Chico’s FAS(CHS) - 2023 Q4 - Annual Report

PART I Item 1. Business Chico's FAS, Inc. is a North American fashion retailer operating three distinct brands through an omnichannel approach, focusing on customer service, product innovation, and operational efficiency Overview Chico's FAS, Inc. is a leading North American fashion retailer with three brands, operating 1,269 stores and 58 international franchises through an omnichannel strategy - The company operates three distinct brands: Chico's, White House Black Market (WHBM), and Soma, collectively referred to as Chico's FAS[47] - As of January 28, 2023, Chico's FAS operated 1,269 stores across 46 states, Puerto Rico, and the U.S. Virgin Islands, plus 58 international franchise locations and 2 domestic airport locations[47] - The company employs an omnichannel approach, integrating retail stores, e-commerce websites, and a call center for a seamless customer experience[47] Our Brands The company's portfolio consists of three brands aggregated into one reportable segment: Chico's for chic clothing, WHBM for modern apparel, and Soma for comfortable lingerie and loungewear - Chico's: Sells exclusively designed, private branded clothing with a chic and artful style, known for its unique sizing (000-4)[49] - White House Black Market (WHBM): Offers a modern collection of stylish and versatile clothing, including workwear and dresses, in American sizes 00-14[49] - Soma: Sells exclusively designed lingerie, sleepwear, and loungewear, focusing on innovative styles that provide both comfort and beauty[28] Our Business Strategy The company's business strategy is centered on four pillars: being customer-led, product-obsessed, digital-first, and operationally excellent, aiming for profitable growth - The company is focused on driving profitable growth through four strategic pillars: - Customer-led: Building community engagement and exceptional customer experiences - Product obsessed: Delivering best-in-class merchandise and elevating Average Unit Retail - Digital-first: Strengthening the digital platform and data-driven decision-making - Operationally excellent: Diligently managing inventory, costs, supply chain, and real estate[52] - The strategy includes enhancing omnichannel capabilities, such as a shared inventory platform, Buy On-Line, Pick-up In-Store (BOPIS), and digital styling tools like StyleConnect and MY CLOSET[52] Real Estate Portfolio and Store Operations As of fiscal year-end 2022, the company operated 1,269 stores, with plans to open new Soma stores and refresh existing locations in fiscal 2023 while optimizing its portfolio Store Count by Fiscal Year | Stores | 2022 | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | :--- | | Stores at beginning of year | 1,266 | 1,302 | 1,341 | 1,418 | | Opened | 27 | — | 1 | 6 | | Closed | (24) | (36) | (40) | (83) | | Total Stores | 1,269 | 1,266 | 1,302 | 1,341 | - In fiscal 2023, the company plans to open up to 15 new Soma stores, refresh approximately 60 stores, and close approximately 20 stores[33] - In July 2020, the company exited its Canada frontline operations, resulting in the permanent closure of four Chico's and six WHBM boutiques in Ontario[75] Digital Commerce and Technology The company maintains a robust digital presence through brand websites, central to its omnichannel strategy, and is investing in a new customer marketing platform for enhanced personalization - Each brand has a digital presence (chicos.com, chicosofftherack.com, whbm.com, soma.com) that is vital to the omnichannel strategy, offering options like buy online, pick-up in store (BOPIS)[58] - The company is migrating to an industry-leading customer database and marketing platform to personalize the customer journey and increase traffic and conversion[34] Marketing and Advertising The company's marketing strategy emphasizes digital media, leveraging transactional data and predictive modeling to drive customer retention and reactivation, with a 2023 focus on advanced analytics for personalization - Marketing efforts are shifting from traditional media to digital media, including social marketing, paid search, and affiliate programs[59][77] - In 2023, the focus will be on using advanced analytics and tools to support audience segmentation and personalization to attract, retain, and reactivate customers[60] Sourcing and Distribution Product sourcing is managed by a centralized team, with Vietnam as the largest source country in fiscal 2022, and distribution primarily handled from a single facility in Winder, Georgia - In fiscal 2022, Vietnam accounted for approximately 36% of merchandise cost[61] - The company's largest supplier accounted for 14% of total purchases in fiscal 2022, and the supplier base has been reduced by 34% since fiscal 2017[63] - Merchandise distribution is primarily handled from the company's distribution center in Winder, Georgia, which has Foreign Trade Zone status[64][65] Human Capital Management As of January 28, 2023, Chico's FAS employed approximately 14,238 people, fostering a culture built on five core values and a commitment to diversity and inclusion, supported by ongoing development and competitive compensation - As of January 28, 2023, the company employed approximately 14,238 people, with 32% being full-time[97] - The company's culture is defined by five core values: Passion for Fashion, Continuously Improve, Customer Centricity, Be Inspired and Inspire Others, and Be Accountable[98] - Focus areas for diversity and inclusion are Attraction and Retention, Education and Training, and Customer Focus[101] Competition, Trademarks, and Regulation The company operates in a highly competitive women's retail apparel industry, relying on numerous registered trademarks for brand protection, and is subject to extensive federal, state, and local regulations - The women's retail apparel business is highly competitive, with competition from department stores, specialty stores, and online retailers[78] - The company owns important trademarks including BODIFY, CHICO'S, COOL NIGHTS, SOMA, VANISHING EDGE, and WHBM[79] - The company is subject to various government regulations, including labor laws, product safety standards, and import/export controls, which can materially impact the business[80][96] Item 1A. Risk Factors The company faces various risks including strategic execution, economic downturns, technology failures, supply chain dependencies, and regulatory changes, all of which could materially affect its business Risks Related to Business Strategy and Operations The company's success depends on executing strategic initiatives and responding to fashion trends, while facing intense competition that could adversely impact sales and profitability - The company's strategic initiatives, designed to reposition brands and drive sales, require substantial internal change and may not deliver expected results, potentially causing business interruptions[134] - The business is highly dependent on identifying and responding to fashion trends in a timely manner; failure to do so can negatively impact inventory and sales[136][112] - The women's specialty retail industry is highly competitive, with pressure from department stores, online businesses, and off-price retailers, which may impact sales and margins[137] Risks Related to General Economic Conditions The company is exposed to risks from adverse economic conditions, including the ongoing impact of the COVID-19 pandemic, declines in consumer spending, inflation, and potential asset impairment charges - The COVID-19 pandemic continues to pose risks, with potential impacts on consumer spending, supply chain disruptions, and higher shipping costs[114] - Declines in consumer spending and mall traffic, driven by economic pressures like inflation and interest rate hikes, can negatively impact sales and profitability[141] - Fluctuations in the cost of raw materials, labor, and transportation, driven by inflation and geopolitical events, may adversely impact margins[116][143] - Significant negative economic trends could lead to impairment charges on goodwill, intangible assets, and other long-lived assets[117] Risks Related to Omnichannel and IT Systems The company's operations heavily rely on technology, exposing it to risks of system failures, cyberattacks, and data breaches, requiring compliance with evolving privacy laws to avoid fines and reputational damage - The business relies heavily on technology for its websites and inventory management, making it vulnerable to system failures, computer viruses, and other disruptions[119] - The storage and transmission of customer personal and credit card information expose the company to cybersecurity risks and data privacy violations, which could result in significant fines and reputational damage[121][122] - Evolving data privacy regulations, such as GDPR and CCPA/CPRA, present compliance challenges and could lead to substantial costs or penalties[167] Risks Related to Sourcing and Distribution The company faces significant sourcing and distribution risks due to heavy reliance on foreign production, particularly from Vietnam and China, and dependence on a single supplier and distribution center - The majority of merchandise is produced outside the U.S., with significant sourcing from Vietnam (36%) and China (30%) in fiscal 2022, creating exposure to geopolitical risks, tariffs, and trade policy changes[169][149][124] - Approximately 14% of total purchases in fiscal 2022 were made from a single supplier, creating a risk of disruption if this relationship is lost[127] - Distribution for all brands is handled from a single facility in Winder, Georgia, making operations vulnerable to interruptions at that location[128] Other General Risks The company is subject to various other risks, including restrictive credit covenants, activist shareholder actions, lease obligations, brand reputation threats, stock price volatility, and changes in regulations or tax laws - The company's credit agreement contains restrictive covenants that could limit its ability to respond to business changes or manage operations[154] - Actions by activist shareholders could be costly, time-consuming, and disruptive to operations[179] - The market price of the company's common stock has been and may continue to be substantially volatile[160] - The business is subject to a wide variety of laws and regulations, and changes in these, particularly regarding trade, cybersecurity, and data privacy, could adversely affect results[163] Item 1B. Unresolved Staff Comments There are no unresolved staff comments - None[187] Item 2. Properties As of fiscal year-end 2022, the company's total consolidated selling square footage was 3.0 million, operating 1,269 stores and owning its corporate campus in Fort Myers, Florida, and distribution center in Winder, Georgia - At fiscal year-end 2022, total consolidated selling square footage was 3.0 million[213] - The company owns its corporate campus in Fort Myers, Florida, and its distribution center in Winder, Georgia[213] Item 3. Legal Proceedings The company is not currently a party to any material legal proceedings, other than claims and lawsuits arising in the normal course of business - The company is not currently a party to any material legal proceedings outside the normal course of business[370] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[190] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "CHS"; the quarterly dividend was suspended in April 2020, and as of January 28, 2023, $55.2 million remained authorized for future share repurchases - The company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol "CHS"[216] - The quarterly dividend was suspended in April 2020, and any future dividends will be determined by the Board of Directors[192] - As of January 28, 2023, $55.2 million remained authorized for repurchase under the company's share repurchase program, with no shares repurchased in fiscal years 2022, 2021, and 2020[192] Item 6. [Reserved] This item is reserved Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2022, Chico's FAS delivered strong financial results with net sales increasing 18.3% to $2.14 billion and net income rising to $109 million, driven by comparable sales growth, gross margin expansion, and disciplined expense management Executive Overview Fiscal 2022 was a strong year for Chico's FAS, marked by significant growth and improved profitability, with net income per diluted share increasing 138% and total net sales growing 18.3% Fiscal 2022 Financial Highlights vs. Prior Year | Metric | Fiscal 2022 Result | Change vs. FY2021 | | :--- | :--- | :--- | | Net Income per Diluted Share | $0.88 | +138% | | Total Net Sales Growth | +18.3% | - | | Comparable Sales Growth | +19.6% | - | | Gross Margin Improvement | +240 bps | - | | SG&A Leverage | +50 bps | - | | Income from Operations | $142M (6.6% of sales) | vs. $67M (3.7% of sales) | - The company ended the fiscal year with $178 million in cash and marketable securities and reduced long-term debt by $50 million[197] Key Performance Indicators and Outlook The company evaluates performance using key indicators such as liquidity, comparable sales, and operating income, projecting fiscal 2023 consolidated net sales between $2.22 billion and $2.25 billion and earnings per diluted share from $0.79 to $0.91 Fiscal 2023 Full Year Outlook | Metric | Expected Range | | :--- | :--- | | Consolidated Net Sales | $2,220M - $2,250M | | Gross Margin Rate | 39.4% - 39.8% | | SG&A as % of Sales | 33.0% - 33.4% | | Effective Income Tax Rate | ~26% | | Earnings per Diluted Share | $0.79 - $0.91 | | Capital Expenditures | $80M - $90M | - Key performance indicators monitored by the company include liquidity, comparable sales, gross margin as a percent of sales, operating income as a percent of sales, and Return on Net Assets (RONA)[224] Results of Operations For fiscal 2022, net sales increased 18.3% to $2.14 billion, driven by a 19.6% rise in comparable sales, leading to improved gross margin and a significant increase in net income to $109 million Net Sales by Brand (in millions) | Brand | Fiscal 2022 | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | :--- | | Chico's | $1,045 | $816 | $596 | | WHBM | $638 | $516 | $376 | | Soma | $460 | $478 | $352 | | Total Net Sales | $2,142 | $1,810 | $1,324 | Gross Margin Performance | Metric | Fiscal 2022 | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | :--- | | Gross Margin ($M) | $838 | $664 | $184 | | Gross Margin % | 39.1% | 36.7% | 13.9% | SG&A Expenses | Metric | Fiscal 2022 | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | :--- | | SG&A ($M) | $696 | $597 | $527 | | SG&A % of Sales | 32.5% | 33.0% | 39.8% | - Net income for fiscal 2022 was $109 million, or $0.88 per diluted share, compared to $46 million, or $0.37 per diluted share, in fiscal 2021[246] Liquidity and Capital Resources The company's liquidity strengthened in fiscal 2022, with cash and marketable securities increasing to $178 million, net cash from operating activities at $162 million, and long-term debt reduced to $49 million Cash Flow Summary (in millions) | Activity | Fiscal 2022 | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $162 | $63 | $(98) | | Net cash (used in) provided by investing activities | $(64) | $14 | $34 | | Net cash (used in) provided by financing activities | $(59) | $(52) | $91 | - At fiscal 2022 year-end, cash and marketable securities totaled $178 million, and long-term debt was $49 million, reflecting a $50 million principal reduction during the year[252] - Inventories totaled $277 million at fiscal 2022 year-end, a 14.4% decrease from the prior year, reflecting optimized inventory management[253] - As of January 28, 2023, available additional borrowing capacity under the Credit Agreement was approximately $219 million[267] Critical Accounting Estimates The company's financial statements rely on critical accounting estimates requiring significant management judgment, particularly in inventory valuation, impairment assessments of long-lived assets and goodwill, and income tax accounting - Inventory valuation involves identifying excess and slow-moving inventory and recording it at net realizable value, with shrinkage estimated between physical counts based on historical rates[282] - Long-lived assets, goodwill, and indefinite-lived intangible assets are reviewed for impairment annually or when triggering events occur, using discounted cash flow models and other valuation techniques[94][7] - Income tax accounting requires judgment in measuring deferred tax assets and liabilities and assessing the need for a valuation allowance against deferred tax assets based on the likelihood of future realization[83] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risk primarily from changes in interest rates on its debt and marketable securities; a 100 basis point increase in interest rates would raise annual interest expense by approximately $2.0 million on the outstanding $49 million debt - The company is exposed to interest rate risk on its Credit Agreement, which has a variable interest rate tied to the Secured Overnight Financing Rate (SOFR)[296] - As of January 28, 2023, $49 million in borrowings were outstanding; a hypothetical 100 basis point increase in market interest rates would increase interest expense by approximately $2.0 million over the remaining term of the loan[296] - The investment portfolio, consisting of cash equivalents and marketable securities like corporate bonds and U.S. government agency securities, is also subject to interest rate risk[296] Item 8. Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for fiscal years 2022, 2021, and 2020, along with the independent auditor's unqualified report on both the financial statements and internal controls Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting, identifying the valuation allowance on deferred tax assets as a Critical Audit Matter - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the period ended January 28, 2023[292] - The auditor also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of January 28, 2023[413] - A Critical Audit Matter was identified concerning the valuation allowance on deferred tax assets, which involved complex and subjective judgments regarding the realizability of these assets[299][295] Consolidated Financial Statements The consolidated financial statements present the company's financial performance and position, reporting net sales of $2.14 billion and net income of $109.0 million for fiscal 2022, with total assets of $1.19 billion and total shareholders' equity of $335.6 million as of January 28, 2023 Consolidated Statement of Income (Loss) Highlights (in thousands) | Metric | Jan 28, 2023 | Jan 29, 2022 | Jan 30, 2021 | | :--- | :--- | :--- | :--- | | Net Sales | $2,142,020 | $1,809,927 | $1,324,051 | | Gross Margin | $838,443 | $663,998 | $184,173 | | Income (Loss) from Operations | $142,145 | $66,580 | $(456,943) | | Net Income (Loss) | $108,999 | $46,218 | $(360,144) | | Diluted EPS | $0.88 | $0.37 | $(3.11) | Consolidated Balance Sheet Highlights (in thousands) | Metric | Jan 28, 2023 | Jan 29, 2022 | | :--- | :--- | :--- | | Total Current Assets | $515,363 | $494,063 | | Total Assets | $1,187,841 | $1,196,837 | | Total Current Liabilities | $451,162 | $487,385 | | Long-Term Debt | $49,000 | $99,000 | | Total Shareholders' Equity | $335,633 | $221,504 | Consolidated Statement of Cash Flows Highlights (in thousands) | Metric | Jan 28, 2023 | Jan 29, 2022 | Jan 30, 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $161,592 | $62,611 | $(97,832) | | Net cash from investing activities | $(64,092) | $13,543 | $33,865 | | Net cash from financing activities | $(59,228) | $(51,840) | $90,792 | Notes to Consolidated Financial Statements The notes provide detailed information supporting the financial statements, including the aggregation of brands into one segment, significant impairment charges in fiscal 2020, details of operating lease liabilities and long-term debt, and the rationale for the valuation allowance against deferred tax assets - Note 1: The company's three operating segments (Chico's, WHBM, Soma) are aggregated into one reportable segment due to similar economic and operating characteristics[321] - Note 3 & 4: In fiscal 2020, the company recognized pre-tax impairment charges of $114.3 million for goodwill and intangible assets and $34.5 million for long-lived assets, primarily due to the pandemic's impact, with no significant impairment charges in fiscal 2022 or 2021[4][6] - Note 10: As of January 28, 2023, total operating lease liabilities were $502.6 million with a weighted average remaining lease term of 4.2 years and a discount rate of 5.3%[527][523] - Note 12: As of January 28, 2023, the company had $49.0 million in long-term debt outstanding under its credit facility[525] - Note 16: The company maintained a valuation allowance of $28.8 million against its deferred tax assets as of January 28, 2023, concluding it is not more likely than not that the net deferred tax assets will be realized[378] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements with accountants on any matter of accounting principles or practices, or financial statement disclosure - None[542] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of January 28, 2023, a conclusion affirmed by the independent auditor's unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[447] - Management concluded that the company's internal control over financial reporting was effective as of January 28, 2023, based on the COSO framework[438] - There were no changes in internal control over financial reporting during the fourth fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[385] Item 9B. Other Information There is no other information to report under this item - None[423] PART III Item 10. Directors, Executive Officers and Corporate Governance Information required by this item, including details about directors, executive officers, and corporate governance matters, is incorporated by reference from the company's 2023 Annual Meeting Proxy Statement - Information is incorporated by reference from the 2023 Annual Meeting Proxy Statement[424] Item 11. Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's 2023 Annual Meeting Proxy Statement - Information is incorporated by reference from the 2023 Annual Meeting Proxy Statement[432] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2023 Annual Meeting Proxy Statement; as of January 28, 2023, there were 5,083,988 securities to be issued upon exercise of outstanding awards under equity compensation plans - Information on security ownership is incorporated by reference from the 2023 Annual Meeting Proxy Statement[425] Equity Compensation Plan Information as of January 28, 2023 | Plan Category | Securities to be Issued upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 5,083,988 | $— | 5,695,160 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated by reference from the company's 2023 Annual Meeting Proxy Statement - Information is incorporated by reference from the 2023 Annual Meeting Proxy Statement[433] Item 14. Principal Accounting Fees and Services Information regarding fees paid to the principal accountant and services rendered is incorporated by reference from the company's 2023 Annual Meeting Proxy Statement - Information is incorporated by reference from the 2023 Annual Meeting Proxy Statement[435] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including the consolidated financial statements and a comprehensive list of exhibits such as bylaws, credit agreements, and compensation agreements - This item lists the financial statements, financial statement schedules, and exhibits filed with the report[444][421] Item 16. Form 10-K Summary This item is not applicable - Not applicable[397]