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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT
For the Quarter Ended: Commission File Number:
August 1, 1998 0-21258
CHICO'S FAS, INC.
(Exact name of registrant as specified in charter)
Florida 59-2389435
(State of Incorporation) (I.R.S. Employer Identification No.)
11215 Metro Parkway, Fort Myers, Florida 33912
(Address of principal executive offices)
941-277-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
At August 31, 1998, there were 8,172,223 shares outstanding of Common Stock,
$.01 par value per share.
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CHICO'S FAS, INC.
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited):
Condensed Balance Sheets - August 1, 1998 and January 31, 1998............................................3
Condensed Statements of Income for the Thirteen and Twenty-six weeks Ended
August 1, 1998 and August 2, 1997....................................................................4
Condensed Statements of Cash Flows for the Twenty-six weeks Ended
August 1, 1998 and August 2, 1997....................................................................5
Notes to Condensed Financial Statements...................................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................8
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders.............................................12
Item 6. Exhibits and Reports on Form 8-K................................................................13
Signatures ................................................................................................13
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CHICO'S FAS, INC.
CONDENSED BALANCE SHEET
[UNAUDITED]
AS OF AS OF
8-1-98 1-31-98
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,249,359 $2,943,916
Certificate of Deposit 1,000,000 --
Receivables, net 1,003,049 894,895
Inventories 7,848,288 9,525,472
Prepaid expenses 547,048 667,145
Deferred taxes 1,622,000 1,251,000
Total Current Assets 22,269,744 15,282,428
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LAND, BUILDING AND EQUIPMENT:
Cost 25,185,681 23,596,977
Less accumulated depreciation and amortization (7,249,386) (6,617,591)
Land, Building and Equipment, Net 17,936,295 16,979,386
----------- -----------
OTHER ASSETS:
Certificate of Deposit -- 1,000,000
Deferred taxes 733,000 559,000
Other assets, net 763,429 650,702
Total Other Assets 1,496,429 2,209,702
----------- -----------
$41,702,468 $34,471,516
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,321,890 $3,520,265
Accrued liabilities 3,474,887 2,540,375
Current portion of debt and lease obligations 276,158 251,762
Total Current Liabilities 7,072,935 6,312,402
NONCURRENT LIABILITIES:
Debt and lease obligations 5,378,821 5,455,271
Deferred rent 1,386,478 1,247,958
Total Noncurrent Liabilities 6,765,299 6,703,229
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 81,705 80,113
Additional paid-in capital 9,584,877 8,219,707
Retained earnings 18,197,652 13,156,065
27,864,234 21,455,885
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$41,702,468 $34,471,516
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See Accompanying Notes
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CHICO'S FAS, INC.
CONDENSED STATEMENTS OF INCOME
[UNAUDITED]
TWENTY-SIX WEEKS ENDED THIRTEEN WEEKS ENDED
8-1-98 8-2-97 8-1-98 8-2-97
----------- ----------- ----------- -----------
Net sales by company stores $52,336,889 $37,972,393 $26,818,037 $19,675,946
Net sales to franchisees 917,561 827,978 540,505 404,628
----------- ----------- ----------- -----------
NET SALES 53,254,450 38,800,371 27,358,542 20,080,574
Cost of goods sold 21,781,224 17,278,890 11,012,071 9,162,530
----------- ----------- ----------- -----------
GROSS PROFIT 31,473,226 21,521,481 16,346,471 10,918,044
General, administrative and
store operating expenses 22,961,690 18,035,809 11,794,759 9,220,508
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 8,511,536 3,485,672 4,551,712 1,697,536
Interest expense, net 109,949 202,660 30,630 85,980
----------- ----------- ----------- -----------
INCOME BEFORE TAXES 8,401,587 3,283,012 4,521,082 1,611,556
Income tax provision 3,360,000 1,313,000 1,808,000 644,000
----------- ----------- ----------- -----------
NET INCOME $5,041,587 $1,970,012 $2,713,082 $967,556
=========== =========== =========== ===========
PER SHARE DATA:
Net income per common share - basic $0.63 $0.25 $0.34 $0.12
=========== =========== =========== ===========
Net income per common and common
equivalent share-diluted $0.60 $0.25 $0.32 $0.12
=========== =========== =========== ===========
Weighted average common shares
outstanding-basic 8,052,351 7,889,370 8,092,661 7,894,621
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding-diluted 8,369,164 7,904,170 8,471,686 7,954,629
=========== =========== =========== ===========
See Accompanying Notes
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CHICO'S FAS, INC.
CONDENSED STATEMENT OF CASH FLOWS
[UNAUDITED]
TWENTY-SIX WEEKS ENDED
----------- ----------
8-1-98 8-2-97
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $5,041,587 $1,970,011
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,129,141 1,062,713
Deferred taxes (545,000) 113,000
Loss on disposal of property and equipment 44,632 126,502
Increase in deferred rent 138,520 84,610
Changes in assets and liabilities:
(Increase) decrease in receivables (108,154) 1,910
Decrease in inventories 1,677,184 1,651,566
Decrease in prepaids and other assets 85,978 49,945
(Decrease) increase in accounts payable (198,375) 375,349
Increase in accrued liabilities 934,512 315,173
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Total adjustments 3,158,438 3,780,768
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Net cash provided by operating activities 8,200,025 5,750,779
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed assets -- 34,500
Purchase of land, buildings and equipment (2,011,290) (902,512)
----------- ----------
Net cash used in investing activities (2,011,290) (868,012)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 1,366,762 36,439
Credit line payments -- (284,919)
Principal payments on debt (52,054) (83,251)
Deferred finance costs (198,000) (100,000)
----------- ----------
Net cash used in financing activities 1,116,708 (431,731)
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Net increase in cash and cash equivalents 7,305,443 4,451,036
CASH AND CASH EQUIVALENT - Beginning of Period 2,943,916 832,176
----------- ----------
CASH AND CASH EQUIVALENT - End of Period $10,249,359 $5,283,212
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See Accompanying Notes
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CHICO'S FAS, INC.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
AUGUST 1, 1998
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of CHICO'S FAS,
Inc. (the "Company") have been prepared in accordance with the instructions to
Form 10-Q and do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the financial statements and notes thereto for
the year ended January 31, 1998, included in the Company's Annual Report on
Form 10-K filed on April 28, 1998. The January 31, 1998 balance sheet amounts
were derived from audited financial statements included in the Company's Annual
Report.
Operating results for the thirteen and twenty-six weeks ended August 1,
1998 are not necessarily indicative of the results that may be expected for the
entire fiscal year.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
In the fiscal year ended January 31, 1998, the Company adopted SFAS No.
128, "Earnings per Share" (SFAS 128). SFAS 128 establishes new standards for
computing and presenting earnings per share (EPS). Specifically, SFAS 128
replaces the presentation of primary EPS with a presentation of basic EPS,
requires dual
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presentation of basic and diluted EPS on the face of the income statement and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS is based upon the weighted average number of common shares
outstanding and diluted EPS is based upon the weighted average number of common
shares outstanding plus the dilutive common equivalent shares outstanding
during the period. The following is a reconciliation of the denominators of the
basic and diluted EPS computations shown on the face of the accompanying
statements of income:
TWENTY-SIX WEEKS ENDED THIRTEEN WEEKS ENDED
8-1-98 8-2-97 8-1-98 8-2-97
----------- ----------- ----------- -----------
Basic weighted average number of common shares 8,052,351 7,889,370 8,092,661 7,894,621
Dilutive effect of options outstanding 316,813 14,800 379,025 60,008
----------- ----------- ----------- -----------
Diluted weighted average common and common
equivalent shares outstanding 8,369,164 7,904,170 8,471,686 7,954,629
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - Thirteen Weeks Ended August 1, 1998 Compared to the
Thirteen Weeks Ended August 2, 1997.
NET SALES. Net sales by Company-owned stores for the thirteen weeks ended
August 1, 1998 (the current period) increased by $7.1 million, or 36.3%, over
net sales by Company-owned stores for the comparable thirteen weeks ended
August 2, 1997 (the prior period). The increase was the result of a comparable
Company store net sales increase of $4.3 million and $2.8 million additional
sales from the new (or reacquired) stores not yet included in the Company's
comparable store base (net of sales of approximately $442,000 from six stores
closed in fiscal 1998).
Net sales to franchisees for the current period increased by approximately
$136,000, or 33.6% compared to net sales to franchisees for the prior period.
The increase in net sales to franchisees was primarily caused by increased
purchases from existing franchisees and the opening of an additional franchised
location by an existing franchisee, net of reduced sales due to the
re-acquisition of two franchised stores in fiscal 1999.
GROSS PROFIT. Gross profit for the current period was $16.3 million, or
59.7% of net sales, compared with $10.9 million, or 54.4% of net sales, for the
prior period. The increase in the gross profit percentage primarily resulted
from higher margins in the Company's front-line stores due to fewer and less
aggressive markdowns associated with the Company's refocusing of its product
development departments described more fully below in comparable company store
net sales. To a lesser degree this increase was due to leverage associated with
the Company's 23.0% comparable store sales increase for the quarter.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General,
administrative and store operating expenses increased to $11.8 million, or
43.1% of net sales, in the current period from $9.2 million, or 45.9% of net
sales, in the prior period. The increase in general, administrative and store
operating expenses was, for the most part, the result of increases in store
operating expenses, including store compensation, occupancy and other costs
associated with additional store openings and additional marketing expenses
associated with the Company's direct mail promotions. The decrease in these
expenses as a percentage of net sales was principally due to direct store
costs, including store compensation, which decreased by 4.0% of net sales due
to leverage associated with the Company's 23.0% comparable company store sales
increase for the quarter, net of an increase in marketing and promotion costs
as a percent of sales and net of increased profit sharing and other accruals.
INTEREST EXPENSE, NET. Net interest expense decreased to approximately
$31,000 in the current period from approximately $86,000 in the prior period.
This decrease was primarily a result of increased interest earnings during the
current period from the Company's increased cash position.
NET INCOME. As a result of the factors discussed above, net income
reflects an increase of 180.4% to $2.7 million in the current period from net
income of $1.0 million in the prior period. The income tax provision
represented an effective rate of 40% for both the current and prior periods.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations - Twenty-six Weeks Ended August 1, 1998 Compared to the
Twenty-six Weeks Ended August 2, 1997.
NET SALES. Net sales by Company-owned stores for the twenty-six weeks
ended August 1, 1998 (the current period) increased by $14.4 million, or 37.8%,
over net sales by Company-owned stores for the comparable twenty six weeks
ended August 2, 1997 (the prior period). The increase was the result of a
comparable Company store net sales increase of $9.8 million and $4.6 million
additional sales from the new (or reacquired) stores not yet included in the
Company's comparable store base (net of sales of $1.0 million from six stores
closed in fiscal 1998).
Net sales to franchisees for the current period increased by approximately
$90,000, or 10.8% compared to net sales to franchisees for the prior period.
The increase in net sales to franchisees was primarily caused by increased
purchases from existing franchisees, and the opening of an additional
franchised location by an existing franchisee, net of reduced sales due to the
re-acquisition of three franchised stores in fiscal 1998 and 1999.
GROSS PROFIT. Gross profit for the current period was $31.5 million, or
59.1% of net sales, compared with $21.5 million, or 55.5% of net sales, for the
prior period. The increase in the gross profit percentage primarily resulted
from higher margins in its front-line stores due to fewer and less aggressive
markdowns associated with the Company's refocusing of its product development
departments described more fully below in comparable company store net sales.
To a lesser degree, this increase was due to leverage associated with the
Company's 27.2% comparable store sales increase for the six month period,
offset by an increase in inventory reserves for merchandise intended for
liquidation.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General,
administrative and store operating expenses increased to $23.0 million, or
43.1% of net sales, in the current period from $18.0 million, or 46.5% of net
sales, in the prior period. The increase in general, administrative and store
operating expenses was, for the most part, the result of increases in store
operating expenses, including store compensation, occupancy and other costs
associated with additional store openings. The decrease in these expenses as a
percentage of net sales was principally due to direct store costs, including
store compensation, which decreased by 4.7% of net sales due to leverage
associated with the Company's 27.2% comparable company store sales increase for
the six month period, net of an increase in marketing and promotion costs as a
percent of sales and net of increased profit sharing and other accruals.
INTEREST EXPENSE, NET. Net interest expense decreased to approximately
$110,000 in the current period from approximately $203,000 in the prior period.
This decrease was primarily a result of increased interest earnings during the
current period from the Company's increased cash position.
NET INCOME. As a result of the factors discussed above, net income
reflects an increase of 155.9% to $5.0 million in the current period from net
income of $2.0 million in the prior period. The income tax provision
represented an effective rate of 40% for both the current and prior periods.
COMPARABLE COMPANY STORE NET SALES. Comparable Company store net sales
increased by 23.0% in the current quarter and 27.2% in the first six months of
1998 when compared to the comparable prior periods. Comparable Company store
net sales data is calculated based on the change in net sales of currently open
Company-owned stores that have been operated as a Company store for at least
thirteen months.
The Company believes that the increase in comparable Company store net
sales in both the quarter and six month period resulted from a refocusing of
the Company's product development, merchandise planning and buying departments
on Chico's target customer. The Company also believes that the look, fit and
pricing policy of the Company's product was in line with the refocusing effort
and that the increase in comparable store sales was fueled by increased direct
mailings and a larger database of existing customers for such mailings. To a
lesser degree, the Company believes the increase was due to increased
store-level training efforts associated with the Company's newly introduced
training programs and continuing sales associated with several styles of
clothing produced from a fabric newly introduced by the Company in the fourth
quarter of fiscal 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary ongoing capital requirements are for funding capital
expenditures related to new store openings and merchandise inventory purchases.
During the six months ended August 1, 1998 (the current period) and the six
months ended August 1, 1997 (the prior period), the Company's primary source of
working capital was cash flow from operations of $ 8.2 million and $5.8
million, respectively. The increase in cash flow from operations of $2.4
million was primarily due to an increase in net income to $5.0 million in the
current period from $2.0 million in the prior period, and an increase in
accrued liabilities of approximately $900,000 in the current period, versus an
increase of approximately $300,000 in the prior period, net of a decrease in
accounts payable of approximately $200,000 in the current period versus an
increase of approximately $400,000 in the prior period and net of an increase
in deferred taxes of approximately $500,000 in the current period versus a
decrease of approximately $100,000 in the prior period. The increase in accrued
liabilities is associated with the Company's improved sales and profitability.
The Company invested $2.0 million in the current period for capital
expenditures primarily associated with the opening of 9 new (or reacquired)
company stores, and the remodeling of several existing stores. During the prior
period, the Company invested approximately $ 903,000 for capital expenditures
associated with the opening of 6 new (or reacquired) company stores, and
remodeling of several existing stores.
During the current period, one of the Company's officers exercised 37,000 stock
options at prices ranging from $3.25 to $7.00, one of the Company's independent
directors exercised 25,000 options at the price of $3.25, a former director
exercised 61,000 options at prices ranging from $5.50 to $8.375 and several
employees and former employees exercised 22,716 options at prices ranging from
$3.25 to $8.75. Also during the current period, the Company sold 13,790 shares
of common stock under its employee stock purchase plan at a price of $7.70. The
proceeds from the issuances of stock as described above amounted to $ 1.4
million.
The Company also invested $198,000 in the current period and $100,000 in the
prior period in intangible assets associated with the reacquisition of
franchised stores. The Company repaid indebtedness of approximately $52,000 and
$83,000 in the current and prior periods, respectively. In addition, the
Company repaid under its then available credit lines approximately $285,000 in
the prior period.
As more fully described in "Item 1-Business" appearing on pages 12 through 15
of the Company's Annual Report on Form 10-K for the fiscal year ended January
31, 1998, the Company is subject to ongoing risks associated with imports. The
Company's reliance on sourcing from foreign countries causes the Company to be
exposed to certain unique business and political risks. Import restrictions,
including tariffs and quotas, and changes in such tariffs or quotas could
affect the importation of apparel generally and, in that event, could increase
the cost or reduce the supply of apparel available to the Company and have an
adverse effect on the Company's business, financial condition and/or results of
operations. The Company's merchandise flow could also be adversely affected by
political instability in any of the countries in which its goods are
manufactured, by significant fluctuations in the value of the U.S. dollar
against applicable foreign currencies and by restrictions on the transfer of
funds.
The Company plans to open approximately 16 to 20 new stores in fiscal 1999, 10
of which were open as of September 1, 1998. The Company plans to open new
stores in fiscal 2000 at least equal to 15% of its existing store base. The
Company believes that the liquidity needed for its planned new store growth,
continuing remodel program and maintenance of proper inventory levels
associated with this growth will be funded primarily from cash flow from
operations. The Company further believes that this liquidity will be
sufficient, based on currently planned new store openings, to fund anticipated
capital needs over the near-term, including scheduled debt repayments. If cash
flow from operations should prove to be less than anticipated or if there
should arise a need for additional letter of credit capacity due to
establishing new and expanded sources of supply, or if the Company were to
increase the number of new Company stores planned to be opened in future
periods, the Company might need to seek other sources of financing to conduct
its operations or pursue its expansion plans and there can be no assurance that
such other sources of financing would be available.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
SEASONALITY AND INFLATION
Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation has had a material
effect on the results of operations during the current or prior periods.
Although sales have recently been somewhat higher in the Company's first and
second fiscal quarters (February through July), the company does not consider
its business to be seasonal.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This 10-Q may contain forward looking statements which reflect the current
views of the Company with respect to certain events that could have an effect
on the Company's future financial performance. These statements include the
words "expects," "believes," and similar expressions. These forward-looking
statements are subject to various risks and uncertainties that could cause
actual results to differ materially from historical results or those currently
anticipated. These potential risks and uncertainties include ability to secure
customer acceptance of Chico's styles, propriety of inventory mix and sizing,
quality of merchandise received from vendors, timeliness of vendor production
and deliveries, increased competition, extent of the market demand by women for
private label clothing and related accessories, adequacy and perception of
customer service, ability to coordinate product development along with buying
and planning, rate of new store openings, performance of management information
systems, ability to hire, train, energize and retain qualified sales associates
and other employees, availability of quality store sites, ability to hire and
retain qualified managerial employees and other risks. In addition, there are
potential risks and uncertainties that are peculiar to the Company's heavy
reliance on sourcing from foreign vendors including the impact of work
stoppages, transportation delays and other interruptions, political
instability, foreign currency fluctuations, imposition of and changes in
tariffs and import and export controls such as import quotas, changes in
governmental policies in or towards such foreign countries and other similar
factors.
The company has assessed the year 2000 readiness of its systems and has
determined that the costs and uncertainties that may be associated with
addressing the year 2000 issues for its systems are not expected to have a
material impact on its business operations or its financial conditions.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Company was held on June 9, 1998.
There were 8,012,584 shares of common stock entitled to vote. The following
matters were voted upon at the meeting:
a) Election of Directors:
Votes For Votes Withheld
--------- --------------
Class II - Term Expiring in 2001
Helene B. Gralnick 7,695,331 7,427
Verna K. Gibson 7,695,755 7,003
The terms of office for the other directors continued after the meeting
as follows: Marvin J. Gralnick (1999), John Burden (1999), Charles J.
Kleman (2000), and Ross Roeder (2000).
b) Board of Directors proposal to ratify the appointment of Arthur
Andersen LLP as independent certified public accountants.
Voting Results: For the proposal 7,685,229
Against the proposal 12,025
Abstentions 5,504
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PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 10.1 Nonemployee Stock Option Agreement by and between
Chico's FAS, Inc. and Verna Gibson dated June 9, 1998
10.2 Nonemployee Stock Option Agreement by and between
Chico's FAS, Inc. and Ross Roeder dated June 9, 1998
10.3 Nonemployee Stock Option Agreement by and between
Chico's FAS, Inc. and John Burden dated June 9, 1998
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K The Company did not file any reports on Form 8-K during
the current period
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 1, 1998 By: /s/ Marvin Gralnick
------------------ ------------------------------------------
Marvin Gralnick
Chief Executive Officer
(Principal Executive Officer)
Date: September 1, 1998 By: /s/ Charles J. Kleman
----------------- ------------------------------------------
Charles J. Kleman
Chief Financial Officer
(Principal Financial and Accounting Officer)
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