operations totaled $64 million compared with $36 million for the prior thirteen week period ended May 3, 2003 (the “prior period”). Although over half the increase in operating cash flow was attributable to the tax benefit from an unusual volume of stock option exercises, the remaining cash flow increase was still quite impressive, representing a growth of over 20%. The Company believes that a key strength of its business is the ability to consistently generate cash. Strong cash flow generation is critical to the future success of the Company, not only to support the general operating needs of the Company, but also to fund capital expenditures related to new store openings, fund implementation of state of the art information systems and to fund strategic acquisitions. See further discussion of the Company’s cash flows in the Liquidity and Capital Resources section. |
• | Passport Club– Management believes that a significant indicator of the Company’s emphasis on personalized customer service and the success of its marketing initiatives is the growth of its loyalty program, the “Passport Club.” In the current period, the Company added approximately 90,000 permanent Passport Club members and approximately 370,000 preliminary Passport Club members. The Company believes that the continued growth of its Passport Club indicates that the |
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Company is still generating strong interest from new customers, many of whom tend to become long term loyal customers due in large part to the Company’s commitment to personalized customer service. |
• | Quality of merchandise offerings –To monitor and maintain the acceptance of its merchandise offerings, the Company monitors sell-through levels, inventory turns, gross margins and markdown rates on a classification and style level. Although the Company does not disclose these statistics for competitive reasons, these reviews help identify comfort, fit and newness issues at an early date and help the Company plan future product development and buying. |
For the thirteen weeks ended May 1, 2004 (the “current period”), the Company reported net sales, operating income and net income of $257 million, $57 million and $36 million, respectively, up 52.0%, 53.1% and 52.6%, from the comparable period in the prior fiscal year (the “prior period”). The Company’s gross margin increased to 62.2% for the current period from 61.7% in the prior period, but this gain was offset in large part by an increase in the Company’s general, administrative and store operating expenses as a percentage of net sales to 37.3% for the current period from 36.9% in the prior period.
Results of Operations – Thirteen Weeks Ended NovemberMay 1, 20032004 Compared to the Thirteen Weeks Ended November 2, 2002.May 3, 2003.
Net Sales.
The following table shows net sales by Company-owned stores, net sales by catalog and Internet and net sales to franchisees in dollars and as a percentage of total net sales for the thirteen weeks ended May 1, 2004 and May 3, 2003 (amounts in thousands):
Thirteen Weeks Ended | ||||||||||||||||
May 1, 2004 | May 3, 2003 | |||||||||||||||
Net sales by Company stores | $ | 248,487 | 96.7 | % | $ | 161,440 | 95.5 | % | ||||||||
Net sales by catalog and Internet | 6,082 | 2.4 | 5,683 | 3.4 | ||||||||||||
Net sales to franchisees | 2,222 | 0.9 | 1,861 | 1.1 | ||||||||||||
Net sales | $ | 256,791 | 100.0 | $ | 168,984 | 100.0 |
Net sales by Company-owned stores forhave increased in the thirteen weeks ended November 1, 2003 (the current period) increased by $70.2 million, or 53.3% over net sales by Company-owned stores forperiod from the comparable thirteen weeks ended November 2, 2002 (the prior period). The increase wasperiod primarily due to new store openings, as well as the resultcurrent trend of a comparable Company store net sales increase of $27.1 million and $43.1 million additional sales primarily from new Chico’s stores not yet includeddouble-digit increases in the Company’s comparable store base. The $43.1 millionnet sales (including stores within the comparable store base that have been expanded or relocated within the same general market). A summary of additionalthe factors impacting year-over-year sales also includesincreases is provided in the table below:
Thirteen Weeks Ended | ||||||||
May 1, 2004 | May 3, 2003 | |||||||
Comparable store sales increases | $ | 31,912 | $ | 9,730 | ||||
Comparable same store sales % | 20.1 | % | 7.8 | % | ||||
New store sales, net | $ | 55,135 | $ | 26,446 |
All of the net sales made atfrom White House | Black Market stores since the Pazo test concept stores and the sales which have occurred sincedate of acquisition on September 5, 2003 at White House|Black Market stores.and through the end of the current period and all of the net sales from the Company’s
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now discontinued Pazo store concept during the current and prior period are included in new store sales for the current and prior period; no such sales are included in comparable store sales.
Net sales by catalog and Internet for the current period (which only included Chico’s merchandise) increased by $2.7$0.4 million, or 70.1%7.0%, compared to net sales by catalog and Internet for the prior period. It is believed that the increase was principally attributable to the increased page count and number of catalog mailings and additional television spots in the current period versus the prior period.period, but was substantially less than the percentage increase in overall sales primarily as a result of an unexpected level of catalog and Internet sales in the prior period attributable to an unsolicited yet welcome public promotion of certain of the Company’s products by a national celebrity.
Net sales to franchisees for the current period increased by approximately $0.4 million, or 24.0%19.4%, compared to net sales to franchisees for the prior period. The increase in net sales to franchisees was primarily due to a net increase in purchases by existing franchisees and is consistent with percentage increases in net sales to a lesser degree, the openingfranchisees experienced in fiscal 2003 over fiscal 2002.
Cost of a new franchise location by an existing franchisee.
Goods Sold/Gross Profit.Gross
The following table shows cost of goods sold and gross profit in dollars and the related gross profit percentages for the current period was $129.4 million, or 61.4% of net sales, compared with $82.4 million, or 60.0% of net sales, for the prior period.thirteen weeks ended May 1, 2004 and May 3, 2003 (amounts in thousands):
Thirteen Weeks Ended | ||||||||
May 1, 2004 | May 3, 2003 | |||||||
Cost of goods sold | $ | 96,955 | $ | 64,689 | ||||
Gross profit | 159,836 | 104,295 | ||||||
Gross profit percentage | 62.2 | % | 61.7 | % |
The improvement in the gross profit percentage during the current period resulted primarily from improved margins at the Chico’s frontline and, to a lesser extent, from improved margins at the outlet stores (whichstores. This improvement resulted in large part from improved initial merchandise markups on new products at the Chico’s frontline stores in the current period versus the prior period offset, in part, by increased markdownsand a change in the current period asCompany’s markdown strategy whereby the Company significantly increased its first markdown at the Chico’s frontline stores to accelerate the clearance of markdown items and thus reduce the extent of second markdowns. Management is still evaluating the long-term viability of this new markdown strategy. To a percent of net sales), as well aslesser degree, the improvement resulted from operating efficiencies associated with the Company’s new distribution center (which costs are included in the Company’s cost of goods sold). These improvements in the gross profit percentage were offset, in part, by Thethe White House and Pazo| Black Market stores sales, which carry a lower gross profit percentage than the CompanyChico’s frontline stores, and an increase in product development costs, as a whole.percentage of sales, primarily due to White House | Black Market.
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General, Administrative and Store Operating Expenses.ExpensesGeneral,
The following table shows general, administrative and store operating expenses increased to $80.8 million, or 38.4%in dollars and as a percentage of total net sales for the thirteen weeks ended May 1, 2004 and May 3, 2003 (amounts in the current period from $53.7 million, or 39.1% of net sales, in the prior period.thousands):
Thirteen Weeks Ended | ||||||||
May 1, 2004 | May 3, 2003 | |||||||
General, administrative and store operating expenses | $ | 95,805 | $ | 62,284 | ||||
Percentage of total net sales | 37.3 | % | 36.9 | % |
The increase in general, administrative and store operating expenses was, for the most part, the result of increases in Chico’sthe Company’s store operating expenses, including associate compensation, occupancy and other costs associated with additional store openings, the acquisition of Thethe White House | Black Market stores in the Pazo store closing costs,third quarter of fiscal 2003 and, to a lesser degree, an increase in marketing expenses and other general corporate infrastructure costs to support the Company’s rapid growth. The decrease in theseGeneral, administrative and store operating expenses as a percentage of net sales was principallyincreased 40 basis points over the prior period primarily due to costs associated with White House | Black Market store operating expenses which run substantially higher than Chico’s frontline stores as a percentage of sales. To a lesser degree, the increase as a percentage of sales was attributable to the interim continuation of the White House | Black Market corporate headquarters and related functions (which are expected to be phased out over the next several quarters), costs associated with the Company’s Sarbanes-Oxley initiatives and increased compensation costs to support the overall growth of the Company. These increases were partially offset by decreases in Chico’s store payroll, bonuses and marketing costsoperating expenses as a percentage of net sales andover the prior period due primarily to leverage associated with the Company’s current period same storescomparable store sales increase of 20.9%20.1%. This leverage improvement was achieved despite approximately $3.2 million of store closing costs associated with the conclusion of the Pazo test concept (including a $2.9 million property and equipment impairment charge) and The White House acquisition which has historically operated with considerably higher store expenses as a percent of sales compared to Chico’s.
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Depreciation and Amortization. Depreciation and amortization increased to $5.6 million, or 2.6% of net sales, in the current period from $3.9 million, or 2.8% of net sales, in the prior period. The increase in depreciation and amortization was principally due to capital expenditures related to new, remodeled and expanded stores.
Interest Income, Net. The Company had net interest income during the current period of approximately $155 versus approximately $228 in the prior period. The decrease in net interest income was primarily a result of the Company’s decreased cash and marketable securities position due to the sale of marketable securities used to fund The White House acquisition.
Net Income. As a result of the factors discussed above,
The following table shows net income reflects an increasein dollars and as a percentage of 72.2% to $26.8 million in the current period from net income of $15.5 million in the prior period. The income tax provision represented an effective rate of approximately 38% for both the current and prior period.
Results of Operations – Thirty-Nine Weeks Ended November 1, 2003 Compared to the Thirty-Nine Weeks Ended November 2, 2002.
Net Sales. Net sales by Company-owned stores for the thirty-nine weeks ended November 1, 2003 (the current period) increased by $153.1 million, or 40.6% over net sales by Company-owned stores for the comparable thirty-nine weeks ended November 2, 2002 (the prior period). The increase was the result of a comparable Company store net sales increase of $54.3 million and $98.8 million additional sales primarily from new Chico’s stores not yet included in the Company’s comparable store base. The $98.8 million of additional sales also includes sales made at the Pazo test concept stores and the sales which have occurred since September 5, 2003 at White House|Black Market stores.
Net sales by catalog and Internet for the current period increased by $6.2 million, or 56.4%, compared to net sales by catalog and Internet for the prior thirty-nine week period. It is believed that the increase was principally attributable to the increased number and frequency of catalog mailings and additional television spots in the current year versus the prior period.
Net sales to franchisees for the current period increased by approximately $1.0 million, or 19.9%, compared to net sales to franchisees for the prior period. The increase in net sales to franchisees was primarily due to the opening of a new franchise location by an existing franchisee and, to a lesser degree, a net increase in purchases by existing franchisees.
Gross Profit. Gross profit for the current period was $341.3 million, or 61.7% of net sales, compared with $239.3 million, or 60.9% oftotal net sales for the prior period. The increasethirteen weeks ended May 1, 2004 and May 3, 2003 (amounts in the gross profit percentage primarily resulted from operating efficiencies related to the Company’s new distribution center (which costs are included in the Company’s cost of goods sold). To a lesser extent, the improvement in gross profit percentage was from improved margins at the Chico’s frontline and outlet stores (which improvement resulted from improved initial merchandise markups on new products in the current period versus the prior period, offset, in part, by increased markdowns in the current period as a percent of net sales) and from decreased inventory shrinkage costs. These improvements in the gross profit percentage were offset, in part, by The White House and Pazo sales, which carry a lower gross profit percentage than the Company as a whole.thousands):
Thirteen Weeks Ended | ||||||||
May 1, 2004 | May 3, 2003 | |||||||
Net income | $ | 35,665 | $ | 23,367 | ||||
Percentage of total net sales | 13.9 | % | 13.8 | % |
General, Administrative and Store Operating Expenses.General, administrative and store operating expenses increased to $206.5 million, or 37.4% of net sales, in the current period from $145.8 million, or 37.1% of net sales, in the prior period. The increase in general, administrative and store
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operating expenses was, for the most part, the result of increases in Chico’s store operating expenses, including associate compensation, occupancy and other costs associated with additional store openings, the acquisition of The White House stores and, to a lesser degree, an increase in marketing expenses and other general corporate infrastructure costs to support the Company’s rapid growth. The increase in these expenses as a percentage of net sales was principally due to the effect of the Pazo test concept stores, including the approximate $3.2 million of store closing costs associated with the conclusion of the Pazo test concept (including a $2.9 million property and equipment impairment charge) and The White House acquisition which operates with considerably higher store expenses as a percent of sales compared to Chico’s. This increase was offset, for the most part, by decreases in Chico’s store payroll and bonuses as a percentage of net sales and due to leverage associated with the Company’s current period same stores sales increase of 14.6%.
Depreciation and Amortization. Depreciation and amortization increased to $15.1 million, or 2.7% of net sales, in the current period from $10.7 million, or 2.7% of net sales, in the prior period. The increase in depreciation and amortization was principally due to capital expenditures related to new, remodeled and expanded stores.
Interest Income, Net. The Company had net interest income during the current period of approximately $705 versus approximately $621 in the prior period. The increase in net interest income was primarily a result of the Company’s increased cash and marketable securities position during most of the current period (until such cash and marketable securities were used in substantial part to fund The White House acquisition), in comparison to the cash and marketable securities position of a year ago.
Net Income. As a result of the factors discussed above, net income reflects an increase of 44.3% to $74.6 million in the current period from net income of $51.7 million in the prior period. The income tax provision represented an effective rate of 38% for both the current and prior period.
Comparable Company Store Net Sales
Comparable Company store net sales increased by 20.9%20.1% in the current quarter and 14.6% in the first nine months of this fiscal year,period when compared to the respective comparable prior periods.period. Comparable Company store net sales data is calculated based on the change in net sales of currently open Chico’s frontline and outletCompany-owned stores that have been operated as Company-owned storesa Company store for at least thirteentwelve full months, including stores that have been expanded or relocated within the same general market area (approximately five miles).
The comparable store percentagespercentage reported above include 26 and 37includes 24 stores respectively, that were expanded or relocated within the last twelve months from the beginning of the prior period by an average of 983 and 9231,066 net selling square feet, respectively.feet. If the stores that were expanded and relocated had been excluded from the comparable
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Company-owned store base, the increase in comparable Company-owned store net sales would have been 19.8%19.3% for the current quarter and 13.2% for the first nine months.period (versus 20.1% as reported). The Company does not consider the effect to be material to the overall comparable store sales results and believes the inclusion of expanded stores in the comparable store net sales to be an acceptable practice, consistent with the practice followed by the Company in prior periods and by many other retailers. The comparable store percentages reported above do not include any of the White House|House | Black Market stores. These stores are treated by Chico’sthe Company as new stores acquired in fiscal 2003 and will not be included in the comparable store computation until they have been under the ownership of the Company for at least thirteentwelve full months.
The Company believes that the increase in comparable Company store net sales in the current period resulted from the continuing effort to focus the Company’s product development, merchandise planning, buying and marketing departments on Chico’s target customer. The Company also believes that the look, fit and pricing policy of the Company’s products wereproduct was in line with the needs of the Company’s
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target customer, andcustomer. In addition, the Company believes that the increase in comparable store sales was also fueled by a coordinated marketing plan, which includes increased national and regional television advertising, national magazine advertising, increased direct mailings of catalogs, including an increased page count in each catalog, a larger database of existing customers for such mailings and the success of the Company’s frequent shopper club (the “Passport Club”). To a lesser degree, the Company believes the increase was due to continued store-level training efforts associated with ongoing training programs.programs and the Company’s overall ability to maintain its high standards for customer service and assistance.
Liquidity and Capital Resources
The Company’s primary ongoing capital requirements are for funding capital expenditures for new, expanded, relocated and remodeled stores and increased merchandise inventories. Also, to a lesser degree, during fiscal 2003,2004, the Company has experienced the need for working capital to address the conversionlaunching of its new test concept, Soma by Chico’s, whose stores are expected to open during the third quarter of fiscal 2004.
The following table shows the Company’s former distribution center into office spacecapital resources as of May 1, 2004 and the acquisition, installation and roll out of new software packages (see the Company’s Form 10-K for the fiscal year ended FebruaryMay 3, 2003 (amounts in thousands):
May 1, 2004 | May 3, 2003 | |||||||
Cash and cash equivalents | $ | 22,133 | $ | 21,060 | ||||
Marketable securities | 160,692 | 101,023 | ||||||
Working capital | 189,957 | 122,026 |
Working capital increased from May 3, 2003 to May 1, 2003 for more details). The Company funded its acquisition of The White House with existing cash balances, the sale of certain marketable securities and the issuance of approximately 151,000 shares of the Company's common stock.
During the first nine months of the current fiscal year (fiscal 2003) and the first nine months of the prior fiscal year (fiscal 2002), the Company’s primary source of working capital was cash flow from operations of $105.4 million and $81.2 million, respectively. The year-over-year increase in cash flow from operations of $24.2 million was2004 primarily due to increased net income of $22.9 million, increased depreciation and amortization of $5.0 million, an increase in accrued liabilities of $6.9 million in the current period versus an increase of $2.6 million inCompany’s ability to generate significant cash from operating activities (in large part due to the prior period, an increase in the loss from impairment and disposal of property and equipment of $2.5 million, an increase in receivables of $0.9 million in the current period versus an increase of $4.1 million in the prior period and an increase in inventories of $9.5 million in the current period versus an increase of $10.8 million in the prior period. These increasesCompany’s strong comparable store sales) to cash flows from operations were offset by a decrease in the tax benefit of stock option exercises of $7.9 million and an increase in accounts payable in the current period of $3.8 million versus an increase of $12.5 million in the prior period.
The Company’s investing activities during the current period were significantly impacted by the acquisition of The White House. The cash paid for the acquisition of The White House was approximately $87.3 million (net of cash acquired of approximately $1.3 million). In addition to The White House acquisition,more than satisfy the Company’s investment in capital expenditures. The significant components of the Company’s working capital are cash and cash equivalents, marketable securities and inventories, reduced by accounts payable and accrued liabilities.
Based on past performance and current expectations, the Company believes that its cash and cash equivalents, marketable securities and cash generated from operations will satisfy the Company’s working capital needs, capital expenditures (see “New Store Openings” discussed below), commitments and other liquidity requirements associated with the Company’s operations through at least the next 12 months.
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Operating Activities
Net cash provided by operating activities was $63.5 million and $36.3 million for the thirteen weeks ended May 1, 2004 and May 3, 2003, respectively. The cash provided by operating activities for both periods was due to the Company’s net income adjusted for non-cash charges and changes in working capital such as:
In addition, in the current period, cash flow from operating activities was significantly increased from a tax benefit of $38.3$21.5 million related to the exercise of employee stock options.
Investing Activities
Net cash used in investing activities was $72.8 million and $26.9 million for the thirteen weeks ended May 1, 2004 and May 3, 2003, respectively.
The Company’s investment in capital expenditures during the current period primarily related to the planning and opening of new, relocated, remodeled and expanded Chico’s and PazoWhite House | Black Market stores ($26.611.5 million), the continued acquisition and initialdistribution center infrastructure costs ($1.4 million), installation costs associated with new software packages ($4.3 million), the conversionand systems integration of the old distribution center into office spaceWhite House | Black Market ($3.51.3 million) and other miscellaneous capital expenditures ($3.92.2 million). During
The Company invested $56.3 million, net in marketable securities during the same period incurrent period. In the prior fiscal year,period, the Company invested $51.4$9.9 million, net in marketable securities.
Financing Activities
Net cash provided by financing activities was $15.7 million and $2.8 million for the thirteen weeks ended May 1, 2004 and May 3, 2003, respectively. The Company received proceeds in both periods from the issuance of common stock related to current and former employee option exercises and employee participation in its employee stock purchase plan. During the current period, the Company satisfied the remaining balances due on capital expenditures primarily associated with theleases assumed as a result of The White House acquisition and initial costs of equipping the new distribution center in Georgia ($12.5 million), the acquisition and initial installation costs associated with new software packages ($7.1 million), and the acquisition of additional land and a 12,000 square foot building adjacent to the Company’s headquarters in Ft. Myers, Florida ($0.8 million), with the balance attributable to planning and opening of new, relocated, remodeled and expanded Company stores.totaling $1.3 million.
During the first ninethree months of the current fiscal year, eighteentwelve of the Company’s twenty-threetwenty-four officers, its two non-officer inside directors, and three of its four independent directors exercised an aggregate of 1,544,8311,485,365 stock options at per share exercise prices ranging from $.9307$0.7777 to $16.02$18.505 and several currentemployees and former employees exercised an aggregate of 85,87173,130 options at prices ranging from $.3610$0.3610 to $18.505. Also, during this period, the Company sold 30,340 and 25,15347,455 shares of common stock during the March and September offering
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periods period under its employee stock purchase plan at pricesa price of $15.36 and $27.62, respectively.$36.34. The proceeds from these issuances of stock, exclusive of the tax benefit realized by the Company, aggregatedamounted to approximately $9.4$17.0 million.
The Company’s sales of marketable securities, net of purchases during the period totaled $20.8 million. In the prior year, the Company invested $32.1 million in marketable securities and repaid approximately $0.1 million in existing debt. The $52.9 million year-over-year decrease in net marketable securities purchases was, for the most part, the result of the sale of certain marketable securities to fund the acquisition of The White House.13
As more fully described in “Item 1” beginning on page 14 of the Company’s Form 10-K for the fiscal year ended February 1, 2003, the Company is subject to ongoing risks associated with imports. The Company’s reliance on sourcing from foreign countries causes the Company to be exposed to certain unique business and political risks. Import restrictions, including tariffs and quotas, and changes in such tariffs or quotas could affect the importation of apparel generally and, in that event, could increase the cost or reduce the supply of apparel available to the Company and have an adverse effect on the Company’s business, financial condition and/or results of operations. The Company’s merchandise flow could also be adversely affected by political instability in any of the countries in which its goods are manufactured, by significant fluctuations in the value of the U.S. dollar against applicable foreign currencies and by restrictions on the transfer of funds.
New Store Openings
The Company plans to open a minimum of 70-75between 85 and 95 net new Company-owned new stores (including The White House stores opened after September 5, 2003), in fiscal 2003,2004, of which 6422 were open as of November 25, 2003. The Company has also begun the process of converting its Pazo store locations to the Company’s other formats.May 24, 2004. The Company believes that the liquidity needed for its planned new store growth (including the launch of its new concept, Soma by Chico’s), continuing remodel/expansion program, conversion of the former distribution center, continued installation of new software packages, and maintenance of proper inventory levels associated with this growth will be funded primarily from cash flow from operations and its existing strong existing cash and marketable securities balances, even after taking into account the impact of using a substantial portion of its cash and marketable securities balances to consummate the acquisition of The White House.balances. The Company further believes that this liquidity will be sufficient, based on the above, to fund other anticipated capital needs over the near-term. Given the Company’s existing cash and marketable securities balances and the capacity included in its bank credit facilities, the Company does not believe that it would need to seek other sources of financing to conduct its operations or pursue its expansion plans even if cash flow from operations should prove to be less than anticipated or if there should arise a need for additional letter of credit capacity due to establishing new and expanded sources of supply, or if the Company were to increase the number of new CompanyCompany-owned stores planned to be opened in future periods.
Seasonality and Inflation
Although the operations of the Company are influenced by general economic conditions, the Company does not believe that inflation has had a material effect on the results of operations during the current or prior periods. The Company does not consider its business to be seasonal.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The critical accounting matters that are particularly important to the portrayal of the Company’s financial condition and results of operations and require some of management’s most difficult, subjective and complex judgments are described in detail in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004. The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to customer product returns, inventories, income taxes, insurance reserves, contingencies and litigation. The Company bases its 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. There have been no material changes in the critical accounting policies during the thirteen weeks ended May 1, 2004.
Certain Factors That May Affect Future Results
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 the current views of the Company with respect to certain events that could have an effect on the Company’s future financial performance, including but without limitation, statements
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regarding the impact of the acquisition of The White House, Inc. and the conclusionlaunch of the Pazo testSoma by Chico’s concept. The statements may address items such as future sales, gross profit expectations, planned store openings, closings and expansions, future comparable store sales, future product sourcing plans, inventory
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levels, planned marketing expenditures, planned capital expenditures and future cash needs. In addition, from time to time, the Company may issue press releases and other written communications, and representatives of the Company may make oral statements, which contain forward-looking information.
These statements, including those in this Form 10-Q and those in press releases or made orally, may include the words “expects,” “believes,” and similar expressions. Except for historical information, matters discussed in such oral and written statements, including this Form 10-Q, are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those currently anticipated. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and beginning on page 21 of the Company’s most recent Form 10-K filed with the Securities and Exchange Commission on April 9, 2004.
These potential risks and uncertainties include the financial strength of retailing in particular and the economy in general, the extent of financial difficulties that may be experienced by customers, the ability of the Company to secure and maintain customer acceptance of Chico’s styles (including without limitation styles of White House|House | Black Market), the propriety of inventory mix and sizing, the quality of merchandise received from vendors, the extent and nature of competition in the markets in which the Company operates, the extent of the market demand and overall level of spending for women’s private label clothing and related accessories, the adequacy and perception of customer service, the ability to coordinate product development with buying and planning, the ability of the Company’s suppliers to timely produce and deliver clothing and accessories, the changes in the costs of manufacturing, labor and advertising, the rate of new store openings (including without limitation White House|House | Black Market and Soma by Chico’s new store openings), the buying public’s acceptance of the Company’s new store concept, the performance, implementation and integration of management information systems, the ability to hire, train, energize and retain qualified sales associates and other employees, the availability of quality store sites, the ability to hire and train qualified managerial employees, the ability to effectively and efficiently establish and operate catalog and Internet sales, the ability to integrate the operations of The White House, to realize synergies and to effectuate other cost efficiencies, the ability to secure and protect trademarks and other intellectual property rights, the ability to effectively and efficiently integrate and operate the newly acquired White House | Black Market division, risks associated with terrorist activities risks associated with integrating an acquired business into Chico’s and other risks. In addition, there are potential risks and uncertainties that are peculiar to the Company’s reliance on sourcing from foreign vendors, including the impact of work stoppages, transportation delays and other interruptions, political or civil instability, foreign currency fluctuations, imposition of and changes in tariffs and import and export controls such as import quotas, changes in governmental policies in or towards foreign countries and other similar factors.
The forward-looking statements included herein are only made as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Litigation
In the normal course of business, the Company is subject to proceedings, lawsuits and other claims including proceedings under laws and government regulations relating to labor, product, intellectual property and other matters, including the matter described in Item 1 of Part II of this Quarterly Report on Form 10-Q. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at NovemberMay 1, 2003,2004, cannot be ascertained. Although these matters could affect the operating results of any one quarter when resolved in future periods, and although there can be no
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assurance with respect thereto, management believes that, after final disposition, any monetary liability or financial impact to the Company would not be material to the annual consolidated financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company’s financial instruments as of NovemberMay 1, 20032004 has not significantly changed since February 1, 2003.January 31, 2004. The Company is exposed to market risk from changes in interest rates on any future indebtedness and its indebtedness.marketable securities. The Company’s exposure to interest rate risk relates in part to its revolving line of credit with its bank; however, as of NovemberMay 1, 2003,2004, the Company did not have any outstanding borrowings on its line of credit and, given its strong liquidity position, does not expect to utilize its line of credit in the foreseeable future except for its continuing use of the letter of credit facility portion thereof.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and 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, the Company’s disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was named as defendant in a suit filed in September 2001 in the Superior Court for the State of California for the County of Orange. This suit, Carmen Davis vs. Chico’s FAS, Inc., was filed by the plaintiff, seeking to represent all other Company assistant store managers, sales associates and hourly employees in California from September 21, 1997 to the present. The Company responded by seeking to dismiss the complaint and strike selected claims in order to either eliminate the litigation or gain greater clarity as to the basis for the plaintiff’s action. In response, the plaintiff filed an amended complaint on February 15, 2002, which differed in a number of material respects from the original complaint. The amended complaint alleged that the Company failed to pay overtime wages and failed to provide rest breaks and meal periods. The action sought “class action” status and sought unspecified monetary damages. Following preliminary settlement discussions, the parties attended a mediation on October 14, 2002, at which the parties reached a settlement on a class-wide basis. The settlement provided for a common fund out of which settlement awards to class members and the costs of the settlement would be paid. At a hearing held on April 2, 2003, the Court granted preliminary approval to the parties’ settlement agreement. The settlement agreement states that the settlement is not an admission of liability and that the Company continues to deny liability for any of plaintiff’s claims. Pursuant to the Court’s preliminary approval order, notice was given to class members of their right to file claim forms to participate in the settlement or to file exclusion forms to opt out of the settlement. The period for filing claim forms or exclusion forms elapsed sixty days after notice was given. No class members filed objections to the settlement. A hearing for final approval of the settlement was set for September 16, 2003. At the hearing, the Court granted final approval to the settlement. The Company has now paid all settlement awards to class members who filed valid claims, as well as amounts owing for attorneys’ fees,
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costs, and other expenses of the settlement. Recently, the Company notified the Court that administration of the settlement has been completed. The Company does not believe the total settlement costs have had a material impact on the Company’s results of operations or financial condition.
The Company was named as defendant in a putative class action suit filed in May 2003 in the Superior Court for the State of California, County of San Francisco. The complaint in this case,Francisco, Charissa Villanueva v. Chico’s FAS, Inc., has now been served on the The Company and the Company has filed an answer denying the material allegations of the complaint.Complaint. The complaintComplaint alleges that the Company, in violation of California law, has in place a mandatory uniform policy that requires its employees to purchase and wear Chico’s clothing and accessories as a condition of employment. It is Chico’sthe Company’s position that no such mandatory uniform policy exists; Chico’sthe Company encourages but does not require its associates to wear Chico’s clothing; although many Chico’s associates choose to wear Chico’s clothing, others do not. This case is at the beginning stages. Chico’s has filed an answer to the plaintiff’s complaint, denying all material allegations. The parties are engaged in discovery, and Chico’sthe Company is continuing its investigation. No rulings on class certification have been made. Chico’sThe Company believes the case is without merit and intends to vigorously defend the litigation.
Chico’s The Company is not a party to any other legal proceedings, other than various claims and lawsuits arising in the normal course of the Company’s business, none of which the Company believes should have a material adverse effect on its financial condition or results of operations.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 5, 2003, the Company issued an aggregate of 150,622 shares of common stock without registration (restricted) to two of the shareholders of The White House, Inc. as part of the consideration paid in connection with the acquisition by the Company of all of the issued and outstanding common stock of The White House, Inc. The shares were valued in the aggregate at $4.3 million ($28.32 per share). No commissions were paid in connection with any of these sales. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933 as a transaction not involving any public offering. No advertising or general solicitation was employed in offering the securities, the offerings and sales were made to a limited number of persons, and we restricted transfer of the securities in accordance with the requirements of the Securities Act of 1933. The recipients of the securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) | The following documents are filed as exhibits to this Quarterly Report on Form 10-Q: |
Exhibit 31.1 | Chico’s FAS, Inc. and Subsidiaries Certification Pursuant to Section 302 of the Sarbanes-Oxley Act | |
Exhibit 31.2 | Chico’s FAS, Inc. and Subsidiaries Certification Pursuant to Section 302 of the Sarbanes-Oxley Act |
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Exhibit 32.1 | Certification of Chief Executive Officer | |
Exhibit 32.2 | Certification of Chief Financial Officer |
(b) | Reports on Form 8-K: |
The Company filed a Current Report on Form 8-K dated | ||||
The Company filed a Current Report on Form 8-K dated | ||||
The Company filed a Current Report on Form 8-K dated |
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SignaturesSIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CHICO’S FAS, INC. | ||||
Date: May 27, 2004 | By: | /s/ Scott A. Edmonds | ||
Scott A. Edmonds | ||||
President and Chief Executive Officer (Principal Executive Officer) | ||||
Date: | May 27, 2004 | By: | ||||
/s/ Charles J. Kleman | ||||||
Charles J. Kleman | ||||||
Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) | ||||||
Date: May 27, 2004 | By: | /s/ Michael J. Kincaid | ||||
Michael J. Kincaid | ||||||
Vice (Principal Accounting Officer) | ||||||
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