Chico's Fas (CHS) 10-Q 2023 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 28, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from   to

 Commission file number 001-16435

Chico’s FAS, Inc.

(Exact name of registrant as specified in its charter)

Florida	59-2389435
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

11215 Metro Parkway, Fort Myers, Florida 33966

(Address of principal executive offices) (Zip Code)

239-277-6200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share	CHS	New York Stock Exchange

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  ☑ No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☑ No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	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  ☑

At November 21, 2023, the registrant had 123,457,364 shares of Common Stock, $0.01 par value per share, outstanding.

1

CHICO’S FAS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE

FISCAL THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 28, 2023

TABLE OF CONTENTS

PART I – Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Statements of Income for the Thirteen and Thirty-Nine Weeks Ended October 28, 2023 (Unaudited) and October 29, 2022 (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income for the Thirteen and Thirty-Nine Weeks Ended October 28, 2023 (Unaudited) and October 29, 2022 (Unaudited)	5
	Condensed Consolidated Balance Sheets – October 28, 2023 (Unaudited), January 28, 2023 (Audited), and October 29, 2022 (Unaudited)	6
	Condensed Consolidated Statements of Shareholders’ Equity for the Thirteen and Thirty-Nine Weeks Ended October 28, 2023 (Unaudited) and October 29, 2022 (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 28, 2023 (Unaudited) and October 29, 2022 (Unaudited)	9
	Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II – Other Information
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	38
Item 5.	Other Information	39
Item 6.	Exhibits	40
Signatures		41

2

PART I – FINANCIAL INFORMATION 

ITEM 1. FINANCIAL STATEMENTS

The accompanying notes are an integral part of these condensed consolidated statements.

3

CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)

	Thirteen Weeks Ended								Thirty-Nine Weeks Ended
	October 28, 2023				October 29, 2022				October 28, 2023				October 29, 2022
	Amount		% of Sales		Amount		% of Sales		Amount		% of Sales		Amount		% of Sales
Net Sales	$	505,126	100.0	%	$	518,332	100.0	%	$	1,584,995	100.0	%	$	1,617,967	100.0	%
Cost of goods sold	308,677		61.1		310,892		60.0		946,637		59.7		962,448		59.5
Gross Profit	196,449		38.9		207,440		40.0		638,358		40.3		655,519		40.5
Selling, general, and administrative expenses	178,643		35.4		175,841		33.9		520,672		32.8		520,296		32.1
Merger-related costs	7,277		1.4		—		0.0		7,277		0.5		—		0.0
Income from Operations	10,529		2.1		31,599		6.1		110,409		7.0		135,223		8.4
Interest expense, net	(389)		(0.1)		(1,080)		(0.2)		(1,439)		(0.1)		(3,111)		(0.2)
Income before Income Taxes	10,140		2.0		30,519		5.9		108,970		6.9		132,112		8.2
Income tax provision	5,100		1.0		5,900		1.2		4,700		0.3		30,600		1.9
Net Income	$	5,040	1.0	%	$	24,619	4.7	%	$	104,270	6.6	%	$	101,512	6.3	%
Per Share Data:
Net income per common share – basic	$	0.04			$	0.20			$	0.87			$	0.84
Net income per common and common equivalent share – diluted	$	0.04			$	0.20			$	0.85			$	0.82
Weighted average common shares outstanding – basic	119,457				120,333				119,424				119,776
Weighted average common and common equivalent shares outstanding – diluted	122,735				124,887				122,500				124,016

The accompanying notes are an integral part of these condensed consolidated statements.

4

CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Net income	$	5,040	$	24,619	$	104,270	$	101,512
Other comprehensive income:
Unrealized gains (losses) on marketable securities, net of taxes	35		(233)		72		(228)
Comprehensive income	$	5,075	$	24,386	$	104,342	$	101,284

The accompanying notes are an integral part of these condensed consolidated statements.

5

CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

	October 28, 2023		January 28, 2023		October 29, 2022
ASSETS	(Unaudited)		(Audited)		(Unaudited)
Current Assets:
Cash and cash equivalents	$	101,944	$	153,377	$	117,726
Marketable securities, at fair value	24,702		24,677		23,017
Inventories	342,721		276,840		304,127
Prepaid expenses and other current assets	51,086		48,604		47,208
Income tax receivable	9,181		11,865		15,430
Total Current Assets	529,634		515,363		507,508
Property and Equipment, net	200,980		192,165		183,153
Right of Use Assets	466,888		435,321		432,018
Other Assets:
Goodwill	16,360		16,360		16,360
Other intangible assets, net	5,000		5,000		5,000
Other assets, net	45,853		23,632		18,890
Total Other Assets	67,213		44,992		40,250
	$	1,264,715	$	1,187,841	$	1,162,929
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	153,401	$	156,262	$	107,400
Current lease liabilities	150,053		153,202		157,687
Other current and deferred liabilities	138,887		141,698		155,133
Total Current Liabilities	442,341		451,162		420,220
Noncurrent Liabilities:
Long-term debt	24,000		49,000		69,000
Long-term lease liabilities	373,823		349,409		346,560
Other noncurrent and deferred liabilities	1,956		2,637		2,612
Total Noncurrent Liabilities	399,779		401,046		418,172
Commitments and Contingencies (see Note 12)
Shareholders’ Equity:
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; 167,994 and 166,320 and 166,326 shares issued respectively; and 123,447 and 125,023 and 125,029 shares outstanding, respectively	1,234		1,250		1,250
Additional paid-in capital	516,323		513,914		510,374
Treasury stock, at cost, 44,547 and 41,297 and 41,297 shares, respectively	(514,168)		(494,395)		(494,395)
Retained earnings	419,292		315,022		307,536
Accumulated other comprehensive loss	(86)		(158)		(228)
Total Shareholders’ Equity	422,595		335,633		324,537
	$	1,264,715	$	1,187,841	$	1,162,929

The accompanying notes are an integral part of these condensed consolidated statements.

6

CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(in thousands)

	Thirteen Weeks Ended
	Common Stock			Additional Paid-in Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Gain (Loss)
	Shares	Par Value				Shares	Amount						Total
BALANCE, July 29, 2023	123,524	$	1,235	$	514,059	44,547	$	(514,168)	$	414,252	$	(121)	$	415,257
Net income	—	—		—		—	—		5,040		—		5,040
Unrealized gains on marketable securities, net of taxes	—	—		—		—	—		—		35		35
Issuance of common stock	44	—		111		—	—		—		—		111
Repurchase of common stock and tax withholdings related to share-based awards	(121)	(1)		(677)		—	—		—		—		(678)
Share-based compensation	—	—		2,830		—	—		—		—		2,830
BALANCE, October 28, 2023	123,447	$	1,234	$	516,323	44,547	$	(514,168)	$	419,292	$	(86)	$	422,595
BALANCE, July 30, 2022	125,184	$	1,252	$	508,105	41,297	$	(494,395)	$	282,910	$	5	$	297,877
Net income	—	—		—		—	—		24,619		—		24,619
Unrealized losses on marketable securities, net of taxes	—	—		—		—	—		—		(233)		(233)
Issuance of common stock	3	—		83		—	—		—		—		83
Dividends on common stock	—	—		—		—	—		7		—		7
Repurchase of common stock and tax withholdings related to share-based awards	(158)	(2)		(978)		—	—		—		—		(980)
Share-based compensation	—	—		3,164		—	—		—		—		3,164
BALANCE, October 29, 2022	125,029	$	1,250	$	510,374	41,297	$	(494,395)	$	307,536	$	(228)	$	324,537

The accompanying notes are an integral part of these condensed consolidated statements.

7

CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(in thousands, except per share amounts)

	Thirty-Nine Weeks Ended
	Common Stock			Additional Paid-in Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Gain (Loss)
	Shares	Par Value				Shares	Amount						Total
BALANCE, January 28, 2023	125,023	$	1,250	$	513,914	41,297	$	(494,395)	$	315,022	$	(158)	$	335,633
Net income	—	—		—		—	—		104,270		—		104,270
Unrealized gains on marketable securities, net of taxes	—	—		—		—	—		—		72		72
Issuance of common stock	2,830	28		301		—	—		—		—		329
Repurchase of common stock and tax withholdings related to share-based awards	(4,406)	(44)		(7,028)		3,250	(19,773)		—		—		(26,845)
Share-based compensation	—	—		9,136		—	—		—		—		9,136
BALANCE, October 28, 2023	123,447	$	1,234	$	516,323	44,547	$	(514,168)	$	419,292	$	(86)	$	422,595
BALANCE, January 29, 2022	122,526	$	1,225	$	508,654	41,297	$	(494,395)	$	206,020	$	—	$	221,504
Net income	—	—		—		—	—		101,512		—		101,512
Unrealized losses on marketable securities, net of taxes	—	—		—		—	—		—		(228)		(228)
Issuance of common stock	4,258	43		196		—	—		—		—		239
Dividends on common stock	—	—		—		—	—		4		—		4
Repurchase of common stock and tax withholdings related to share-based awards	(1,755)	(18)		(8,797)		—	—		—		—		(8,815)
Share-based compensation	—	—		10,321		—	—		—		—		10,321
BALANCE, October 29, 2022	125,029	$	1,250	$	510,374	41,297	$	(494,395)	$	307,536	$	(228)	$	324,537

The accompanying notes are an integral part of these condensed consolidated statements.

8

CHICO’S FAS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Thirty-Nine Weeks Ended
	October 28, 2023		October 29, 2022
Cash Flows from Operating Activities:
Net income	$	104,270	$	101,512
Adjustments to reconcile net income to net cash provided by operating activities:
Inventory write-offs	—		826
Depreciation and amortization	31,283		33,350
Non-cash lease expense	135,679		137,184
Loss on disposal and impairment of property and equipment, net	83		1,804
Deferred tax benefit	(15,825)		(381)
Share-based compensation expense	9,136		10,321
Changes in assets and liabilities:
Inventories	(65,881)		18,436
Prepaid expenses and other assets	(10,480)		(2,591)
Income tax receivable	2,684		(1,732)
Accounts payable	(2,778)		(73,120)
Accrued and other liabilities	(6,924)		13,583
Lease liability	(145,729)		(155,561)
Net cash provided by operating activities	35,518		83,631
Cash Flows from Investing Activities:
Purchases of marketable securities	(13,913)		(26,376)
Proceeds from sale of marketable securities	13,938		3,083
Purchases of property and equipment	(35,460)		(21,207)
Proceeds from sale of assets	—		2,772
Net cash used in investing activities	(35,435)		(41,728)
Cash Flows from Financing Activities:
Payments on borrowings	(25,000)		(30,000)
Payments of debt issuance costs	—		(706)
Proceeds from issuance of common stock	329		239
Repurchase of treasury stock under repurchase program	(19,805)		—
Payments of tax withholdings related to share-based awards	(7,040)		(8,815)
Net cash used in financing activities	(51,516)		(39,282)
Net (decrease) increase in cash and cash equivalents	(51,433)		2,621
Cash and Cash Equivalents, Beginning of period	153,377		115,105
Cash and Cash Equivalents, End of period	$	101,944	$	117,726
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	2,409	$	3,686
Cash paid for income taxes, net	$	(14,230)	$	(26,426)

The accompanying notes are an integral part of these condensed consolidated statements.

9

CHICO’S FAS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts and where otherwise indicated)

(Unaudited)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements of Chico’s FAS, Inc., a Florida corporation, and its wholly owned subsidiaries (“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, 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. The fiscal year ended January 28, 2023 balance sheet data was derived from audited consolidated financial statements. For further information, refer to the consolidated financial statements and notes thereto for the fiscal year ended January 28, 2023, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2023, filed with the Securities and Exchange Commission (“SEC”) on March 14, 2023 (“2022 Annual Report on Form 10-K”).

As used in this report, all references to “we,” “us,” “our,” “Company,” and “Chico’s FAS,” 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 thirty-nine weeks ended October 28, 2023 are not necessarily indicative of the results that may be expected for the entire year.

Adoption of New Accounting Pronouncements

In September 2022, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (“ASU”) 2022-04, entitled “Supplier Finance Programs: Disclosure of Supplier Finance Program Obligations,” to improve the disclosures of supplier finance programs. Specifically, the ASU requires disclosure of key terms of the supplier finance programs and a roll-forward of the related obligations. The amendments in this ASU do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The ASU is effective for the fiscal years, and the interim periods within those years, beginning after December 15, 2022, except for the amendment on roll-forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company entered into a supplier financing agreement administered by a third-party platform in the fourth quarter of 2022. Payments to suppliers through this program began in the third quarter of fiscal 2023. Refer to Note 11 for additional information regarding the Company’s payment obligations to participating suppliers.

Entry into Merger Agreement

On September 27, 2023, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Daphne Parent LLC, a Delaware limited liability company (“Parent”), and Daphne Merger Sub, Inc., a Florida corporation and wholly owned subsidiary of Parent (“Merger Sub” and together with Parent, “Buyer Parties”), providing for the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation and becoming a wholly owned subsidiary of Parent (“Merger”).

Upon the consummation of the Merger, each share of the Company’s common stock outstanding as of immediately prior to the effective time of the Merger (other than shares of the Company’s common stock that are (i) held by the Company or any subsidiary of the Company, (ii) owned by the Buyer Parties, or (iii) owned by any direct or indirect wholly owned subsidiary of the Buyer Parties as of immediately prior to the effective time (“Owned Company Shares”)) will be cancelled and extinguished and automatically converted into the right to receive cash in an amount equal to $7.60 per share, without interest thereon. Each Owned Company Share will be cancelled and extinguished without any conversion thereof or consideration paid therefor.

Consummation of the Merger is subject to certain conditions set forth in the Merger Agreement, including, but not limited to, the following: (i) the affirmative vote of the holders of a majority of all of the outstanding shares of the Company’s common stock to adopt the Merger Agreement; (ii) the absence of any law or order restraining, enjoining, or otherwise prohibiting the Merger; and (iii) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement,

10

which is filed as Exhibit 2.1 to this Quarterly Report on Form 10-Q). The Go-Shop Period has ended, and the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has expired. In addition, the Company filed its Definitive Merger Proxy Statement on Schedule 14A with the Securities and Exchange Commission on November 29, 2023. The transaction is not subject to a financing condition. The Merger Agreement includes customary representations, warranties, and covenants of the parties, including termination provisions for both the Company and the Buyer Parties. Under the Merger Agreement, the Company may be required to pay the Buyer Parties a termination fee of up to $29,956,324 if the Merger Agreement is terminated under certain specified circumstances. The Merger Agreement also places certain restrictions on the conduct of the Company’s business prior to the completion of the Merger, which could delay or prevent the Company from undertaking business opportunities that may arise or any other action it would otherwise take with respect to the operations of the Company absent these restrictions.

Parent and the Company expect to close the Merger by the end of the first calendar quarter of 2024.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The Company currently has no material recent accounting pronouncements yet to be adopted.

3. REVENUE RECOGNITION

Disaggregated Revenue

The table below disaggregates our operating segment revenue by brand, which we believe provides a meaningful depiction of the nature of our revenue. Amounts shown include licensing and wholesale revenue, which is not a significant component of total revenue, and is aggregated within the respective brands.

	Thirteen Weeks Ended								Thirty-Nine Weeks Ended
	October 28, 2023				October 29, 2022				October 28, 2023				October 29, 2022
Chico’s	$	252,221	49.9	%	$	255,341	49.3	%	$	800,088	50.5	%	$	801,584	49.5	%
WHBM	147,498		29.2		157,451		30.4		451,016		28.4		485,061		30.0
Soma	105,407		20.9		105,540		20.3		333,891		21.1		331,322		20.5
Total Net Sales	$	505,126	100.0	%	$	518,332	100.0	%	$	1,584,995	100.0	%	$	1,617,967	100.0	%

Contract Liability

    Contract liabilities in the unaudited condensed consolidated balance sheets are comprised of obligations associated with our gift card and customer rewards programs. As of October 28, 2023, January 28, 2023, and October 29, 2022, contract liabilities primarily consisted of gift cards of $29.2 million, $42.6 million, and $31.9 million, respectively.

For the thirteen and thirty-nine weeks ended October 28, 2023, the Company recognized $6.2 million and $25.3 million, respectively, of revenue that was previously included in the gift card contract liability as of January 28, 2023. For the thirteen and thirty-nine weeks ended October 29, 2022, the Company recognized $7.0 million and $27.0 million, respectively, of revenue that was previously included in the gift card contract liability as of January 29, 2022.

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Beginning gift card liability	$	30,905	$	33,707	$	42,649	$	43,536
Issuances	7,602		7,878		26,585		28,218
Redemptions	(9,174)		(9,869)		(35,893)		(37,739)
Breakage adjustment	(162)		176		(4,170)		(2,123)
Ending gift card liability	$	29,171	$	31,892	$	29,171	$	31,892

11

The Company maintains customer rewards programs in which customers earn points toward rewards for qualifying purchases and other marketing activities. Upon reaching specified point values, customers are issued a reward, which they may redeem on merchandise purchases at the Company’s stores or on its website. Generally, rewards earned must be redeemed within 60 days from the date of issuance. The Company defers a portion of the merchandise sales based on the estimated standalone selling price of the points earned. This deferred revenue is recognized as the rewards are redeemed or expire. While historically this points-based program was specific to Soma®, during the second quarter of fiscal year 2022, Chico’s FAS extended its points-based rewards program to Chico’s® and White House Black Market® (“WHBM”). As of October 28, 2023, January 28, 2023, and October 29, 2022, the rewards deferred revenue balance was $9.9 million, $7.4 million, and $4.5 million, respectively.

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Beginning balance rewards deferred revenue	$	9,233	$	3,236	$	7,441	$	626
Net reduction in revenue	653		1,288		2,445		3,898
Ending balance rewards deferred revenue	$	9,886	$	4,524	$	9,886	$	4,524

Performance Obligation

For the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022, revenue recognized from performance obligations related to prior periods was not material. Revenue to be recognized in future periods related to performance obligations is not expected to be material.

4. LEASES

The Company leases retail stores, a limited amount of office space, and certain equipment under operating leases expiring in various years through the fiscal year ending 2033. All of our leases have been classified as operating leases and are recognized and measured as such.

Certain operating leases provide for renewal options that are at a pre-determined period and rental value. Furthermore, certain leases provide that we may cancel the lease if our retail sales at that location fall below an established level. In the normal course of business, operating leases are typically renewed or replaced by other leases.

Escalation of operating lease payments of certain leases depend on an existing index or rate, such as the consumer price index or the market interest rate. These are considered variable lease payments and are included in lease payments when the escalation is known.

12

Operating lease expense was as follows:

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Operating lease cost (1)	$	58,132	$	55,608	$	169,916	$	163,271

(1) For the thirteen and thirty-nine weeks ended October 28, 2023, includes $14.3 million and $41.1 million, respectively, in variable lease costs. For the thirteen and thirty-nine weeks ended October 29, 2022, includes $9.7 million and $28.5 million, respectively, in variable lease costs.

Supplemental balance sheet information related to operating leases was as follows:

	October 28, 2023			January 28, 2023			October 29, 2022
Right of use assets	$	466,888		$	435,321		$	432,018
Current lease liabilities	$	150,053		$	153,202		$	157,687
Long-term lease liabilities	373,823			349,409			346,560
Total operating lease liabilities	$	523,876		$	502,611		$	504,247
Weighted Average Remaining Lease Term (years)	4.4			4.2			4.1
Weighted Average Discount Rate (1)	5.9		%	5.3		%	5.0		%

(1) The incremental borrowing rate used by the Company is based on the rate at which the Company could borrow funds using its credit rating for a collateralized loan of similar term to the lease. The weighted average discount rate represents a weighted average of the incremental borrowing rate for each lease, weighted based on the remaining fixed lease obligations.

Supplemental cash flow information related to operating leases was as follows:

	Thirty-Nine Weeks Ended
	October 28, 2023		October 29, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows	$	145,729	$	155,561
Right of use assets obtained in exchange for lease obligations, non-cash	145,342		88,484

Maturities of operating lease liabilities as of October 28, 2023 were as follows:

Fiscal Year Ending:
February 3, 2024	$	48,986
February 1, 2025	171,076
January 31, 2026	129,459
January 30, 2027	95,434
January 29, 2028	66,278
Thereafter	92,906
Total future minimum lease payments	$	604,139
Less imputed interest	(80,263)
Total	$	523,876

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5. SHARE-BASED COMPENSATION

For the thirty-nine weeks ended October 28, 2023 and October 29, 2022, share-based compensation expense was $9.1 million and $10.3 million, respectively. As of October 28, 2023, approximately 10.4 million shares remain available for future grants of equity awards under our 2020 Omnibus Stock and Incentive Plan.

Restricted Stock Awards

    Restricted stock awards vest in equal annual installments over a three-year period from the date of grant, except for a (i) restricted stock award granted to our then Chief Executive Officer in fiscal 2019, which vests over a four-year period from the date of grant, and (ii) restricted stock awards granted in March 2021, which vest 50% one year from the date of grant, 30% two years from the date of grant, and 20% three years from the date of grant.

Restricted stock award activity for the thirty-nine weeks ended October 28, 2023 was as follows:

	Number of Shares	Weighted Average Grant Date Fair Value
Unvested, beginning of period	4,611,801	$	4.02
Granted	2,146,506	5.85
Vested	(2,399,562)	3.77
Forfeited	(418,664)	5.02
Unvested, end of period	3,940,081	5.06

Restricted Stock Units

    Restricted stock units vest 100% one year from the date of grant with certain rights to defer settlement in shares of our common stock, except for (i) restricted stock units granted in March 2021, which vest 50% one year from the date of grant, 30% two years from the date of grant, and 20% three years from the date of grant, and (ii) restricted stock units granted in March 2022, which vest in equal annual installments over a three-year period from the date of grant.

Restricted stock unit activity for the thirty-nine weeks ended October 28, 2023 was as follows:

	Number of Shares	Weighted Average Grant Date Fair Value
Unvested, beginning of period	406,218	$	2.46
Granted	27,462	5.28
Vested	(274,573)	2.17
Unvested, end of period	159,107	3.46

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Performance-based Restricted Stock Units

During the thirty-nine weeks ended October 28, 2023, we granted performance-based restricted stock units (“PSUs”), contingent upon the achievement of Company-specific performance goals during the three fiscal years 2023 through 2025. Any units earned as a result of the achievement of the performance goals of the PSUs will vest three years from the date of grant and will be settled in shares of our common stock.

PSU activity for the thirty-nine weeks ended October 28, 2023 was as follows:

	Number of Units/ Shares	Weighted Average Grant Date Fair Value
Unvested, beginning of period	2,696,449	$	3.48
Granted	1,239,354	5.70
Vested	(753,078)	3.17
Forfeited	(193,703)	5.45
Unvested, end of period	2,989,022	4.35

6. INCOME 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 across jurisdictions.

For the thirteen weeks ended October 28, 2023 and October 29, 2022, the Company’s effective tax rate was 50.3% and 19.3%, respectively. The effective tax rate of 50.3% for the thirteen weeks ended October 28, 2023 primarily reflects the impact of certain incurred and anticipated nondeductible Merger-related costs, and the Company’s projected annual pre-tax income, partially offset by a fiscal 2022 provision-to-return benefit related to federal tax credits. The 19.3% effective tax rate for the thirteen weeks ended October 29, 2022 primarily reflects the impact of a fiscal 2021 provision-to-return benefit due to the reversal of a valuation allowance related to temporary differences.

For the thirty-nine weeks ended October 28, 2023 and October 29, 2022, the Company’s effective tax rate was 4.3% and 23.2%, respectively. The effective tax rate of 4.3% for the thirty-nine weeks ended October 28, 2023 primarily reflects the non-cash benefit for the partial reversal of the valuation allowance on deferred tax assets, favorable share-based compensation benefit, and a fiscal 2022 provision-to-return benefit related to federal credits, offset by the impact of certain incurred and anticipated nondeductible Merger-related costs and the Company’s projected annual pre-tax income. The 23.2% effective tax rate for the thirty-nine weeks ended October 29, 2022 primarily reflects a provision to return benefit due to the reversal of a valuation allowance related to 2021 temporary differences and favorable share-based compensation benefit.

As of October 28, 2023, our unaudited condensed consolidated balance sheet reflected a $7.9 million income tax receivable related to the recovery of federal income taxes paid in prior years and other tax law changes as a result of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act.

7. INCOME 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 income per common share pursuant to the “two-class” method. For the Company, participating securities are comprised entirely of unvested restricted stock awards granted prior to fiscal 2020.

Net income per share is determined using the two-class method when it is more dilutive than the treasury stock method. Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period, including participating securities. Diluted net income per share reflects the dilutive effect of potential common shares from non-participating securities, such as restricted stock awards granted after fiscal 2019, stock options, PSUs, and restricted stock units.

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The following table sets forth the computation of net income per basic and diluted share shown on the face of the accompanying condensed consolidated statements of income:

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Numerator:
Net income	$	5,040	$	24,619	$	104,270	$	101,512
Net income allocated to participating securities	(2)		(47)		(113)		(370)
Net income available to common shareholders	$	5,038	$	24,572	$	104,157	$	101,142
Denominator:
Weighted average common shares outstanding – basic	119,457		120,333		119,424		119,776
Dilutive effect of non-participating securities	3,278		4,554		3,076		4,239
Weighted average common and common equivalent shares outstanding – diluted	122,735		124,887		122,500		124,016
Net income per common share:
Basic	$	0.04	$	0.20	$	0.87	$	0.84
Diluted	$	0.04	$	0.20	$	0.85	$	0.82

For the thirteen weeks ended October 28, 2023 and October 29, 2022, 0.0 million and 0.1 million potential shares of common stock, respectively, were excluded from the income per diluted common share calculation relating to non-participating securities, due to the antidilutive effect of including these shares.

For the thirty-nine weeks ended October 28, 2023 and October 29, 2022, 0.1 million and 0.1 million potential shares of common stock, respectively, were excluded from the income per diluted common share calculation relating to non-participating securities, due to the antidilutive effect of including these shares.

8. FAIR VALUE MEASUREMENTS

Our financial instruments generally 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, less reserves for credit losses, as applicable, 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 October 28, 2023, consisted of U.S. government agencies, corporate bonds, and commercial paper, with $22.2 million of securities with maturity dates within one year or less, and $2.5 million with maturity dates over one year.

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 unaudited condensed consolidated balance sheets, as applicable, as they were 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 gain (loss) until realized, and any credit risk-related losses recognized in net income during the period incurred. 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.

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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

Assets Measured on a Recurring Basis

We measure certain financial assets at fair value on a recurring basis, including our marketable securities, as applicable, 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, as applicable. 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 unaudited condensed consolidated balance sheets.

Assets Measured on a Nonrecurring Basis

From time to time, we measure certain assets at fair value on a nonrecurring basis when carrying value exceeds fair value. This measurement includes the evaluation of long-lived assets, goodwill, and other intangible assets for impairment using Company-specific assumptions that would fall within Level 3 of the fair-value hierarchy. Assets that are measured at fair value on a nonrecurring basis are remeasured when carrying value exceeds fair value. Carrying value after impairment approximates fair value.

We assess the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses market participant rents and a market participant discount rate to calculate the fair value of right of use assets. The Company uses discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a market participant to quantify fair value for other long-lived assets within the asset group, which are primarily leasehold improvements. The asset group is defined as the lowest level for which identifiable cash flows are available and is largely independent of the cash flows of other groups of assets, which for our retail stores, is primarily at the store level.

To assess the fair value of goodwill, we have historically utilized both an income approach and a market approach. Inputs used to calculate the fair value 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 trademarks, we utilize a relief from royalty approach. Inputs used to calculate the fair value of the trademarks primarily include future sales projections, discounted at a rate that approximates the cost of capital of a market participant, and an estimated royalty rate.

As of October 28, 2023, January 28, 2023, and October 29, 2022, our revolving loan and letter of credit facility approximates fair value, as this instrument has a variable interest rate that approximates current market rates (Level 2 criteria).

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.

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.

In accordance with the provisions of the guidance, we categorized our financial assets and liabilities, which are valued on a recurring and nonrecurring basis, based on the priority of the inputs to the valuation technique for the instruments, as follows:

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			Fair Value Measurements at the End of the Reporting Date Using
	Balance as of October 28, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements:
Current Assets
Cash equivalents:
Money market accounts	$	18,255	$	18,255	$	—	$	—
Marketable securities:
U.S. government agencies	5,531		—		5,531		—
Corporate bonds	11,767		—		11,767		—
Commercial paper	7,404		—		7,404		—
Total recurring fair value measurements	$	42,957	$	18,255	$	24,702	$	—
			Fair Value Measurements at the End of the Reporting Date Using
	Balance as of January 28, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements:
Current Assets
Cash equivalents:
Money market accounts	$	41,642	$	41,642	$	—	$	—
Marketable securities:
U.S. government agencies	5,506		—		5,506		—
Corporate bonds	12,802		—		12,802		—
Commercial paper	6,369		—		6,369		—
Total recurring fair value measurements	$	66,319	$	41,642	$	24,677	$	—
			Fair Value Measurements at the End of the Reporting Date Using
	Balance as of October 29, 2022		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements:
Current Assets
Cash equivalents:
Money market accounts	$	42,596	$	42,596	$	—	$	—
Marketable securities:
U.S. government agencies	3,479		—		3,479		—
Corporate bonds	10,709		—		10,709		—
Commercial paper	8,829		—		8,829		—
Noncurrent Assets
Deferred compensation plan	4,776		4,776		—		—
Total recurring fair value measurements	$	70,389	$	47,372	$	23,017	$	—

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9. DEBT

On February 2, 2022, the Company and certain material domestic subsidiaries entered into Amendment No. 2 (“Amendment”) to its credit agreement (as amended, “Credit Agreement”), originally entered into on August 2, 2018 and amended October 30, 2020, by and among the Company, certain material domestic subsidiaries as co-borrowers and guarantors, Wells Fargo Bank, National Association (“Wells Fargo Bank”), as Agent, letter of credit issuer, and swing line lender, and certain lenders party thereto. Our obligations under the Credit Agreement are guaranteed by the guarantors and are secured by a first-priority lien on certain assets of the Company and certain material domestic subsidiaries, including inventory, accounts receivable, cash deposits, certain insurance proceeds, real estate, fixtures, and certain intellectual property. The Credit Agreement provides for a five-year Asset-Based Lending senior secured revolving loan (“ABL”) and letter of credit facility of up to $285.0 million, maturing February 2, 2027. The interest rate applicable to Term Secured Overnight Financing Rate (“SOFR”) loans drawn under the ABL is equal to Term SOFR plus 1.60% (subject to a further decrease to Term SOFR plus 1.35% or an increase to Term SOFR plus 1.85% based upon average quarterly excess availability under the ABL). The Credit Agreement also provides for a $15.0 million first-in last-out (“FILO”) loan. The interest rate applicable to the FILO is equal to Term SOFR plus 3.60% (subject to a further decrease to Term SOFR plus 3.35% or an increase to Term SOFR plus 3.85% based on average quarterly excess availability under the FILO). However, for any ABL or FILO with a SOFR interest rate period of six months, the interest rate applicable to the ABL and FILO is increased by 30 basis points.

The Credit Agreement contains customary representations, warranties, and affirmative covenants, as well as customary negative covenants, that, among other things restrict, subject to certain exceptions, the ability of the Company and certain of its domestic subsidiaries to (i) incur liens, (ii) make investments, (iii) issue or incur additional indebtedness, (iv) undergo significant corporate changes, including mergers and acquisitions, (v) make dispositions, (vi) make restricted payments, (vii) prepay other indebtedness, and (viii) enter into certain other restrictive agreements. The Company may pay cash dividends and repurchase shares under its share buyback program, subject to certain thresholds of available borrowings, based upon the lesser of the aggregate amount of commitments under the Credit Agreement and the borrowing base, determined after giving effect to any such transaction or payment, on a pro forma basis. In addition, the Company must pay a commitment fee per annum on the unused portion of the commitments under the Credit Agreement.

As of October 28, 2023, $24.0 million in net borrowings were outstanding under the Credit Agreement. Availability under the Credit Agreement is determined based upon a monthly borrowing base calculation, which includes eligible credit card receivables, real estate, and inventory, less outstanding borrowings, letters of credit, and certain designated reserves. As of October 28, 2023, the available additional borrowing capacity under the Credit Agreement was approximately $265.1 million, inclusive of the current loan cap of $30.0 million.

As of October 28, 2023, deferred financing costs of $2.7 million were outstanding related to the Credit Agreement and are presented in other current assets in the accompanying unaudited condensed consolidated balance sheet.

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10. SHARE REPURCHASES

During the thirty-nine weeks ended October 28, 2023, under our $300.0 million share repurchase program announced in November 2015 (“Prior Share Repurchase Program”), we repurchased 3.25 million shares at a total cost of approximately $19.8 million, at an average price of $6.09 per share. In June 2023, the Company authorized a new share repurchase program (“New Share Repurchase Program”) of up to $100.0 million of the Company’s common stock and cancelled the remaining $35.4 million available under the Prior Share Repurchase Program. As of October 28, 2023, the Company had $100.0 million remaining for future repurchases under the New Share Repurchase Program. However, we have no continuing obligation to repurchase shares under this authorization, and the timing, actual number, and purchase price of any shares purchased under the New Share Repurchase Program will depend on a variety of factors, including, but not limited to, the pending Merger, the market price of the Company’s common stock, general business and market conditions, other investment opportunities, and applicable legal and regulatory requirements.

11. SUPPLIER FINANCE PROGRAM

In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which enhances the transparency about the use of supplier finance programs for investors and other allocators of capital. The Company entered into a supplier financing agreement administered by a third-party platform in the fourth quarter of 2022. Payments to suppliers through this program began in the third quarter of fiscal 2023. Inclusion in the supplier financing program is by sole discretion of the Company, offering participating suppliers early payment of invoices through a third-party financial institution. The Company negotiates payment terms with each supplier separately, and inclusion in the financing program does not impact amounts due. One supplier is currently participating in the program with 90-day payment terms. The Company may on occasion submit debit memos to the third-party financial institution, and the financial institution agrees to work with the Company in applying these credits to future payments to suppliers. During the thirteen weeks ended October 28, 2023, no payments were made for invoices submitted through the supplier financing program. The outstanding payment obligation to the financial institution under this program was $2.2 million as of October 28, 2023, which is 1.7% of total trade payables obligations to suppliers.

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12. COMMITMENTS AND CONTINGENCIES

We are not currently a party to any material legal proceedings other than claims and lawsuits arising in the normal course of our business. All such matters are subject to uncertainties, and outcomes may not be predictable. Consequently, as of October 28, 2023, the ultimate aggregate amounts of monetary liability or financial impact with respect to such matters 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.

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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, or MD&A, should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (“this Form 10-Q”) and in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, filed with the Securities and Exchange Commission (“SEC”) on March 14, 2023 (“2022 Annual Report on Form 10-K”).

Executive Overview

Chico’s FAS, Inc. (“Company,” “we,” “us,” or “our”) is a Florida-based fashion company founded in 1983 on Sanibel Island, Florida. The Company reinvented the fashion retail experience by creating fashion communities anchored by service, which put the customer at the center of everything we do. As one of the leading fashion retailers in North America, Chico’s FAS is a company of three unique brands – Chico’s®, White House Black Market® (“WHBM”), and Soma® – each operating in their own white space, founded by women, led by women, providing solutions that millions of women say give them confidence and joy. We sometimes refer to our Chico’s and WHBM brands collectively as our “Apparel Group.” Our distinct lifestyle brands serve the needs of fashion-savvy women with household incomes in the moderate-to-high income level. We earn revenue and generate cash through the sale of merchandise in our domestic retail stores, our various Company-operated e-commerce websites, social commerce, our call center (which takes orders for all our brands), and through unaffiliated franchise partners.

We utilize an integrated, omnichannel approach to managing our business. We want our customers to experience our brands holistically and to view the various commerce channels we operate as a single, integrated experience rather than as separate sales channels operating independently. This approach allows our customers to browse, purchase, return, or exchange our merchandise through whatever sales channel, and at whatever time, is most convenient. As a result, we track total sales and comparable sales on a combined basis.

Our growth strategy is supported by the “power of three” unique brands and the “power of three” commerce channels. Our physical stores serve as community centers for entertainment and self-discovery, where our stylists and bra experts showcase our products and share their knowledge and enthusiasm for our brands. Our digital stores serve as a first impression of our brands and an efficient platform to teach and inspire our customers about our merchandise. Our social stylists – who are a combination of store associates, social media platform hosts and hyperlocal social stylists who arrange events within their communities – are an additional connection between our physical stores and digital.

Business Highlights

The Company’s third quarter highlights include:

•Consistent profitability: For the third quarter, the Company reported net income per diluted share of $0.04.

•Solid balance sheet: The Company ended the third quarter with $126.6 million in cash and marketable securities and total liquidity of $361.7 million, with $24.0 million in long-term debt.

•Pending Merger: On September 27, 2023, the Company entered into a definitive agreement (“Merger Agreement”), which is filed as Exhibit 2.1 to this Form 10-Q, to be acquired by Sycamore Partners, a private equity firm specializing in retail, consumer, and distribution-related investments, pursuant to which the Company’s shareholders would receive $7.60 per share in cash (“Merger”). If the Merger is successful, Chico’s FAS will become a privately held company. The Merger is expected to close by the end of the first calendar quarter of 2024, subject to both the approval by the Company’s shareholders and customary closing conditions. The Go-Shop Period has ended, and the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has expired. In addition, the Company filed its Definitive Merger Proxy Statement on Schedule 14A with the Securities and Exchange Commission on November 29, 2023. The transaction is not subject to a financing condition.

Select Financial Results

The following table depicts select financial results for the thirteen and thirty-nine weeks ended October 28, 2023 and October 29, 2022:

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	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
	(in millions, except per share amounts)
Net sales	$	505	$	518	$	1,585	$	1,618
Income from operations (1)	11		32		110		135
Net income (2)	5		25		104		102
Net income per common and common equivalent share – diluted	$	0.04	$	0.20	$	0.85	$	0.82

(1) Includes $7.3 million in Merger-related costs during the third quarter of 2023.

(2) Includes a $25.6 million non-cash favorable impact of the tax valuation allowance reversal during the second quarter of 2023 and $8.0 million in Merger-related costs, after taxes, during the third quarter of 2023.

Current Trends

Our financial results, we believe, demonstrate that we are successfully executing on our four strategic pillars of customer led, product obsessed, digital first, and operationally excellent.

We offer our customers the ability to shop through three powerful platforms – digital, stores, and our social stylists. Our customers have proven to be resilient, and our multi-channel customers are especially valuable to us, spending three times more than single-channel customers. We continually work to assure we are meeting our customers’ demands with the right balance and styles of inventory and accommodating their evolving shopping preferences. We are constantly innovating and introducing new fashion, trends, and fabrications to our assortments. Over the last several years, we have made meaningful investments to transform our Company into a digital-first enterprise, fast-tracking numerous innovation and technology investments across all three brands to improve service, engagement, and decision making. In addition, we are disciplined in the way we manage our inventories, costs, real estate, and cash.

Our cash position, total liquidity, and operating cash flow remain strong, providing us with flexibility to manage the business, make investments to further propel our growth, and return excess cash to shareholders, as deemed appropriate. In addition to funding strategic investments, we believe our cash flow will allow us to navigate any economic developments that may arise over the coming quarters.

Looking ahead, we are well-positioned to react in this dynamic environment, further supported by a strong balance sheet. We are managing lean inventories; making prudent investments in digital, technology, and stores; and progressing on our key strategic initiatives that we expect will deliver both top- and bottom-line growth over the long term.

Outlook

Given the pending acquisition by Sycamore Partners, the Company is not providing a financial outlook and is withdrawing its previously issued outlook for fiscal 2023.

Key Performance Indicators

We consider a variety of key performance and financial measures to evaluate our business, develop financial forecasts, and make strategic decisions. These key measures include liquidity, comparable sales, gross margin, income per diluted share, and return on net assets (“RONA”). We remain focused on effectively managing our liquidity position, including aligning our operating cost structure with expected sales. We will continue to evaluate our key performance and financial measures, which are described below.

Liquidity

Liquidity is measured through cash flow, which is the measure of cash provided by, or used in, operating, investing, and financing activities. We believe we are able to effectively manage our liquidity position.

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Comparable Sales

Comparable sales is an omnichannel measure of the amount of sales generated from products the Company sells directly to the consumer, relative to the amount of sales generated in the comparable prior-year period. Comparable sales is defined as sales from stores open for the preceding twelve months, including stores that have been expanded, remodeled, or relocated within the same general market, and also includes online and catalog sales. The comparable sales calculation excludes the negative impact of stores closed for four or more days.

Gross Margin

Gross margin is computed as gross profit divided by net sales. We believe gross margin is a primary metric to measure the performance of our business, as gross margin is used to determine the value of incremental sales, and to guide pricing and promotion decisions.

Income per Diluted Share

Income per share is determined using the two-class method when it is more dilutive than the treasury stock method. Income per basic share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period, including participating securities. Income per diluted share reflects the dilutive effect of potential common shares from non-participating securities, such as stock options, performance stock units, and restricted stock units. While income per basic share serves as an indicator of the Company’s profitability, we believe income per diluted share is a key performance measure because it gauges the Company’s quality of income per share, assuming all potential common shares from non-participating securities are exercised.

Return on Net Assets

RONA is defined as (i) net income divided by (ii) the “five-point average” (based on balances at the beginning of the first quarter plus the final balances for each quarter of the fiscal year) of net working capital less cash and marketable securities plus fixed assets. We believe RONA is a primary metric, as it helps to determine how well the Company is utilizing its assets. As such, a higher RONA could indicate that the Company is using its assets and working capital efficiently and effectively.

Our Business Strategy

We are focused on building a collection of distinct, high-performing retail brands primarily serving the fashion needs of women with moderate-to-high household income levels.

The primary function of the Company is the production, procurement, and sale of beautiful merchandise that delivers the promise and positioning of each of our brands and that resonates with customers. To that end, we are continually strengthening our merchandise and design capabilities, and enhancing our sourcing and supply chain to deliver product in a timely manner to our customers, while also focusing on improving the quality and aesthetic of our merchandise.

Over the long term, we may build our brand portfolio by organic development or acquisition of other specialty retail concepts if the opportunity complements our current brands, is appropriate, and is in the best interest of our shareholders.

We pursue improving the performance of our brands by building our omnichannel capabilities, growing our online presence, managing our store base, executing marketing plans, leveraging expenses effectively, considering additional sales channels and markets, and optimizing the merchandise offerings of each of our brands. We continue to invest heavily in our omnichannel capabilities so that our customers can fully experience our brands in the manner they choose.

We view our stores and Company-operated e-commerce websites as a single, integrated sales function rather than as separate, independently operated sales channels. As a result, we maintain a shared inventory platform for our primary operations, allowing us to fulfill orders for all channels from our distribution center (“DC”) in Winder, Georgia. Our domestic customers can return merchandise to a store or to our DC, regardless of the original purchase location. Using our enhanced “Locate” tool, we ship in-store orders from other locations directly to the customer, expediting delivery times while reducing our shipping costs. In addition, our shared inventory system enables customers to make purchases online that ship either from our DC or a store. Our mobile apps launched in 2022, following our previously introduced customized, branded, digital styling software tools, StyleConnect® and MY CLOSETSM, and Buy On-Line, Pick-up In-Store. We believe all of these digital tools are driving customer engagement, loyalty and cross-channel shopping.

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We seek to acquire new customers and retain existing customers by leveraging existing customer-specific data and through targeted marketing, including digital marketing, social media, television, catalogs, and mailers. We seek to optimize the potential of our brands with innovative product offerings, potential new merchandise opportunities, and brand extensions that enhance the current offerings, as well as through continued emphasis on our “Most Amazing Personal Service” standard. We will also continue to consider potential alternative sales channels for our brands, including international franchise, wholesale, licensing, and other opportunities.

We are focused on driving profitable growth through four strategic pillars: customer led, product obsessed, digital first, and operationally excellent.

•By being customer-led, we are focused on building community engagement, creating exceptional customer experiences, and increasing customer lifetime value.

•We are product-obsessed, delivering best-in-class merchandise to our Chico’s, WHBM, and Soma customers, offering a continual pipeline of innovation and beautiful solutions that inspire confidence and joy. With each brand, we are focused on elevating average unit retail and driving full-priced sales growth.

•Being digital-first means we want to strengthen our core platform, data-driven insights, and decision-making. We are leveraging technology to engage and deliver to our customers across channels and brands.

•To be operationally excellent, we are continually focusing on diligently managing our inventory, cost of sales, supply chain, expenses, and real estate, while generating healthy cash flow and delivering a strong bottom line.

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Results of Operations

Thirteen Weeks Ended October 28, 2023 Compared to the Thirteen Weeks Ended October 29, 2022

Net Income and Income per Diluted Share

For the third quarter, the Company reported net income of $5.0 million, or $0.04 per diluted share, compared to net income of $24.6 million, or $0.20 per diluted share, in last year’s third quarter. This year’s net income and earnings per diluted share include the impact of $8.0 million in Merger-related costs, after taxes.

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 October 28, 2023 and October 29, 2022:

	Thirteen Weeks Ended
	October 28, 2023				October 29, 2022
	(dollars in millions)
Chico’s	$	252	49.9	%	$	255	49.3	%
WHBM	148		29.2		157		30.4
Soma	105		20.9		106		20.3
Total Net Sales	$	505	100.0	%	$	518	100.0	%

For the third quarter, net sales were $505.1 million compared to $518.3 million in last year’s third quarter. This decrease of 2.5% primarily reflects a comparable sales decrease of 2.7% since last year’s third quarter. The 2.7% comparable sales decline was driven by a decrease in transaction count, partially offset by an increase in average dollar sale.

The following table depicts comparable sales percentages by Chico’s, WHBM, and Soma for the thirteen weeks ended October 28, 2023 and October 29, 2022:

	Thirteen Weeks Ended
	October 28, 2023		October 29, 2022
	Compared to Fiscal 2022		Compared to Fiscal 2021
Chico’s	0.0	%	28.8	%
WHBM	(6.7)		17.0
Soma	(3.1)		(6.1)
Total Company	(2.7)		16.5

Cost of Goods Sold / Gross Margin

The following table depicts cost of goods sold and gross profit in dollars, and gross margin as a percentage of total net sales for the thirteen weeks ended October 28, 2023 and October 29, 2022:

	Thirteen Weeks Ended
	October 28, 2023			October 29, 2022
	(dollars in millions)
Cost of goods sold	$	309		$	311
Gross profit	196			207
Gross margin percentage	38.9		%	40.0		%

For the third quarter, gross profit was $196.4 million, or 38.9% of net sales, compared to $207.4 million, or 40.0% of net sales, in last year’s third quarter. This 110-basis-point decrease in gross margin primarily reflects higher occupancy costs, as well as deleverage on lower net sales.

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Selling, General, and Administrative Expenses

The following table depicts selling, general, and administrative expenses (“SG&A”), which includes store and direct operating expenses, marketing expenses, and National Store Support Center (“NSSC”) expenses, in dollars and as a percentage of total net sales for the thirteen weeks ended October 28, 2023 and October 29, 2022:

	Thirteen Weeks Ended
	October 28, 2023			October 29, 2022
	(dollars in millions)
Selling, general, and administrative expenses	$	179		$	176
Percentage of total net sales	35.4		%	33.9		%

For the third quarter, SG&A was $178.6 million, or 35.4% of net sales, compared to $175.8 million, or 33.9% of net sales, for last year’s third quarter. The 150 basis points of deleverage primarily reflects increased marketing and store operating expenses to support our long-term growth strategies.

Merger-Related Costs

Merger-related costs of $7.3 million were recognized during the period.

	Thirteen Weeks Ended
	October 28, 2023			October 29, 2022
	(dollars in millions)
Merger-related costs	$	7		$	—
Percentage of total net sales	1.4		%	—		%

Income Taxes

The third quarter effective tax rate was 50.3% compared to 19.3% for last year’s third quarter. This year’s effective tax rate primarily reflects the impact of certain incurred and anticipated nondeductible Merger-related costs, and the Company’s projected annual pre-tax income, partially offset by a fiscal 2022 provision-to-return benefit related to federal tax credits. Last year’s third quarter effective tax rate primarily reflected the impact of a fiscal 2021 provision-to-return benefit due to the reversal of a valuation allowance related to temporary differences.

Thirty-Nine Weeks Ended October 28, 2023 Compared to the Thirty-Nine Weeks Ended October 29, 2022

Net Income and Income per Diluted Share

    For the thirty-nine weeks ended October 28, 2023, the Company reported net income of $104.3 million, or $0.85 per diluted share, compared to net income of $101.5 million, or $0.82 per diluted share, for the thirty-nine weeks ended October 29, 2022. This year’s net income and earnings per diluted share include the impact of a $25.6 million non-cash tax benefit and the $8.0 million Merger-related costs, after taxes.

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 thirty-nine weeks ended October 28, 2023 and October 29, 2022:

	Thirty-Nine Weeks Ended
	October 28, 2023				October 29, 2022
	(dollars in millions)
Chico’s	$	800	50.5	%	$	802	49.5	%
WHBM	451		28.4		485		30.0
Soma	334		21.1		331		20.5
Total net sales	$	1,585	100.0	%	$	1,618	100.0	%

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Net sales for the thirty-nine weeks ended October 28, 2023 decreased to $1,585 million from $1,618 million for the thirty-nine weeks ended October 29, 2022. This 2.0% decrease primarily reflects the comparable sales decrease of 2.1% driven by a decrease in transaction count and average dollar sale.

The following table depicts comparable sales percentages by Chico’s, WHBM, and Soma for the thirty-nine weeks ended October 28, 2023:

	Thirty-Nine Weeks Ended
	October 28, 2023		October 29, 2022
	Compared to Fiscal 2022		Compared to Fiscal 2021
Chico's	0.7	%	36.0	%
WHBM	(6.8)		35.6
Soma	(2.0)		(5.8)
Total Company	(2.1)	%	24.7	%

Cost of Goods Sold / Gross Margin

The following table depicts cost of goods sold and gross profit in dollars and gross margin, as well as gross margin as a percentage of total net sales, for the thirty-nine weeks ended October 28, 2023 and October 29, 2022:

	Thirty-Nine Weeks Ended
	October 28, 2023			October 29, 2022
	(dollars in millions)
Cost of goods sold	$	947		$	962
Gross profit	638			656
Gross margin percentage	40.3		%	40.5		%

Gross profit for the thirty-nine weeks ended October 28, 2023 was $638.4 million, or 40.3% of net sales, compared to $655.5 million, or 40.5% of net sales, for the thirty-nine weeks ended October 29, 2022. The 20-basis-point decrease in gross margin primarily reflects higher raw material and occupancy costs, partially offset by lower inbound freight costs, disciplined expense management, and higher average unit retail.

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 thirty-nine weeks ended October 28, 2023 and October 29, 2022:

	Thirty-Nine Weeks Ended
	October 28, 2023			October 29, 2022
	(dollars in millions)
Selling, general, and administrative expenses	$	521		$	520
Percentage of total net sales	32.8		%	32.1		%

For the thirty-nine weeks ended October 28, 2023, SG&A was $521 million, or 32.8% of net sales, compared to $520 million, or 32.1% of net sales, for the thirty-nine weeks ended October 29, 2022. The increase in SG&A as a percent of total net sales primarily reflects increased store operating and marketing expenses to support our long-term growth strategies, partially offset by disciplined expense management.

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Merger-Related Costs

Merger-related costs of $7.3 million were recognized during the period.

	Thirty-Nine Weeks Ended
	October 28, 2023			October 29, 2022
	(dollars in millions)
Merger-related costs	$	7		$	—
Percentage of total net sales	0.5		%	—		%

    Income Taxes

The effective tax rate for the thirty-nine weeks ended October 28, 2023 and October 29, 2022 was 4.3% and 23.2%, respectively. The 4.3% effective tax rate for the thirty-nine weeks ended October 28, 2023 primarily reflects the non-cash benefit for the partial reversal of the valuation allowance on deferred tax assets, favorable share-based compensation benefit, and a fiscal 2022 provision-to-return benefit related to federal credits, offset by the impact of certain incurred and anticipated nondeductible Merger-related costs and the Company’s projected annual pre-tax income. The effective tax rate of 23.2% for the thirty-nine weeks ended October 29, 2022 reflects a provision-to-return benefit due to the reversal of a valuation allowance related to 2021 temporary differences and favorable share-based compensation benefit.

Balance Sheet

At the end of the third quarter, cash and marketable securities totaled $126.6 million compared to $140.7 million at the end of last year’s third quarter.

Long-term debt at the end of the third quarter totaled $24.0 million compared to $69.0 million at the end of last year’s third quarter, reflecting principal payments of $25.0 million in the first quarter of fiscal year 2023 and $20.0 million in the fourth quarter of fiscal year 2022.

At the end of the third quarter, inventories totaled $342.7 million compared to $304.1 million at the end of last year’s third quarter. The increase of $38.6 million, or 12.7%, reflects an increase of $19.8 million in on-hand inventories and $18.8 million in in-transit inventories to support anticipated holiday sales.

Income Tax Receivable

At the end of the third quarter, our unaudited condensed consolidated balance sheet reflected a $7.9 million income tax receivable related to the recovery of federal income taxes paid in prior years and other tax law changes as a result of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act.

Liquidity and Capital Resources

The Company’s material cash requirements include amounts outstanding under operating leases, open purchase orders for inventory, other operating expenses in the normal course of business, contractual commitments for future capital expenditures, long-term debt obligations, and interest payments on long-term debt. Our ongoing capital requirements will continue to be primarily for enhancing and expanding our omnichannel capabilities, including investments in our stores, information technology, and supply chain.    

We anticipate satisfying our material cash requirements from our cash flows from operating activities, our cash on hand, capacity within our credit facility, and other liquidity options.

The following table summarizes cash flows for the year-to-date period ended October 28, 2023 compared to last year’s year-to-date period ended October 29, 2022:

	Thirty-Nine Weeks Ended
	October 28, 2023		October 29, 2022
	(in millions) (1)
Net cash provided by operating activities	$	36	$	84
Net cash used in investing activities	(35)		(42)
Net cash used in financing activities	(52)		(39)
Net (decrease) increase in cash and cash equivalents	$	(51)	$	3

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(1) Values may not foot due to rounding.

Operating Activities

Net cash provided by operating activities for the year-to-date period of fiscal 2023 was $35.5 million compared to $83.6 million in last year’s the year-to-date period. The change in net cash provided by operating activities primarily reflects a reduction in income tax liabilities, increase in inventories, lower incentive compensation accrual, and the timing of pre-paid expenses, which includes an increase in cloud software spend net of amortization.

Investing Activities

Net cash used in investing activities for the year-to-date period of fiscal 2023 was $35.4 million compared to $41.7 million in last year’s year-to-date period, reflecting a net $23.3 million decrease in investments made in marketable securities and a $14.3 million increase in capital spending in comparison to the prior year.

Financing Activities

Net cash used in financing activities for the year-to-date period of fiscal 2023 was $51.5 million compared to $39.3 million used in last year’s year-to-date period. The change in net cash used in financing activities primarily reflects approximately $19.8 million in share repurchases, partially offset by the $5.0 million decrease in payments made on borrowings and $1.8 million less in payments of tax withholding related to the vesting of share-based awards.

Credit Facility

On February 2, 2022, the Company and certain material domestic subsidiaries entered into Amendment No. 2 (“Amendment”) to its credit agreement (as amended, “Credit Agreement”) originally entered into on August 2, 2018 and amended October 30, 2020, by and among the Company, certain material domestic subsidiaries as co-borrowers and guarantors, Wells Fargo Bank, National Association (“Wells Fargo Bank”), as Agent, letter of credit issuer and swing line lender, and certain lenders party thereto. Our obligations under the Credit Agreement are guaranteed by the guarantors and are secured by a first-priority lien on certain assets of the Company and certain material domestic subsidiaries, including inventory, accounts receivable, cash deposits, certain insurance proceeds, real estate, fixtures, and certain intellectual property. The Credit Agreement provides for a five-year Asset-Based Lending senior secured revolving loan (“ABL”) and letter of credit facility of up to $285.0 million, maturing February 2, 2027. The interest rate applicable to Term Secured Overnight Financing Rate (“SOFR”) loans drawn under the ABL is equal to Term SOFR plus 1.60% (subject to a further decrease to Term SOFR plus 1.35% or an increase to Term SOFR plus 1.85% based upon average quarterly excess availability under the ABL). The Credit Agreement also provides for a $15.0 million first-in last-out (“FILO”) loan. The interest rate applicable to the FILO is equal to Term SOFR plus 3.60% (subject to a further decrease to Term SOFR plus 3.35% or an increase to Term SOFR plus 3.85% based on average quarterly excess availability under the FILO). However, for any ABL or FILO with a SOFR interest rate period of six months, the interest rate applicable to the ABL and FILO is increased by 30 basis points.

The Credit Agreement contains customary representations, warranties, and affirmative covenants, as well as customary negative covenants, that, among other things, restrict, subject to certain exceptions, the ability of the Company and certain of its domestic subsidiaries to: (i) incur liens, (ii) make investments, (iii) issue or incur additional indebtedness, (iv) undergo significant corporate changes, including mergers and acquisitions, (v) make dispositions, (vi) make restricted payments, (vii) prepay other indebtedness, and (viii) enter into certain other restrictive agreements. The Company may pay cash dividends and repurchase shares under its share buyback program, subject to certain thresholds of available borrowings based upon the lesser of (i) the aggregate amount of commitments under the Credit Agreement and (ii) the borrowing base, determined after giving effect to any such transaction or payment, on a pro forma basis. In addition, the Company must pay a commitment fee per annum on the unused portion of the commitments under the Credit Agreement.

As of October 28, 2023, $24.0 million in net borrowings were outstanding under the Credit Agreement. Availability under the Credit Agreement is determined based upon a monthly borrowing base calculation, which includes eligible credit card receivables, real estate, and inventory, less outstanding borrowings, letters of credit, and certain designated reserves. As of October 28, 2023, the available additional borrowing capacity under the Credit Agreement was approximately $265.1 million, inclusive of the current loan cap of $30.0 million.

Store and Franchise Activity

Stores continue to be an important part of our omnichannel strategy, and digital sales are typically higher in markets where we have a retail presence. We will continue to actively manage our real estate portfolio, reflecting our digital-first strategy and our higher overall store and Company profitability standards. We will continue to adjust our store base, as appropriate, to align with these standards, primarily as leases come due, lease kickouts are available, or buyouts make economic sense.

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We closed net 13 underperforming locations during the thirty-nine weeks ended October 28, 2023, ending the third quarter with 1,256 boutiques. This year, the Company has upgraded approximately 60 Chico’s boutiques. With respect to Soma, we have opened two of the three stores planned for this year.

As of October 28, 2023, the Company’s franchise operations consisted of 58 international retail locations in Mexico and two domestic airport locations.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in 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 estimates with the Audit Committee of our Board and believes the assumptions and estimates, as set forth in our 2022 Annual Report on Form 10-K, are significant to reporting our results of operations and financial position. There have been no material changes to our critical accounting estimates as disclosed in our 2022 Annual Report on Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) may contain statements concerning our current expectations, assumptions, plans, estimates, judgments, and projections about our business and our industry, and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, words or phrases such as “aim,” “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “target,” “may,” “will,” “plans,” “path,” “outlook,” “project,” “should,” “strategy,” “potential,” “confident,” “assumptions,” and similar expressions identify forward-looking statements. These forward-looking statements are based largely on information currently available to our management and are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those expressed or implied by such forward-looking statements. Although we believe our expectations are based on reasonable estimates and assumptions, our expectations are not guarantees of performance. There is no assurance that our expectations will occur or that our estimates or assumptions will be correct, and we caution investors and all others not to place undue reliance on such forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, those factors described in our Definitive Merger Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on November 29, 2023; in Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K; and, from time to time, in Item 1A, “Risk Factors” in our Quarterly Reports on Form 10-Q, and the following:

•the ability of our suppliers, logistics providers, vendors, and landlords to meet their obligations to us in light of financial stress, labor shortages, liquidity challenges, bankruptcy filings by other industry participants, and supply chain and other disruptions;

•our ability to sufficiently staff our retail stores;

•changes in general economic conditions, including, but not limited to, consumer confidence and spending patterns;

•the impacts of rising inflation, gasoline prices, and interest rates on consumer spending;

•the availability of, and interest rates on, consumer credit;

•the impact of consumer debt levels and consumers’ ability to meet credit obligations;

•market disruptions, including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, adverse developments affecting the financial services industry, political and social crises, war and other military conflicts (such as the war in Ukraine and the Israel-Hamas war) or other major events, or the prospect of these events (including their impact on consumer spending, inflation, and the global supply chain);

•shifts in consumer behavior, and our ability to adapt, identify, and respond to new and changing fashion trends and customer preferences, and to coordinate product development with buying and planning;

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•changes in the general or specialty retail or apparel industries, including significant decreases in market demand and the overall level of spending for women’s private-branded clothing and related accessories;

•our ability to secure and maintain customer acceptance of in-store and online concepts and styles;

•our ability to maintain strong relationships with our vendors, manufacturers, licensors, and retail customers;

•increased competition in the markets in which we operate, including for, among other things, premium mall space;

•our ability to remain competitive with customer shipping terms and costs;

•decreases in customer traffic at malls, shopping centers, and our stores;

•fluctuations in foreign currency exchange rates and commodity prices;

•significant increases in the costs of manufacturing, raw materials, transportation, importing, distribution, labor, and advertising;

•decreases in the quality of merchandise received from suppliers and increases in delivery times for receiving such merchandise;

•our ability to appropriately manage our store fleet;

•our ability to achieve the expected results of any store openings or store closings;

•our ability to appropriately manage inventory and allocation processes and leverage targeted promotions;

•our ability to maintain cost-saving discipline; our ability to generate sufficient cash flow;

•our ability to operate our retail websites in a profitable manner;

•our ability to successfully identify and implement additional sales and distribution channels;

•changes in the timing of holidays or in the onset of seasonal weather affecting period-to-period sales comparisons;

•our ability to successfully execute and achieve the expected results of our business, brand strategies, brand awareness programs, and merchandising and marketing programs, including, but not limited to, the Company’s rewards programs and its three-year strategic growth plan, sales initiatives, multi-channel strategies, and four strategic pillars, which are (1) customer led, (2) product obsessed, (3) digital first, and (4) operationally excellent;

•our ability to utilize our Fort Myers campus, our distribution center, and our other support facilities in an efficient and effective manner;

•our reliance on sourcing from foreign suppliers;

•significant adverse economic, labor, political, or other shifts (including adverse changes in tariffs, taxes, or other import regulations, particularly with respect to China or Vietnam, or legislation prohibiting certain imports from China or Vietnam);

•U.S. and foreign governmental actions and policies, and changes thereto;

•the continuing performance, implementation, and integration of our management information systems;

•our ability to successfully update and maintain our information systems;

•the impact of any system failure, cybersecurity, or other data security breaches, including any security breaches resulting in the theft, transfer, or unauthorized disclosure of customer, employee, or company information that we or our third-party vendors may experience;

•the risks that our share repurchase program may not successfully enhance shareholder value, or that share repurchases could be negatively perceived by investors;

•our ability to comply with applicable domestic and foreign information security and privacy laws, regulations, and technology platform rules or other obligations related to data privacy and security;

•our ability to attract, hire, train, motivate, and retain qualified employees in an inclusive environment;

•our ability to successfully recruit leadership or transition members of our senior management team;

•increased public focus and opinion on environmental, social, and governance (“ESG”) initiatives and our ability to meet any announced ESG goals and initiatives;

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•future unsolicited offers to buy the Company and actions of activist shareholders and others, and our ability to respond effectively;

•our ability to secure and protect our trademark and other intellectual property rights;

•our ability to protect our reputation and our brand images;

•unanticipated obligations or changes in estimates arising from new or existing litigation, income taxes, and other regulatory proceedings;

•unanticipated adverse changes in legal, regulatory, or tax laws;

•our ability to comply with the terms of our credit agreement, including the restrictive provisions limiting our flexibility in operating our business and in obtaining additional credit on commercially reasonable terms;

•the completion of the pending acquisition by Sycamore Partners (“Merger”) – pursuant to the Agreement and Plan of Merger, dated September 27, 2023, by and among Daphne Parent LLC, Daphne Merger Sub, Inc., and the Company (“Merger Agreement”), which is filed as Exhibit 2.1 to this Form 10-Q – on the anticipated terms and timing, or at all;

•the occurrence of any event, change, or other circumstance that could give rise to the termination of the Merger Agreement, including in circumstances requiring the Company to pay a termination fee;

•potential litigation relating to the Merger that could be instituted against the Company or its directors or officers, including the effects of any outcomes related thereto;

•the risk that disruptions from the Merger will harm the Company’s business, including current plans and operations;

•the ability of the Company to retain and hire key personnel during the pendency of the Merger;

•the diversion of management’s time and attention from ordinary course business operations to completion of the Merger;

•potential adverse reactions or changes to business relationships resulting from the announcement or completion of the Merger;

•potential business uncertainty, including changes to existing business relationships, during the pendency of the Merger; and

•certain restrictions during the pendency of the Merger that may impact the Company’s ability to pursue certain business opportunities or strategic transactions.

These factors should be considered in evaluating forward-looking statements contained herein. All forward-looking statements that are made, or are attributable to us, are expressly qualified in their entirety by this cautionary notice. The forward-looking statements included herein are only made as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk of our financial instruments as of October 28, 2023 has not materially changed since January 28, 2023. We are exposed to market risk from changes in interest rates on any future indebtedness and our marketable securities and also from foreign currency exchange rate fluctuations.

Our exposure to interest rate risk relates in part to our Credit Agreement with Wells Fargo Bank, which is further discussed in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Item 1, Note 9 to the accompanying unaudited condensed consolidated financial statements included in this Form 10-Q. The interest rate applicable to Term SOFR loans drawn under the ABL is equal to Term SOFR plus 1.60% (subject to a further decrease to Term SOFR plus 1.35% or an increase to Term SOFR plus 1.85% based upon average quarterly excess availability under the ABL). The Credit Agreement also provides for a $15.0 million FILO loan. The interest rate applicable to the FILO is equal to Term SOFR plus 3.60% (subject to a further decrease to Term SOFR plus 3.35% or an increase to Term SOFR plus 3.85% based on average quarterly excess availability under the FILO). However, for any ABL or FILO with a SOFR interest rate period of six months, the interest rate applicable to the ABL and FILO is increased by 30 basis points. As of October 28, 2023, $24 million in borrowings was outstanding under the Credit Agreement and is reflected as long-term debt in the accompanying unaudited condensed consolidated balance sheet. An increase in market interest rates of 100 basis points would increase interest expense in the amount of approximately $0.8 million over the remaining term of the loan. 

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, which includes U.S. government agencies, corporate bonds and commercial paper. The marketable securities portfolio as of October 28, 2023 consisted of $22.2 million of securities with maturity dates within one year or less and $2.5 million with maturity dates over one year. We consider all securities available-for-sale, including those with maturity dates beyond 12 months, and therefore classified these securities, as applicable, as short-term investments within current assets on the consolidated balance sheets, as they are available to support current operational liquidity needs.

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 (“Exchange Act”), 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 Exchange Act). 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 each such officer 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 was no change in our internal controls 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.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information regarding legal proceedings is incorporated by reference from Note 12 to our unaudited condensed consolidated financial statements included in this Form 10-Q under the heading “Commitments and Contingencies.”

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ITEM 1A. RISK FACTORS

In addition to the other information discussed in this report, the factors described in Part I, Item 1A. “Risk Factors” in our 2022 Annual Report on Form 10-K and in Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended July 29, 2023 should be considered, as they could materially affect our business, financial condition, or future results. Except as presented below, there have been no material changes with respect to the risks described in our 2022 Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the quarterly period ended July 29, 2023, and as described in our Preliminary Proxy Statement, filed with the SEC on Schedule 14A on November 16, 2023, 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 results from operations.

Risk

Description

1. The pendency of the Merger could have a material adverse effect on our business, consolidated financial condition or results of operations, or the market price of our common stock.

On September 27, 2023, the Company entered into the Merger Agreement. During the period between the date of the signing of the Merger Agreement and the closing of the Merger, our business has been and is exposed to certain inherent risks due to the effect of the announcement and the pendency of the Merger, including the following: • difficulties maintaining relationships with customers and business partners, who may defer decisions about working with us, move to our competitors, or seek to delay or change existing business relationships with us; • uncertainties caused by negative sentiment in the marketplace with respect to the Merger, which could adversely impact investor confidence in our business; • our inability to retain and hire key personnel during the pendency of the Merger, as our personnel may experience uncertainty about their future roles following the Merger; • diversion of our management’s time and attention, as well as distraction of our key personnel, from the Company’s ordinary course of business operations; • the occurrence of any event, change, or other circumstance that could give rise to the termination of the Merger Agreement, including in circumstances requiring the Company to pay a termination fee; and • our inability to solicit other acquisition proposals, pursue alternative business opportunities, make strategic changes to our business, and other restrictions on our ability to conduct our business pursuant to the Merger Agreement.

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2. The Merger may not be completed within the expected timeframe, or at all, and any significant delay or the failure to complete the Merger could adversely affect our business, consolidated financial condition or results of operations, or the market price of our common stock.

There can be no assurance that the Merger will be completed within the intended timeframe, or at all. If the Merger is not completed within the intended timeframe or at all, or if the Merger is significantly delayed, we may be subject to a number of material risks, including the following: • to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed, the market price may be negatively impacted because of a failure to complete the Merger within the expected timeframe, or at all; • we could be subject to litigation related to any failure to complete the Merger; • we have incurred, and expect to continue incurring, significant costs, expenses, and fees for professional services and other Merger-related costs, for which we may receive little or no benefit if the Merger is not completed, and many of these fees and costs will be payable by us even if the Merger is not completed; and • a significant delay in completing the Merger or the failure to complete the Merger may result in negative publicity, which, in turn, could negatively affect our relationships with business partners and could impact investor and consumer confidence in our business. The occurrence of any of these events individually or in combination could materially adversely affect our business, consolidated financial condition or results of operations, or the market price of our common stock.

3. Shareholder litigation could prevent or delay the closing of the Merger or otherwise negatively impact our business, consolidated financial condition or results of operations, or the market price of our common stock.

We may incur additional costs in connection with the defense or settlement of any future shareholder litigation related to the pending Merger. Such litigation may adversely affect our ability to complete the Merger. We could incur significant costs in connection with any such litigation, including costs associated with the indemnification of obligations to our directors, which could adversely affect our business, consolidated financial condition or results of operations, or the market price of our common stock.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth information concerning our purchases of common stock for the periods indicated (in thousands, except share and per share amounts):

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
July 30, 2023 - August 26, 2023	100,420	$	5.37	—	$	100,000
August 27, 2023 - September 30, 2023	5,845		5.04	—		100,000
October 1, 2023 - October 28, 2023	14,697		7.49	—		100,000
Total	120,962		5.61	—

(a) Total number of shares purchased consists of 120,962 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 June 2023, the Company authorized a new share repurchase program (“New Share Repurchase Program”) of up to $100 million of the Company’s common stock and cancelled the remaining $35.4 million available under the Prior Share Repurchase Program. There was $100 million remaining under the New Share Repurchase Program as of October 28, 2023. The New Share Repurchase Program has no specific termination date and will expire when the Company has repurchased all securities authorized for repurchase thereunder, unless terminated earlier by the Board. The Company has no obligation to repurchase shares under this authorization, and the timing, actual number, and purchase price of any shares purchased under the New Share Repurchase Program will depend on a variety of factors, including, but not limited to, the pending Merger, the market price of the Company’s common stock, general business and market conditions, other investment opportunities, and applicable legal and regulatory requirements.

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ITEM 5. OTHER INFORMATION

During the three months ended October 28, 2023, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933, as amended).

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ITEM 6. EXHIBITS

(a)The following documents are filed as exhibits to this Form 10-Q:

Exhibit 2.1	Agreement and Plan of Merger, dated as of September 27, 2023, by and among Daphne Parent LLC, Daphne Merger Sub, Inc. and Chico’s FAS, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K, as filed with the SEC on September 28, 2023)
Exhibit 10.1	First Amendment to Chico’s FAS, Inc. - 2021 Employee Stock Purchase Plan, effective September 27, 2023
Exhibit 10.2	Indemnification Agreement with Wendy Hufford, dated as of July 26, 2023
Exhibit 31.1	Chico’s FAS, Inc. and Subsidiaries Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer
Exhibit 31.2	Chico’s FAS, Inc. and Subsidiaries Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer
Exhibit 32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the Quarter Ended October 28, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Income; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags
Exhibit 104	The cover page from the Company’s Quarterly Report on Form 10-Q for the Quarter Ended October 28, 2023, formatted in Inline XBRL (included within Exhibit 101)

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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.

			CHICO'S FAS, INC.
Date:	November 30, 2023	By:	/s/ Molly Langenstein
			Molly Langenstein
			Chief Executive Officer, President and Director
Date:	November 30, 2023	By:	/s/ David M. Oliver
			David M. Oliver
			Executive Vice President – Chief Financial Officer and Chief Accounting Officer

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