Chico’s FAS(CHS) - 2024 Q2 - Quarterly Report

PART I – Financial Information Item 1. Financial Statements The company presents its unaudited condensed consolidated financial statements for the periods ended July 29, 2023 Condensed Consolidated Statements of Income Net income increased to $59.3 million for the quarter, driven by a significant non-cash tax benefit Condensed Consolidated Statements of Income (Thirteen and Twenty-Six Weeks Ended) | Indicator | Thirteen Weeks Ended July 29, 2023 | Thirteen Weeks Ended July 30, 2022 | Twenty-Six Weeks Ended July 29, 2023 | Twenty-Six Weeks Ended July 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $545,126 | $558,720 | $1,079,869 | $1,099,635 | | Gross Margin | $216,900 | $231,514 | $441,909 | $448,079 | | Income from Operations | $46,544 | $58,217 | $99,880 | $103,624 | | Net Income | $59,324 | $41,961 | $99,230 | $76,893 | | Diluted EPS | $0.49 | $0.34 | $0.81 | $0.62 | Condensed Consolidated Balance Sheets The balance sheet reflects a strong liquidity position, significantly reduced long-term debt, and increased shareholders' equity Key Balance Sheet Items (in thousands) | Account | July 29, 2023 (Unaudited) | January 28, 2023 (Audited) | July 30, 2022 (Unaudited) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $129,015 | $153,377 | $157,233 | | Inventories | $300,151 | $276,840 | $338,761 | | Total Current Assets | $514,301 | $515,363 | $571,502 | | Total Assets | $1,235,946 | $1,187,841 | $1,232,513 | | Long-term debt | $24,000 | $49,000 | $99,000 | | Total Liabilities | $820,689 | $852,208 | $934,636 | | Total Shareholders' Equity | $415,257 | $335,633 | $297,877 | Condensed Consolidated Statements of Cash Flows Operating cash flow decreased year-over-year due to inventory spending, while financing cash use increased from debt repayment Cash Flow Summary (Twenty-Six Weeks Ended, in thousands) | Activity | July 29, 2023 | July 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $42,629 | $75,999 | | Net cash used in investing activities | ($16,042) | ($25,486) | | Net cash used in financing activities | ($50,949) | ($8,385) | | Net (decrease) increase in cash | ($24,362) | $42,128 | | Cash and Cash Equivalents, End of period | $129,015 | $157,233 | Notes to Condensed Consolidated Financial Statements The notes detail revenue by brand, tax rate reconciliation, debt structure, and share repurchase program updates Revenue by Brand (Twenty-Six Weeks Ended July 29, 2023) | Brand | Revenue (in thousands) | % of Total | | :--- | :--- | :--- | | Chico's | $547,867 | 50.7% | | WHBM | $303,518 | 28.1% | | Soma | $228,484 | 21.2% | | Total Net Sales | $1,079,869 | 100.0% | - The effective tax rate for the 13 weeks ended July 29, 2023 was a 28.6% benefit, primarily due to a $25.6 million non-cash discrete benefit from the reversal of a valuation allowance on deferred tax assets[38] - As of July 29, 2023, the company had $24.0 million in net borrowings outstanding under its Credit Agreement, with an additional borrowing capacity of approximately $265.1 million[31][84] - In June 2023, the company authorized a new $100 million share repurchase program, with the full amount available for future repurchases as of July 29, 2023[68] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses brand performance, market share gains, a strong balance sheet, and the financial outlook for fiscal 2023 Executive Overview The company achieved market share gains across all brands and maintained a strong liquidity position despite a slight sales decline - Q2 total comparable sales decreased 3.0% YoY but increased 16.5% on a two-year stacked basis[89] - All three brands (Chico's, WHBM, and Soma) gained market share in their respective target demographics during the second quarter[89] - The company ended Q2 with $150.7 million in cash and marketable securities, total liquidity of $385.8 million, and long-term debt at $24.0 million[89] Fiscal 2023 Third Quarter and Full-Year Outlook The company provides its financial outlook for Q3 and the full fiscal year 2023, expecting continued sales and margin performance Fiscal 2023 Third Quarter Outlook | Metric | Expected Range | | :--- | :--- | | Consolidated net sales | $505M - $525M | | Gross margin rate | 38.5% - 39.0% | | SG&A as % of sales | 35.1% - 35.6% | | Earnings per diluted share | $0.08 - $0.12 | Fiscal 2023 Full-Year Outlook | Metric | Expected Range | | :--- | :--- | | Consolidated net sales | $2,145M - $2,175M | | Gross margin rate | 38.5% - 38.8% | | SG&A as % of sales | 33.0% - 33.3% | | Earnings per diluted share | $0.87 - $0.95 | Results of Operations Net sales decreased slightly for the quarter and half-year, while gross margin fell in Q2 but improved for the 26-week period Comparable Sales vs. Prior Year (Thirteen Weeks Ended) | Brand | Q2 2023 vs Q2 2022 | | :--- | :--- | | Chico's | (2.5)% | | WHBM | (5.7)% | | Soma | (0.5)% | | Total Company | (3.0)% | Comparable Sales vs. Prior Year (Twenty-Six Weeks Ended) | Brand | YTD 2023 vs YTD 2022 | | :--- | :--- | | Chico's | 1.1% | | WHBM | (6.9)% | | Soma | (1.5)% | | Total Company | (1.8)% | - Q2 gross margin decreased to 39.8% from 41.4% YoY, primarily due to higher occupancy costs and lower average unit retail[126] - YTD gross margin improved slightly to 40.9% from 40.7% YoY, driven by lower inbound freight costs and higher average unit retail[151] Liquidity and Capital Resources The company maintained strong liquidity, significantly reduced long-term debt, and lowered inventory levels from the prior year - Long-term debt was reduced to $24.0 million at the end of Q2 2023, down from $99.0 million at the end of Q2 2022[133] - Inventories totaled $300.2 million, an 11.4% decrease from $338.8 million in the prior-year quarter, primarily due to lower in-transit inventories[134] - Net cash from operating activities for the first half of 2023 was $42.6 million, compared to $76.0 million in the same period last year[13] Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure, primarily from interest rate fluctuations, has not materially changed since year-end - The company is exposed to interest rate risk through its Credit Agreement; a 100 basis point increase in market rates would increase interest expense by about $0.9 million[161] - The marketable securities portfolio as of July 29, 2023, consisted of $21.7 million, primarily in U.S. government agencies and corporate bonds[41][161] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of July 29, 2023[33] - No material changes to internal control over financial reporting occurred during the quarter[162] PART II – Other Information Legal Proceedings The company is not party to any material legal proceedings outside of the normal course of business - The company reports no material legal proceedings other than those arising in the normal course of business[50][54] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2022 Annual Report - No material changes have been made to the risk factors disclosed in the 2022 Annual Report on Form 10-K[201] Unregistered Sales of Equity Securities and Use of Proceeds The company details its share repurchase activity, including the authorization of a new $100 million program in June 2023 - In June 2023, the Board authorized a new share repurchase program for up to $100 million and cancelled the prior program[133][185] Share Repurchases (Thirteen Weeks Ended July 29, 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Apr 30 - May 27, 2023 | 4,096 | $4.96 | | May 28 - Jul 1, 2023 | 30,700 | $5.28 | | Jul 2 - Jul 29, 2023 | — | — | Other Information No directors or officers adopted or terminated a Rule 10b5-1 trading arrangement during the reporting period - No directors or officers adopted or terminated a Rule 10b5-1 trading arrangement during the third quarter[34] Exhibits This section lists exhibits filed with the Form 10-Q, including compensation plans and required officer certifications - Exhibits filed include compensation agreements, the Amended and Restated 2020 Omnibus Stock and Incentive Plan, and Sarbanes-Oxley Act certifications from the CEO and CFO[17] Signatures The report is duly signed by the Chief Executive Officer and Chief Financial Officer on August 30, 2023 - The Form 10-Q was signed by CEO Molly Langenstein and CFO David M. Oliver on August 30, 2023[188]